Three Fatal Flaws Behind the Failure of SAFT.

Written by: Paul Klay, Partner at Begin Capital

Translated by: Saoirse, Foresight News

Recently, the vast majority of token generation events (TGE) have shown weak performance after launch, and a few projects that rise against the trend often raise doubts in the market regarding their compliance.

The investment logic through the SAFT agreement is essentially this: token issuance has opened a gap in the traditional venture capital model, somewhat similar to prediction markets and gambling.

(Note: SAFT, Simple Agreement for Future Tokens, is an early financing tool for crypto projects, where investors provide funds in exchange for contractual rights to receive tokens after the project launches on the mainnet/TGE, categorized as a pre-token subscription agreement.)

In the Web2 space, venture capital firms and founders generally rely on project exits or IPOs to make money. Both of these monetization paths are extremely scarce and very challenging. However, in the crypto industry, even if a project fails, the team can still issue tokens. Retail investors come in to take over the holdings, providing immediate liquidity for the project.

In traditional venture capital models, typically only one out of ten projects can earn back the entire fund's cost, while the other nine go to zero; in the crypto sector, theoretically, all ten projects have a chance to bring returns.

Sounds pretty good, right? But this system has three fatal flaws:

Wealth Does Not Appear Out of Thin Air

IPOs have a clear and complete process. Companies undergo strict scrutiny, financial data is verified, regulatory oversight is involved, and valuations are generally linked to the company's current profitability and market expectations of future earnings.

The crypto industry's operating model is almost completely the opposite. Not long ago, projects desiring to list on top-tier exchanges faced astonishingly little scrutiny. As long as the trading volume is sufficient, they can go live. The market value of tokens is often almost unrelated to the project's fundamental business aspects.

Investors hold token rights, while the project retains all operational income. Thus, the economic interests of both parties are completely severed.

Originally viewed as a simplified version of an IPO, token issuance has ultimately turned into a casino. Retail investors lose money, gradually losing enthusiasm for participation, and eventually exiting the market.

Only now is the market beginning to realize that the truly important aspects are quite simple: Can this company be profitable? Are there real users using the product? Are these users real people or bots and airdrop hunters?

Complete Lack of Transparency

This might be the biggest problem. The group controlling the entire process is almost the only one that understands the real situation.

You cannot verify whether Key Opinion Leaders (KOLs) actually received promotional fees; you cannot determine why market makers make certain operations; you cannot explain why large amounts of chips suddenly flood the market just one minute after a token goes live; it is impossible to verify where the marketing budget was spent; and you cannot even discern the truth of the majority of statements provided by the project.

Unless you directly participate in project operations, you have no choice but to believe the stories told by others.

For years, many crypto venture capitalists have been indifferent to this. They do not diligently verify the truth of events, the motivations behind them, or the flow of funds. They only care about issuing tokens. Until everyone ends up in bankruptcy.

The Entire Process is Extremely Complex

In the past, this sector relied more on hype rather than the true value of companies. To make money, you need to understand a huge number of variables: marketing promotion, KOLs, exchanges, market makers, launch platforms, liquidity, listing arrangements, chip allocation.

One decision might yield a 500% return, but another decision might cause profits to go to zero. Distinguishing between the two typically requires years of industry experience and a complete cycle through the entire token issuance process.

This is worlds apart from an IPO. The game in the crypto sector is often not about judging the intrinsic value of the asset itself but about finding ways to sell it at a price far above its real value. Many have perfected this process.

So what is happening now in the crypto venture capital industry? Everyone is gradually realizing that the old model is no longer feasible. This is also why we see these changes:

• SAFE and SAFT agreements have almost become standard;

(Note: SAFE, Simple Agreement for Future Equity, is a traditional early financing tool in Web2, where investors provide funds and receive shares upon the company’s equity maturing, corresponding to equity, not tokens.)

SAFE and SAFT agreements have almost become standard, indicating that in current Web3 project financing, the mixed use of both agreements is becoming increasingly common. A portion receives equity, and another portion receives future tokens, no longer relying solely on SAFT to speculate on token launch arbitrage, marking the industry’s shift from pure token speculation to regulated financing.)

• The industry places greater importance on real income and clear, understandable business models;
• Due diligence (DD) is becoming more aligned with Web2 industry standards;
• More funds are flowing into sectors that have already validated product-market fit (PMF): gambling and prediction markets, meme token launch platforms, payment, digital new banks, fiat deposit and withdrawal channels, artificial intelligence; DePIN and RWA sectors have received relatively less funding.

In the past, Web3 fundraising was entirely a barren land. Now, if your project can secure funding in Web3, theoretically, it can also secure funding in the Web2 market.

Where will the industry head next? The industry is maturing.

Those venture capital institutions that could once blindly throw money have either exited the market or paid painful prices to learn lessons. The institutions that remain are all building more rigorous investment processes. This is actually a good thing. Because only in this way can the industry potentially give birth to more truly viable crypto applications and quality products.

Retail investors are also becoming more rational. Now, there are only two types of play in the market: One is where you clearly understand this is purely gambling, entering and exiting quickly; the other is where the project has real products, real users, and real income, making holding this asset logically reasonable.

The middle ground is disappearing.

"We are about to launch an amazing product," "Everything is going smoothly with the project," "There will be significant good news next month" … Such rhetoric that once made people plenty of money is now hard to use to deceive anyone.