The VC-Dominated Crypto Funding Model Needs a Reboot

The practice of dumping tokens and driving down prices is common among venture capital firms. Models of funding that are based on the community could solve the problem.

Should the funding space for the cryptocurrency industry go through an overhaul? Following the collapse of FTX, many questions have been raised, including the following one: When the well-known exchange failed, it was left with a long line of hapless creditors and lenders. Among these were a number of promising projects that were dependent on the funds that Sam Bankman-Fried and his colleagues had promised.

There is, however, a more significant issue at the heart of the current funding picture. This issue is that large venture capital firms with deep pockets are throwing their weight around in the low-liquidity Web3 market by heavily backing early-stage projects in the hopes of making a profit once retail investors have FOMO and enter the market.

When it comes to how projects are currently financed, the concept that blockchain and cryptocurrencies represent a crucial off-ramp from fiat currencies and a wholesome pathway towards greater decentralization, transparency, fairness, and inclusion is pure fantasy. There has been a lot of talk about how blockchain and cryptocurrencies represent these things, but the reality is that they do not.

The issue starts with a project’s pre-sale or closed sale, which naturally favors wealthy venture capital firms that are able to inject substantial capital, typically in exchange for significantly discounted tokens. This is where the problem begins. At this juncture, venture capitalists will invariably promote their portfolios as well as the token of choice. This will cause many retail investors to grab a bag for themselves, as they will be encouraged by the fact that a reputable name is backing the project.