Memecoins > Governance Tokens

Ramblings and insights on how and why memecoins offer fairer launches compared to VC-backed governance tokens and TradFi — Lessons for founders.

9 min readMay 10, 2024

A16z’s CTO recently argued that Memecoins are “not attractive to builders”, and “probably even net negative if you consider the externalities”

“a series of false promises masking a casino”
“altering how the public, regulators, and entrepreneurs see crypto”
“not technically interesting”
and so on.

Around the same time, Chris Dixon published a more sober piece on the subject that highlights the systemic absurdity of the US securities law regime — highlighting how the best projects are stuck in regulatory purgatory while memecoins end up pulling through since they make no “pretence of memecoin investors relying on the managerial efforts of anyone.” This implicitly acknowledges the pretence (the act of pretending) in the rest of crypto — the managerial efforts of various teams contributing to a protocol while we call them governance tokens.

Our goal is neither to defend nor to diminish memecoins (or governance tokens); it’s simply to advocate for fairer token launches.

Governance Tokens are Memecoins with extra steps.

I argue that all governance tokens are essentially memecoins, valued by the Memetic provenance of the protocol. Put differently, Governance tokens are memecoins dressed up in a suit. Why?

Typically, governance tokens do not offer any revenue sharing (due to security laws), and they don’t work particularly well as a community-oriented decision-making framework (holding tends to be concentrated, and there’s apathy in participation or DAOs are generally dysfunctional) — rendering them as useful as memecoins with extra steps. Whether it’s ARB (Arbitrum’s governance token) or WLD (Worldcoin’s token) — they are essentially memecoins attached to those projects.

This isn’t to say that governance tokens aren’t useful. Ultimately, their existence is a constant reminder of why laws need to be updated. That said, governance tokens can in many cases cause as much harm as memecoins:

For builders: Many big-name VC-backed governance tokens launch before the product creating significant disillusionment. This directly undermines the credibility of founders who have been striving to gain adoption for years. For instance, Zeus Network launched at a $1 billion FDV before even releasing a product, whereas many founders struggle to attain such a valuation even after achieving significant traction.
For the community: Most governance tokens are VC-backed coins launched at high valuations and gradually offloaded onto retail investors.

Study ICP. XCH. Apecoin. DFINITY. And more. Even the 2017 ICOs were preferable to the current VC-backed low float tokens, as they were much fairer, with most of the supply unlocked at launch.

Taking the case of a16z, but study any big VC with > $300 million fund

Let’s take the case of EigenLayer:

EigenLayer, arguably the biggest Ethereum protocol of this cycle, is a classic example. The insiders (VCs and team) hold a sizeable chunk of 55%, with the initial community airdrop being just 5%. It’s a typical low float, high FDV play backed by VCs who own 29.5%. Last cycle, we blamed FTX/Alameda, but this cycle we’re no better.

The EIGENDAO, governed by EIGEN, is now apparently just like any Web2 governance board since insiders control the majority of the supply (community supply is just 5% initially). Not to forget, the whole concept of EigenLayer is restaking (leveraged yield farming), making the financial engineering equally Ponzi-like as memecoins.

If a group of insiders is taking more than half of the supply (55% in this case), we are seriously hindering the redistributive effects of crypto and making a handful of insiders insanely rich with low float, high FDV launches. If the insiders truly believe, they would be better off taking far less allocation, given that token launches are happening at astronomical valuations.

Will the real Cabal please stand up?

Given the absurdity of the capital formation process — we end up with VCs blaming meme coins and memers blaming VCs for leading the space through a muck of regulatory confusion and reputational hazard within serious builders.

But why are VCs so detrimental to the token?

There is a structural reason for VCs to inflate FDV. Let’s say a big VC fund invests $4 million for 20% at $20 million; logically, they would have to pump the FDV to at least $400 million at TGE (token generation event) to make it lucrative for their LPs. Protocols are pushed to launch at the highest FDV possible to mark up pre-seed/seed investors’ bags.

In this process, they keep encouraging the project to raise rounds at higher valuations. The bigger the fund, the more likely they are to give projects an absurdly high private valuation, build a strong narrative, and eventually launch at much higher public valuations, forcing the dump on retail at token launch.

Launching at a high FDV just results in a downward spiral and zero mindshare. Study Starkware.
Launching at a lower FDV allows retail to profit from the repricing and helps form community and mindshare. Study Celestia.

Retail is more unlock-sensitive than ever. In May alone, $1.25 billion of Pyth will get unlocked along with hundreds of millions from Avalanche, Aptos, Arbitrum, and more. Check out all unlocks at tokens.unlock.app.

Memecoins are the result of a broken financial system.

