Original Author: Momir
Original Source: IOSG Ventures
The altcoin market has experienced its toughest period this year. To understand why, we need to go back to decisions made a few years ago. The financing bubble of 2021-2022 spawned a batch of projects that raised significant capital. These projects are now issuing tokens, leading to a fundamental problem: a massive supply is hitting the market, but demand is scarce.
The issue is not just oversupply; worse still, the mechanisms that created this problem have remained largely unchanged. Projects continue to issue tokens regardless of product-market fit, treating token issuance as a mandatory step rather than a strategic choice. As venture capital dries up and primary market investments shrink, many teams see token issuance as their only financing channel or a way to create exit opportunities for insiders.
This article will delve into the "lose-lose-lose-lose dilemma" that is unraveling the altcoin market, examine why past repair mechanisms have failed, and propose potential rebalancing ideas.
1. The Low Circulation Dilemma: A Four-Way Losing Game
Over the past three years, the entire industry has relied on a severely flawed mechanism: low circulation token launches. Projects issue tokens with extremely low initial circulation, often only a single-digit percentage, artificially maintaining a high FDV (Fully Diluted Valuation). The logic seems reasonable: less supply means price stability.
But low circulation doesn't stay low forever. As supply is gradually released, the price inevitably crashes. Early supporters become the victims; the data shows that most tokens perform poorly after listing.
The most cunning aspect is that low circulation creates a situation where everyone thinks they are benefiting, but in reality, everyone is losing:
- Centralized exchanges (CEXs) thought they were protecting retail investors by requiring low circulation and strengthening control, but instead, they attracted community resentment and poor token performance.
- Token holders initially believed "low circulation" would prevent insider dumping, but they ended up with neither effective price discovery nor protection, and their early support backfired. When the market demanded that insider holdings not exceed 50%, primary market valuations were pushed to distorted levels, forcing insiders to rely on low circulation strategies to maintain superficial stability.
- Project teams thought they could sustain high valuations and reduce dilution through low circulation manipulation, but once this practice trended, it destroyed the entire industry's financing capability.
- Venture capitalists (VCs) thought they could mark their holdings based on the market cap of low-circulation tokens and continue fundraising, but as the drawbacks of the strategy became apparent, mid-to-long-term financing channels were ultimately cut off.
A perfect four-way lose-lose matrix. Everyone thinks they are playing a master game, but the game itself is inherently disadvantageous to all participants.
2. Market Reactions: Meme Coins and MetaDAOs
The market has attempted to break the deadlock twice, and both attempts exposed the complexity of token design.
Round One: The Meme Coin Experiment
Meme coins were a backlash against VC low-circulation token launches. The slogan was simple and appealing: 100% circulation on day one, no VCs, completely fair. Finally, retail investors wouldn't be scammed by this game.
Reality was much darker. Without a filtering mechanism, the market was flooded with unscreened tokens. Solo, anonymous operators replaced VC teams, which didn't bring fairness but instead created an environment where over 98% of participants lost money. Tokens became tools for rug pulls, with holders being completely liquidated within minutes or hours of launch.
Centralized exchanges were caught in a dilemma. If they didn't list meme coins, users would trade directly on-chain; if they listed them, they would be blamed when the prices crashed. Token holders suffered the most losses. The real winners were only the issuing teams and platforms like Pump.fun.
Round Two: The MetaDAO Model
MetaDAOs were the market's second major attempt, swinging the pendulum to the other extreme—heavily favoring token holder protection.
There were indeed benefits:
- Token holders gained control, making capital deployment more attractive.
- Insiders could only cash out upon achieving specific KPIs.
- It opened new financing avenues in a capital-tight environment.
- Initial valuations were relatively lower, allowing fairer access.
But MetaDAOs overcorrected, bringing new problems:
Founders lost too much control too early. This created a "founder lemon market"—teams with capability and options avoided this model, leaving only desperate teams to accept it.
Tokens still launched at a very early stage, with extreme volatility, but with even fewer screening mechanisms than the VC cycle.
The infinite minting mechanism made listing on tier-1 exchanges nearly impossible. MetaDAOs and CEXs, which control the vast majority of liquidity, are fundamentally incompatible. Without CEX listings, tokens are trapped in illiquid markets.
Each iteration attempted to solve problems for one party and also demonstrated the market's ability to self-correct. But we are still searching for a balanced solution that serves the interests of all key participants: exchanges, token holders, project teams, and capital providers.
Evolution continues; there will be no sustainable model until balance is found. This balance isn't about making everyone happy but drawing a clear line between harmful practices and reasonable rights.
3. What Should the Balanced Solution Look Like?
Centralized Exchanges
What should stop: Requiring extended lock-ups that hinder normal price discovery. These extended locks appear protective but actually prevent the market from finding a reasonable price.
What they are entitled to request: Predictability in token release schedules and effective accountability mechanisms. The focus should shift from arbitrary time locks to KPI-based unlocks, with shorter, more frequent release cycles tied to actual progress.
Token Holders
What should stop: Overcorrecting due to historical lack of rights, exercising excessive control, and scaring away the best talent, exchanges, and VCs. Not all insiders are the same; demanding uniform long-term lockups ignores role differences and hinders reasonable price discovery. Obsession with magical ownership thresholds ("insiders cannot exceed 50%") precisely creates the soil for low-circulation manipulation.
