In Search of Token-Market-Fit
In Paul Graham’s famous “Be Good” essay, he outlined how startups could find product-market-fit: make something people want. If we believe that our token is the product, then the question we’re left with is: how do we make a token that people will want?
The first piece of advice Paul gives is to not worry too much about the business model in the beginning, although he admits that creating value without worrying about capturing it is the definition of a charity. In crypto, we see that things happen in reverse — by releasing utility tokens which people have to purchase before they can use them (sometimes years in advance), value is necessarily captured before it can be created. This is probably why many successful crypto token ecosystems look more like scams than charities in their early days, especially to people who are well steeped in the traditional mode of building startups.
Is it possible that in the same spirit as Paul’s original advice, in order to find token-market-fit crypto startups shouldn’t worry at all about creating immediate value for their token holders, and should focus exclusively on first capturing value by selling their tokens?
Tokens as Narrative Discovery Tools
One of the most challenging parts of building an early-stage, pre-pmf startup is the need to constantly be talking to your customers, to gauge their interest in new products or features that you might want to build. Founders work tirelessly to develop relationships with various stakeholders in their ecosystem, hoping that by staying close they can create tight feedback loops to design a solution that fits the needs of the market perfectly. The tighter these feedback loops can be, the faster teams can iterate towards an optimal solution and test it in the market. However, talking to customers doesn’t scale — there are only so many people who will be willing to meet you or jump on a call... what about everyone else?
When we look at existing crypto projects which have their own token, we witness that there’s another feedback loop between the price of a token and the market’s expectation of the future value which that token ecosystem will create. Whether it’s Uniswap’s token pumping in response to their fee switch proposal, or Vitalik selling his MKR in response to their plans to launch their own chain, or $DEGEN pumping in response to plans to launch an L3, we see that token prices respond fairly well to news around a given project’s future plans.
Tokens serve as something of a prediction market on the crowd’s collective interest in a project moving in a particular direction, combined with the expected likelihood that it’ll happen. The efficiency of this feedback loop is dictated by the token’s liquidity, where more liquid tokens like BTC and ETH respond to news events immediately, compared with smaller projects which attract fewer speculators who will trade on news events. Nonetheless even less liquid tokens will attract new buyers if they become interested in the narrative that the project is building in — ie if they believe that the solution they’re outlining will be valuable to someone down the line. The massive expansion of AI token valuations in the last 6 months is clear evidence of this: although very few of them are delivering value to any token holders right now, the market has repriced the expected future value that these ecosystems can create, based on the immense value that traditional AI startups are already creating right now.
What’s interesting about this process is that by launching a token and attracting sufficient liquid attention to themselves (in order for it to be worth people’s time/money to trade on your news), it’s possible that teams can develop extremely tight feedback loops about their future product launches. Alongside conversations with humans, crypto product builders can get a temperature check on product decisions by iteratively cycling through them one at a time until they find one which the market values (ie the one that causes your token to pump most substantially). Once that happens, you’ll know you’re building in a direction that the market believes is meaningful, and in doing so you will have used your token’s price mechanism as a tool for mass market needs discovery, without needing to build anything up-front.
Tokens as Efficient Venture Capital
This mechanism — of letting people buy in to a project based on their belief in the needs the project can meet in the future— is at the very heart of venture capital investing. It’s also often a pre-requisite for creating value using the pattern that Paul Graham describes, which is why technically founders have already been doing this in one form or another.
Normally when startups go out to raise venture capital, it’s because they have a particular set of goals or plans that they want to undertake, which requires new funding. This allows for something of a feedback loop for founders (if people hate your new plans, they won’t invest), but it’s one which is both exclusive and opaque. It’s also a feedback loop which only returns once every ~18 months.
By letting anyone freely participate in funding new projects whenever they please, tokens increase the available supply of capital in the market that can participate in buying into early stage projects, which results in a higher % of them getting funded. If a new proposal expands the market opportunity for a token by providing a new use case which the token accomplishes, then the market will assign a higher value to the project and its coffers will increase in size. In this way the market is a direct funding mechanism for innovation. This is at the very heart of what makes tokens such a powerful tool for expanding human potential on Earth.
While VCs love to write long essays espousing their love for tokens, the elephant in the room is that tokens stand in direct competition to venture capital — they’re substitute products. Having been both a founder and now a venture investor, I believe there is some goldilocks amount of VC funding which is useful and necessary for all founders— having great people in your corner is a massive unlock, especially when they are willing to play an active role in helping you stand up your ecosystem. The right amount of this depends on the team itself and the market they’re in, but I don’t believe it’s 0 for anyone. VCs have also played an important role in continuing to fund early stage projects during periods when public token markets have dried up, often earning them large rewards for taking on that risk.
