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In mid-2022, venture capital firms like Andreessen Horowitz (a16z) and Binance Labs invested $4.5 billion and $500 million, respectively. The bear market conditions are making many VCs nervous, however, as total investments plummeted 66% to $4.98 billion in Q3 2022. This represents an opportunity to reclaim the blockchain/cryptocurrency industry’s core philosophy: Decentralized community-backed investments and collective ownership.
A bear market is ideal for separating greedy communities from value-oriented communities that will contribute towards building innovative technological solutions. A robust, tightly-knit investor community can support Web3 projects even amid volatile market conditions. Initial DEX Offerings (IDOs) are just one of many methods for finding suitable investors for a Web3 project. IDOs — combined with on-chain analytics tools and investment refund options — provide a safe investment space for investors and startups alike.
In 2013, Web3 investing began its evolutionary journey with Initial Coin Offerings (ICOs). And while ICOs raised more than $22.4 billion during 2017 and 2018, they were riddled with problems. The most unfortunate issue was that more than 80% of them ICOs were scams, falling severely short of investor protection. Additionally, ICOs were centralized, with pre-mining unfairly favoring project teams over investors.
To address these shortcomings, the Raven protocol conducted its first IDO in June 2019. IDOs enable Web3 projects to pool funds from retail investors by launching project tokens on a decentralized exchange. Because no centralized intermediaries are involved, this investment strategy can offer instant liquidity access and faster trading opportunities. Startups also do not have to pay fees to any intermediary for facilitating investments.
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Since Web3 projects no longer need permission to list their tokens, there is no unnecessary waiting time. Without centralized approval procedures, the community takes the initiative of vetting projects and tokens. Thus, a new project organically expands its reach without the need for formal advertising and marketing support. The community is responsible for ensuring that they enlist genuine project tokens.
However, this poses a challenge for project founders. The management team must find suitable investors who will provide long-term support to the projects. Indiscriminate buying and selling project tokens on DEXs for quick profits will have detrimental consequences. Therefore, startups need screening procedures to find reliable investor communities that will consistently fund them during developmental stages.
On-chain analysis: The searchlight for finding investor communities
Leveraging blockchain technology’s immutable data storage facilities, an on-chain analysis provides startup founders with the tools they need to find suitable investors. The project teams can then assess investor sentiment to understand their interest in funding specific projects for the long term. For example, if investors “HODL” an NFT collectible, that means they’re bullish on NFTs and might support new NFT projects. Thus, analyzing on-chain investor activity helps projects allocate token supplies during public sale rounds.
On-chain activity-based public sales have emerged as a popular investment strategy for building customized investor communities compatible with a project’s vision. Web3 startups can design their own criteria and parameters for screening investor applications with a provable investment record. For example, their requirements can mean functioning as liquidity providers on DEXs or holding a cryptocurrency worth $5,000 for six months. This helps startups identify a community with a common interest in a product before onboarding them.
On-chain analysis onboards high-quality retail investors, helping projects find and seed suitable investor communities. However, investors must also have safety nets to protect them from participating in dubious projects. A refund option is one way to ensure that malicious projects and uncommitted management teams don’t dupe investors. After all, no one wants a repeat of the 2017/2018 ICO fiasco.
Suppose a project is successful and maintains interest in the token for a pre-fixed amount of time. The community can quantify success or failure in terms of percentage changes in asset price from the initial sales day. If the project token maintains the desired price for the time frame, investors cannot avail themselves of the refund option. However, if the asset price falls drastically, the project will have to issue refunds to investors.
Art photographer Dave Krugman once compared NFT communities with the fungus network mycelium, which thrives on symbiotic nourishing. In many ways, the Web3 investment space is similar to a mycelium network. Investors and project founders have a reciprocal, mutually beneficial relationship. Therefore, finding the right investment community for sustained growth and development of the entire Web3 ecosystem is vital.
Apart from funding opportunities, investment communities will also provide a space for ideation and create exciting collaborative opportunities. These communities could disrupt the industry, forming a feedback loop to strengthen each other. In this long crypto winter, a robust investor community will help create a powerful sense of belonging and affinity towards a project. This will lead to organic growth, paving the way for an eventual crypto market revival.
Hassan (Hatu) Sheikh is chief marketing and strategy officer at DAO Maker.