What they are entitled to request: Strong information rights and operational transparency. Holders should understand the business operations behind the token, receive regular updates on progress and challenges, and know the true status of treasury reserves and resource allocation. They have the right to ensure value is not leaked through opaque operations or alternative structures; the token should be the primary IP holder, ensuring created value accrues to token holders. Finally, holders should have reasonable control over budget allocation, especially major expenditures, but should not micromanage daily operations.
Project Teams
What should stop: Issuing tokens without clear signals of product-market fit or actual token utility. Too many teams treat tokens as inferior equity—worse than venture equity but without legal protection. Token issuance shouldn't happen just because "all crypto projects do it" or because funds are running low.
What they are entitled to request: The ability to make strategic decisions, place bold bets, and handle daily operations without needing DAO approval for everything. If they are accountable for results, they must have the power to execute.
Venture Capitalists
- What should stop: Forcing every portfolio company to issue a token, regardless of whether it makes sense. Not every crypto company needs a token; forcing issuance to mark holdings or create exit opportunities has flooded the market with low-quality projects. VCs should be stricter and realistically judge which companies are truly suited for a token model.
- What they are entitled to request: Appropriate returns for taking extreme risks by investing in early-stage crypto projects. High-risk capital deserves high returns when bets are right. This means reasonable ownership stakes, fair vesting schedules reflecting contribution and risk, and the right not to be demonized when successful investments exit.
Even if a balanced path is found, timing is crucial. The short-term outlook remains grim.
4. The Next 12 Months: The Final Wave of Supply Shock
The next 12 months will likely be the final wave of oversupply from the last VC hype cycle.
After surviving this digestion period, the situation should improve:
- By the end of 2026, projects from the last cycle will have either fully issued their tokens or shut down.
- Financing costs remain high, limiting the formation of new projects. The pipeline of VC projects waiting to issue tokens has noticeably shrunk.
- Primary market valuations return to rationality, reducing the pressure to use low circulation to prop up high valuations.
Decisions made three years ago shaped today's market. Decisions made today will determine the market's direction two to three years from now.
But beyond the supply cycle, the entire token model faces a deeper threat.
5. Existential Crisis: The Lemon Market
The biggest long-term threat is altcoins becoming a "lemon market"—where quality participants are driven away, leaving only those with no other options.
Possible evolution path:
Failed projects continue to issue tokens to obtain liquidity or survive, even if their product has no market fit. As long as all projects are expected to issue tokens, regardless of success, failed projects will continuously flood the market.
Successful projects, seeing the惨状 (miserable situation), choose to exit. When excellent teams see the persistently poor overall performance of tokens, they might turn to traditional equity structures. Why endure the torture of the token market if they can be successful equity companies? Many projects simply lack a compelling reason to issue a token; for most application-layer projects, tokens are shifting from a must-have to an optional extra.
If this trend continues, the token market will be dominated by failed projects with no other options—the unwanted "lemons."
Despite the risks, I remain optimistic.
6. Why Tokens Can Still Win
Despite the immense challenges, I still believe the worst-case lemon market scenario will not materialize. Tokens offer unique game theory mechanisms that equity structures simply cannot replicate.
Accelerating growth through ownership distribution. Tokens enable precise allocation strategies and growth flywheels impossible with traditional equity. Ethena's token-driven mechanisms to bootstrap user growth and build a sustainable protocol economy are prime examples.
Creating moated communities of passionate loyalty. Done right, tokens can build communities with skin in the-game—participants become highly engaged, loyal ecosystem advocates. Hyperliquid is an example: their trader community became deep participants, creating network effects and loyalty impossible to replicate without a token.
Tokens can enable growth much faster than equity models while opening vast space for game theory design, unlocking huge opportunities when executed correctly. These mechanisms are truly transformative when they work.
7. Signs of Self-Correction
Despite the difficulties, the market is showing signs of adjustment:
Tier-1 exchanges have become extremely selective. Token issuance and listing requirements have tightened significantly. Exchanges are strengthening quality control, conducting stricter evaluations before listing new tokens.
Investor protection mechanisms are evolving. Innovations from MetaDAOs, DAO-owned IP (referencing Uniswap and Aave governance disputes), and other governance experiments show communities are actively trying better architectures.
The market is learning, albeit slowly and painfully, but it is learning.
Recognizing the Cycle's Position
Crypto markets are highly cyclical, and we are currently at a trough. We are digesting the negative consequences of the 2021-2022 VC bull market, hype cycle, overinvestment, and misaligned structures.
But cycles always turn. Two years from now, after the 2021-2022 batch of projects is fully digested, after new token supply decreases due to funding constraints, and after better standards are trial-and-errored—market dynamics should improve significantly.
The key question is whether successful projects will return to the token model or permanently shift to equity structures. The answer depends on whether the industry can solve the problems of interest alignment and project screening.
8. The Path to Breaking the Deadlock
The altcoin market stands at a crossroads. The four-way lose-lose dilemma—exchanges, holders, projects, VCs all losing—has created an unsustainable market condition, but it is not a dead end.
The next 12 months will be painful, with the final wave of 2021-2022 supply arriving. But after the digestion period, three things could drive recovery: better standards formed from painful trial and error, a rebalancing mechanism acceptable to all four parties, and selective token issuance—only when it truly adds value.
The answer depends on choices made today. Three years from now, looking back at 2026, will we see it as we see 2021-2022 today? What are we building?
