Tokens as Products: How to Make Tokens People Want

Original author: Mark

Original translation: TechFlow

In Paul Graham’s famous Be Good essay, he outlines how startups find product-market fit: by making something people want. If we consider our token to be the product , then the question we are left with is: how do we make a token that people want?

The first piece of advice Paul gives is to not worry too much about the business model in the beginning, although he acknowledges that creating value without thinking about how it is captured is charity. In crypto, we see things going the other way. By issuing utility tokens that people have to buy to use them (sometimes years in advance), value is captured before it’s created. This is probably why many successful crypto token ecosystems look more like scams than charities in their early days, especially to those who are well versed in traditional startup models.

Is it possible that, in the spirit of Paul’s original suggestion, in order to find token-market fit, crypto startups shouldn’t worry about creating immediate value for their token holders at all, but should instead focus on capturing value first by selling tokens?

Tokens as narrative discovery tools

One of the most challenging parts of building an early-stage, yet-to-find product-market fit startup is the need to constantly talk to customers to gauge their interest in new products or features you might want to build. Founders work tirelessly to build relationships with various stakeholders in the ecosystem, hoping that by staying close, they can create a tight feedback loop to design a solution that is perfectly aligned with market needs. The tighter the feedback loop, the faster the team can iterate on the best solution and test it in the market. However, talking to customers doesn’t scale, and there’s a limit to the number of people willing to meet or take a call with you… so what about everyone else?

When we look at existing crypto projects that have their own tokens, we see another feedback loop between token prices and the market’s expectations of the future value of that token’s ecosystem. Whether it’s Uniswap’s token rising due to the fee switch proposal , Vitalik selling MKR due to his plans to launch his own chain , or $DEGEN rising due to plans to launch L3 , we see token prices reacting quite sensitively to news about the project’s future plans.

Tokens are, to some extent, predictive of the market, reflecting the crowd’s collective interest in a project moving in a particular direction, and the expected likelihood of that happening. The efficiency of this feedback loop is determined by the liquidity of the token, with more liquid tokens like BTC and ETH reacting immediately to news events, while smaller projects attract fewer speculators to trade on news events. However, even less liquid tokens can attract new buyers if people are interested in the narrative the project is building (i.e. they believe the described solution will be valuable to someone in the future). The huge expansion in AI token valuations over the past six months is clear evidence of this: while few AI tokens are currently creating value for any holder, the market has revalued the value these ecosystems could create in the future, based on the massive value that traditional AI startups have created now.

What’s interesting about this process is that by launching a token and attracting enough liquid attention (so that people are willing to spend time/money to trade your news), the team can potentially form an extremely tight feedback loop on future product releases. In addition to conversations with humans, crypto product builders can also temperature-check product decisions by iterating through these product decisions one by one until they find the one that the market values (i.e. the one that causes a significant increase in the token price). Once that happens, you know you’re building in a direction that the market finds meaningful, and in doing so, you’ve used the token’s price mechanism as a tool to discover mass market demand without having to build anything beforehand.

Tokens as an efficient venture capital tool

The mechanism of getting people to buy into a project based on their belief that it will meet a need in the future is at the heart of venture capital. It is also one of the prerequisites for creating value in the model described by Paul Graham, which is why technical founders have already been doing this in some form.

Typically, when startups go to raise venture capital, it’s because they have a specific set of goals or plans that they need new money to achieve. This provides a feedback loop for founders (if people hate your new plan, they won’t invest), but the feedback is exclusive and opaque, and the feedback loop only returns about every 18 months.

Tokens allow anyone to freely participate in funding new projects at any time, thereby increasing the supply of funds available in the market to participate in purchasing early projects and increasing the proportion of projects that receive funding. If a new proposal expands the market opportunity for the token by providing new use cases that the token can enable, the market will assign a higher value to the project and the size of the token pool will increase accordingly. In this way, the market is a direct financing mechanism for innovation. This is at the core of why tokens are a powerful tool for expanding human potential on the planet.