Arguably, Bitcoin is the biggest and oldest memecoin, born after the 2008 financial crisis. The negative/zero real rates (interest rates — inflation) forced every saver to speculate on new shiny asset classes (e.g., memecoins). The zero-rate environment created markets stuffed with undead firms kept afloat by a stream of cheap capital. Even the top indexes like the S&P 500 have ~5% zombie firms, and with rising interest rates now, they are about to get worse, making them no better than memecoins. What’s worse, they have been pitched by fund managers, and retail keeps buying them every month.

There’s a reason why speculation never dies. For this cycle, they are memecoins.

On the back of this, the term ‘Financial nihilism’ has recently been garnering a lot of attention. It encapsulates the idea that the cost of living is strangling most Americans, that upward mobility opportunities are out of reach for an increasing number of people, that the American Dream is largely a thing of the past, and that median home prices divided by median income are at a completely untenable level. The underlying drivers of Financial Nihilism are the same as those of populism, a political approach that appeals to ordinary people fed up with established elite groups — ‘This system is not working for me, so I want to try something very different’ (e.g., buying BODEN instead of voting for Biden).

Memecoins are battle-testing Infra:

Memecoins aren’t just a great crypto onboarding tool but also an excellent way to battle-test infrastructure. We believe, contrary to A16z’s stance, that memecoins have a net positive impact on any ecosystem. Without memecoins, chains like Solana wouldn’t have faced network congestion, and all networking/economic bugs wouldn’t have surfaced. Memecoins on Solana have been net positive:

All DEXs have not only processed all-time high volumes but have also surpassed their Ethereum counterparts.
Money markets integrate memecoins to increase TVL.
Consumer apps integrate memecoins to gain attention or for marketing purposes.
Validators earn huge fees, thanks to priority fees and MEV.
Broader network effects in DeFi due to increased liquidity and activity.

There is a reason why the Solana wallet, Phantom, has 7 million monthly active devices, powered by memecoins onboarding normies — probably one of the most used apps in crypto currently.

For serious RWAs to trade on-chain, we need infrastructure with enough liquidity (look at top memecoins; they have the deepest liquidity aside from L1 tokens/stables), stress-tested DEXs, and broader DeFi. Memecoins aren’t a distraction; they are just another asset class that exists on a shared ledger.

Memecoins as Fundraising Mechanisms:

Memecoins have now proven to be an efficient means of capital coordination. Study Pump.fun which has facilitated closer to millions of memecoins to be launched and created billions in value for memecoins. Why? For the first time in human history, any one can create a financial asset in < $2 and < 2 mins!

Mememcoins can serve as an excellent fundraising mechanism and Go-To-Market strategy as well. Traditionally, projects used to raise substantial amounts of money by allocating 15–20% to VCs, developing a product, and then launching a token while building a community through memes and marketing. However, this often resulted in the community being eventually abandoned by the VCs.

In the memecoin era, one can raise capital by launching their memecoin (with no roadmap, just for fun) and forming a tribalistic community early on. Then, they can proceed to build apps/infrastructure, continually adding utility to the memecoin without making false promises or providing roadmaps. This approach leverages the tribalism of memecoin communities (such as bagholder bias), ensuring high engagement from community members who become your BD/marketers. It also ensures much fairer token distributions, countering the low float high FDV pump and dump tactics employed by VCs.

This is already playing out:

BONKBot, a Telegram bot (with a peak daily volume of $250 million) spawned from the BONK memecoin, utilizes 10% of the trading fees to buy and burn the BONK. It has cumulatively burned ~$7 million of BONK solely through fees, thereby aligning its economics with holders.
Degen, a memecoin in the Farcaster ecosystem enables casters to reward/tip others with DEGEN for posting quality content. Further, they also built an L3 chain for degens. Similarly, one of the most popular memecoin of the last cycle, Shibatoken is now building an L2.

This trend will eventually lead to the convergence of memecoins and governance tokens. It’s important to note that not all memecoins are equal; scams are prevalent, but they are openly exposed compared to the silent rugs pulled by VCs.

What’s ahead?

Everyone wants to be early on the next big thing, and memecoins are one of the few areas where retail investors can get in earlier than most institutions. As the access to VC private deals is restricted, memecoins offer better potential market fit for retail capital. While Memecoins are giving power back to the community, yes it does make crypto look like a Casino.

So, what’s the solution? VCs like a16z should syndicate their deals and enable anyone to participate in them. Platforms like Echo are perfectly suited.

To VCs — Put your deals on Echo, let the community participate in syndicate deals, and witness the memecoin-like magic of community rallying for projects from their early days.

To clarify, we aren’t against VC/private funding; we are advocating for fairer distribution, creating level playing fields where everyone has a chance at financial sovereignty. VCs should be rewarded for their early risk-taking. Crypto isn’t just about open and permissionless technology; it’s also about making early-stage financing open, which is currently as opaque as traditional startups.