A brief comment on the Celestia and Polychain sell-offs: Everyone wants to make money, so are coin prices destined to return to zero?

Author: Pavel Paramonov, Founder of Hazeflow

Compiled by: xiaozou, Golden Finance

This article analyzes the recent Celestia and Polychain sell-offs - Polychain sold $242 million worth of TIA. I think this is both a good and bad thing, and this article will delve into why and what lessons we can learn from it.

1. Do you expect investors not to make money?

Many people (including excellent researchers) described this as extremely predatory and uncertain behavior by Polychain. How could a company that is considered a first-tier fund sell such a large amount of its holdings to the open market to impact the price of the currency?

First, Polychain is a venture capital fund whose job is to profit from assets purchased during periods of illiquidity (I can’t believe I even need to explain this).

Polychain not only took the risk of investing in Celestia in its early stages, but also bet on the then-new concept of "external data availability layer". This concept was quite advanced at the time and many people did not believe it (especially those in the "Ethereum camp").

Imagine someone discovering Spotify in 2008 and believing that people would listen to music through streaming services instead of CDs and MP3 players. That person would be considered crazy. This is the financing situation when you are not only the newcomer in the industry, but also trying to create a new market in the data availability throughput field.

Polychain’s job is to take risks and earn rewards, just like everyone else. Founders take the risk that their company may fail, and ordinary people also take certain risks when making choices every day.

We all make choices and take risks; the only difference is the nature and scale of the risks.

Polychain is not the only investor, there are several other venture capital funds involved.

Interestingly, no one blames them because their transaction data is more difficult to track.

But the Polychain sell-off alone was not enough to cause such a dramatic price crash. It must be pointed out that this accusation against Polychain alone is unfair for the following reasons:

• Their job is to take risks and make money, and they do it pretty well.
• They are not the only ones selling; other investors are also taking action.

Are these moves good for investors? Of course.

Are these actions ethical for the community? You know.

2. Do you expect the team not to make money?

Well, you probably do. There is a serious profitability problem in crypto: most protocols are not profitable, and they don’t even consider profitability. According to DefiLlama, Celestia currently only makes about $200 a day (the daily salary of a senior software engineer in Eastern Europe) while giving out about $570,000 in token incentives.

This is just the profit and loss data on the team chain. We know nothing about its off-chain profit and loss, but I believe that the operating costs of a team of this size are also quite high. Nowadays, there are indeed some KOLs who seriously declare: "Web3 protocols should be profitable, and companies should make money." Are we crazy to take this view seriously?

Yes, we were crazy, but the core problem was not the business model. The key point was that the team saw the token sale as profit and built a business model around it without ever considering the consequences. If the token sale equals the business model, then why is there any need to consider the business model and cash flow? Right? But the problem is that investors' money is not infinite, and neither are tokens.

At the same time, venture capital is all about betting on startups that have great potential for success. Many companies are not profitable, but they may offer something revolutionary or interesting enough to attract others to explore and develop the idea.

Anyway, you can't expect the core team to never sell, right? The fact is: when your protocol is not profitable, money has to come from somewhere. The foundation has to sell some tokens to pay for infrastructure, salaries, and a host of other expenses.

At least, paying operating expenses is one of the reasons for selling that I am willing to believe. Of course, there may be other reasons and different perspectives: on the one hand, they "dumped" and hurt the community; on the other hand, after all, they built this protocol and created market enthusiasm, maybe they have the right to sell at least some of the tokens? Note that it is part, not all.

Ultimately, this is a reflection of the token/equity problem and why crypto VCs don’t like equity very much. Compared to private placement or waiting for an exit, selling in the public market is more convenient and the time cycle is shorter.

3. Token economics is not the core issue, the token itself is

Obviously, investors are increasingly preferring token investments over equity. We are in the era of digital assets, so isn’t it natural to invest in digital assets?

But this trend is not as simple as it seems. Interestingly, many founders themselves realize that their products may not really need tokens, and they prefer to raise funds through equity. Despite this, they still face two major challenges:

• As I said before, most crypto-native VCs don’t like equity (harder to exit).
• Equity valuations are usually lower than token valuations, and people always want to raise more money.

This situation not only creates a dilemma, but also directly incentivizes teams to choose a token model. Token issuance can attract more investors because it provides a clear public market exit path, making it easier to raise funds. For the team, this means higher valuations and more development funds.

The core equity value of your company is not affected. You can retain 100% equity while raising a large amount of capital through these "artificial" tokens. This approach also attracts a wider group of investors who are specifically looking for token investment opportunities.

Unfortunately, in the current environment, token models make retail investors poor and VCs rich in 99% of cases. Or as Yash puts it: infrastructure/governance tokens are just meme coins in suits.

However, when TIA went live, it did bring huge returns to retail investors - from $2 to $20. People thanked the team for making them rich and staked tokens to get various airdrops. Yes, we had that time, it was the fall of 2023...

Once the price started to drop, people suddenly started spreading a lot of panic about Celestia: rumors that the team was behaving strangely, that the token economics were predatory, that on-chain revenues were mocked, and so on.

It’s good to find problems and point them out, but it would be terrible if those who once praised Celestia now consider it a “dumping ground” simply because of its price action.

4. What conclusions can we draw from this?

VCs are rarely your friends. Their core business is making money, your core business is making money, and the core interest of VC LPs is also making money.

Don’t blame VCs for selling: their tokens are unlocked, they have full ownership of their assets and can do whatever they want with them.

The people who should really be blamed are the VCs who are selling while tweeting about the bullishness of tokens: this is deceptive behavior and should never be tolerated.

Business models should not be designed around token sales alone. Either come up with a profit model or stay non-profit with cutting-edge technology - as long as you do it well, the market will pay for it.

The token economics are transparent to everyone: if the team tokens are unlocked, they certainly have full control over their assets. But if you are a firm believer in the project, a large-scale sell-off is questionable.

Equity investment is not very popular, and the valuations of some tokens are inflated and lack indicator support.

Teams should pay great attention to token economics design at the earliest stage, otherwise they may pay a heavy price in the future.

Technological innovation has nothing to do with token prices.

When the K-line goes up, everyone is happy; when the K-line goes down, problems are exposed. It is truly tragic if the same group of people are praising a project one moment and then slandering it the next.