While venture capitalists love to write long articles about their love for tokens, it’s obvious that tokens compete directly with venture capital, they are an alternative product. As a founder and now a venture capitalist, I believe that some level of venture capital funding is useful and necessary for all founders, and having great team members is a huge unlocker, especially when they are willing to actively help you build the ecosystem. It depends on the team itself and the market they are in, but I don’t think anyone needs 0 funding. Venture capitalists have also played an important role in continuing to fund early-stage projects during the period when the public token market dried up, and are often well rewarded for taking that risk.

Dealing with market cyclicality

Tokens have an unfortunate drawback in that capital flows as market attention changes. Market participants vary in type, with investors’ attention spans positively correlated with their investment sophistication. As people continually adjust their portfolios based on their latest views, a token’s value cycle relies on its ability to continue to attract and maintain the attention of market participants, who then invest their energy into trading activities.

One way teams solve this problem is through “narrative surfing,” which is constantly associating their project with the latest and hottest cryptocurrency value propositions to attract liquidity. They hope to maximize the value of their tokens by continually increasing the functionality that the tokens can achieve.

Another way teams stay fresh is with memes: great memes create a snowball effect by reverberating through the community, and meme wars between communities are also very powerful. Communities with great meme creation cycles ensure that a lot of content is always created/shared on social platforms, keeping their tokens on everyones minds. This is why memes are one of the elements necessary to maintain sufficient liquidity for tokens, and why memes continue to be successful in attracting and maintaining liquidity. If you allow the right people to join the ecosystem early enough, they will have an intrinsic motivation to talk about your project and help it grow. If you distribute too many multiples of your tokens to people who are not willing to share your project consistently, it will have difficulty maintaining attention over a long period of time.

Avoid excessive financialization of decision-making

Imagine a world where markets are perfectly efficient, with the price of a project’s token acting as a perfect oracle as to whether a certain action is optimal. Perhaps the market is populated by a large number of AI agents that trade tokens based on updates from various projects, and are able to predict very well whether a particular move will be successful. Imagine a team that relies entirely on this feedback loop — only taking actions that are validated as worthwhile by external market participants. If one were to ask “who’s in charge here?” the correct answer would be the market as a whole (via the token price) , with everyone else in the token ecosystem simply being stewards or custodians who help achieve the market’s goals. The question is, would this system of organizational governance actually achieve more than other models?

I think the answer is no.

First, the best founders in an industry hate being told what to do. They understand the market intimately and have their own ideas about the best course of action to construct. Second, the best founders are often comfortable with these opinions deviating from the mainstream consensus. In fact, they are often proud of it. Importantly, these deviations are precisely why they build such successful companies: every market misunderstanding is an arbitrage opportunity that rewards the first person with the courage to disagree. Today’s most successful companies have experienced long periods of time when the market actively devalues their work, and it is their ability to resist this force that makes them so valuable over the long term. They win by saying “you are wrong” to the entire market.

Great founders are visionaries who, unlike others, do not pursue local optima, but instead explore new areas and seek new opportunities that were thought to not exist. They rely on intuition and quickly switch concepts in the absence of data by asking questions that others have never considered. This enables them to reach product-market fit (PMF) faster than their competitors, win markets, and create valuable ecosystems from scratch.

If a team has collected new data about a valuable untapped market, the last thing they want to do is share it publicly for all competitors to see immediately. The best founders may have trouble attracting the attention of the public markets through a strategy of secrecy, but they can attract funding through private financing rounds with carefully screened participants with high credibility. They will also benefit from finding investors who understand their vision and are capable of the same intuitive leaps as the founders—people who have the same crazy ideas as them.

So, what does it take to actually find token-market fit?

Going back to our original question, we see that tokens are a powerful tool that teams can use to discover market needs and narratives they are a good fit for. Like product founders before them, token founders can quickly iterate on the token’s value proposition based on the large-scale feedback the token provides.

To keep this feedback loop alive, teams should strive to consistently attract lasting attention on social platforms. They should have a deep understanding of the various narratives surrounding them and understand why the market assigns value to each narrative. They should use content and memes to stay on people’s radar so as not to lose interest and rebalance their portfolio. Most importantly, they should focus on attracting high-value contributors, people who believe in the mission and are willing to support it with their capital and energy. If the team does this well, they will build an army of supporters who will never sell their tokens and evangelize the token to new audiences.

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