The "VC Coin" Controversy: Examining the Token Distribution Dilemma of Crypto Projects through the BERA Token

Original Title: "The Funding: Why 'VC coins' like BERA are facing backlash"

Author: Yogita Khatri , The Block

Translation by: Yuliya, PANews

The launch of the BERA token on Berachain last week has reignited the debate over "VC coins" (i.e., tokens that early venture capitalists hold a large allocation of). Critics question the proportion of the BERA token supply controlled by investors and insiders, as well as the impact of this allocation on its long-term price. Similar concerns have emerged in other VC-backed projects, such as Aptos, Sei Network, and Starknet. The cryptocurrency community is assessing whether these token distribution structures can drive long-term growth or merely benefit early investors.

FDV is not the best way to assess project valuation

Several industry investors have shared their insights on why these projects continue to face controversy. Rob Hadick, a general partner at Dragonfly, stated that the level of criticism these projects receive is "always directly related to whether airdrop recipients and early users are profiting." He pointed out that the performance of the BERA token has failed to meet the expectations of many traders, which has stirred negative sentiment. "If the token had performed better, the sentiment on Twitter might be completely different."

Currently, as multiple VC-backed tokens perform poorly, concerns about their distribution methods are becoming more pronounced. Many traders have noted that the low circulation (or small circulating supply) and high fully diluted valuation (FDV) of these tokens are key issues. Zaheer Ebtikar, founder and chief investment officer of crypto hedge fund Split Capital, stated that excessive venture capital funding inflates valuations, leading to high FDV, as funds must deploy limited partner capital. However, he expects that as VC funding slows down, the scale of financing will shrink, early project bidding will decrease, and valuation methods will be reassessed.

Regarding the controversy over FDV, Hadick offered a different perspective. He believes that FDV is not the best way to assess the valuation of crypto projects, as future issuance is not guaranteed, and any new supply could dilute market capitalization. He also noted that many liquidity providers and foundations receive incentives after unlocking tokens, but when these incentives end, they may not continue to hold the tokens, exacerbating potential selling pressure.

In this discussion, Ed Roman, co-founder and managing partner of Hack VC (a Berachain investor), added that FDV is actually determined by the market rather than the project, meaning that the team cannot control the height of FDV—though they can control the supply at the time of token issuance. He pointed out that Berachain's 21% circulation is significantly higher than that of other blockchain projects, such as Starkware (7.28%) and Sui (5%).

Nevertheless, Roman also acknowledged that Web3 projects still have room for improvement in handling long-term incentives. He stated that many Web2 companies offer new stock rewards after employee vesting periods to maintain employee engagement. Similarly, he believes that crypto projects could introduce token-based incentives to "create lasting value more likely."

Hyperliquid: Highly differentiated products and a loyal community

The HYPE token of the non-VC coin project Hyperliquid has surged 140% since its launch in November, receiving widespread acclaim. However, Hadick stated that this model is difficult to replicate. Hyperliquid's success stems from "highly differentiated products and a loyal community," along with millions of dollars invested in self-development—none of which are easily replicable by most projects.

Hyperliquid allocated 31% of its total supply to users, increasing circulation through airdrops. Boris Revsin, general partner and managing director at Tribe Capital, pointed out that such high circulating supply is not achievable for all projects, as they need to retain treasury funds for ongoing ecosystem development. He noted that even Ethereum, which is often considered the fairest Layer 1 project, allocated 10% of its supply to the team and foundation, with another 40% for ecosystem growth and early miners.

Hadick stated that projects should focus on the long-term healthy development of the protocol, aligning with the core community, and avoid over-focusing on "gamification" or those trades that only attract speculative capital shortly after launch. He emphasized that such trades do not bring real value to the protocol and only lead to short-term volatility in the token, rather than long-term growth.

PMF is not the only determinant of success

While some VC-backed tokens have gradually faded after initial hype, others have managed to maintain long-term value. Investors believe that this difference often depends on the fundamentals, real applications, and market demand.

Roman emphasized that the real appeal of blockchain projects at launch should be reflected in their early ecosystems. As for valuation, the market ultimately determines its height, as investors will consider future expectations. "The market is a voting machine in the short term and a weighing machine in the long term. If the team is strong enough, they are likely to build a protocol with significant appeal and a vibrant ecosystem."

Smokey the Bera, an anonymous co-founder of Berachain, revealed that Berachain's early ecosystem has significantly grown, with projects built on its blockchain raising over $100 million in venture capital to create a range of "novel and excellent applications in finance and culture from 0 to 1." He stated that these applications span "all kinds of industries, including large Web2 companies, such as sports franchises, media groups, and even payment layers (e.g., PayPal deploying PYUSD on Berachain through BYUSD)."

However, Ebtikar believes that market demand for tokens often transcends their fundamentals. He stated that certain Layer 1 tokens, despite lacking appeal, can achieve valuations in the billions, while other projects with strong adoption struggle to gain support. He believes that the key to determining token performance lies in "who is willing to bid for token A or token B." While product-market fit is important, it is not the sole determinant of success.