Surviving Market Cyclicality
One of the unfortunate downsides of tokens is that as attention flows in and out of a given ecosystem, so does capital. Not all market participants are the same, with a given investor’s attention span being positively correlated to their level of sophistication. Because people constantly rebalance their portfolios to align with their latest point of view, the strength of a token’s loops relies on its ability to continuously retain the attention of market participants who put energy into trading on their updates.
One way teams have solved this issue is by narrative surfing — constantly attaching their project to the latest hottest value proposition that’s attracting liquidity in crypto— hoping that by continuously expanding the number of jobs their token can accomplish, they can maximize the amount of value that’s being projected onto their token.
Another way that teams stay fresh is using memes: great memes have a snowball effect by reverberating through a community, and meme warfare between communities is quite powerful as well. Communities with great meme-creation-loops ensure that there’s always a healthy amount of content always being created/shared about them on social channels, keeping their token top of mind. This is why memes are such a necessary element of maintaining sufficient liquidity for your token, and one of the reasons why memecoins have continued to succeed in attracting and retaining liquidity. If you’ve allowed the right people to join the ecosystem early enough, they’ll have a native incentive to talk about your project and help it grow. If you’ve given away too many of your token’s multiples to people who are aren’t willing to share the project consistently, then it will struggle to sustain attention over long periods of time.
Avoiding the Over-Financialization of Decision Making
Imagine a world where the market was totally efficient, with a project’s token price acting as a perfect oracle for whether or not a given course of action is optimal. Perhaps the market is filled with a plethora of AI agents who trade on various projects’ tokens based on their updates, and are well equipped to predict whether or not a particular undertaking will succeed. Imagine a team exists which exclusively relies on this feedback loop — taking only the actions that external market participants have validated as being worthy. If someone were to ask “who is in charge here?” the correct answer would be the market at large (via the token’s price), with everyone else in the ecosystem around the token existing only as stewards or custodians to help accomplish the market’s goals. The question is — would such a system of organizational governance actually accomplish more than alternative models?
I believe that the answer is no.
Firstly, the best founders in a given industry hate being told what to do. They’re extremely well-informed about their market, and have their own well-constructed opinions about the best course of action. Secondly, the best founders are often comfortable with those opinions deviating from mainstream consensus opinions — in fact they often pride themselves on it. Importantly, these deviations are the very reason why they build such successful companies: every market misconception is an arbitrage opportunity, a bounty for the first person willing to have the courage to disagree. The most successful companies of our time went through long periods when the market actively devalued their work, and it was their very ability to withstand this force that made them so valuable in the long run. They won by saying “you’re wrong” to the market at large.
Great founders are visionaries — instead of optimizing around the local minima like everyone else, they explore new territory in the hopes of uncovering new opportunities that no one else believed existed. They do that by asking questions that other people haven’t considered asking before, moving quickly between concepts with very little data by relying heavily on their intuition. This helps them achieve PMF faster than their competitors, winning markets and creating valuable ecosystems out of thin air.
If teams gather new data on valuable untapped markets, the last thing they want to do is to share it publicly for all of their competitors to immediately see as well. By keeping their cards close to the chest, the best founders will struggle to attract attention from public markets, and instead will benefit from attracting capital via private fundraising rounds, with participants curated for trustworthiness. They’ll also benefit from finding investors who can see the vision and follow the same intuitive hops that founders do — people who are crazy in the same way they are.
So What Does it Really Take to Find Token-Market-Fit?
Returning to our original question, we see that tokens are a powerful tools that teams can use to discover market needs and narratives which they’re well suited for. Like product founders before them, token founders can quickly iterate on their token’s value proposition based on large surface area for feedback that a token provides.
In order to keep this feedback loop alive, teams should work hard to continuously attract persistent attention on social platforms. They should remain deeply aware of various narratives around them, and understand why the market is attaching value to each of them. They should use content and memes to remain within people’s spheres of attention, so that they don’t lose interest and rebalance their portfolios. Most importantly, they should focus on attracting high value contributors who believe in the mission, and are willing to support with both their capital and their energy. If teams do this well, they’ll build up an army of supporters who won’t ever sell their tokens, and will evangelize the token to new audiences.
At Boost, we’re excited to continue backing people building moonshot ideas at the edges of the map, and we don’t mind being the first people to believe in your crazy vision. If you’re building something new and are looking for early supporters, please reach out.