When the chain becomes the product: Seven years inside a token-funded venture | Hacker News Reader

When the chain becomes the product: Seven years inside a token-funded venture

markmhendrickson.com

49 pointsmhendric34 comments

Lots of similarities to the Bitcoin investment thesis. Where the chain itself becomes the product and not any utility derived from it. You have to believe in a future where all fiat money crashes and becomes worthless, evil states confiscate other forms of wealth, like stocks and bonds but for some reason will be powerless to prevent bitcoin transfers. At the same time the hard limit of 21 million BTC will never be revoked despite continuously declining miners revenue. And only within that strict narrative does a long-term investment really make sense.

FATF and the government were desperate to eliminate/immobilize bearer bonds, bearer shares, high denomination notes, and hawala. It does seem like at least part of it is they think they have less control over oversight of their transfer for certain instrument or asset classes.

Bitcoin is not like high denomination notes or bearer bonds, though. Transactions are on the public blockchain.

In theory someone could have coins untraceable to them as long as they never intersect with something on chain that could be traced back to them, but that turns into a game of never spending the tokens when taken to the extreme. Bitcoiners quietly see that as a feature, not a bug, because the goal of the game is to get everyone to buy as much as possible but sell as little as possible. That’s the formula to make the number go up.

Exactly: money disappears into the hands of Government (or because of hyperinflation) but somehow you can buy goods on a "free" Internet without the Government intervention. Also: all transactions are recorded...

Good luck with that.

It does not need to be all or nothing though. It simply needs to be true for a large enough number of people, to create an extremely valuable market.

We are over 8 billion on earth, even if as little as 1% of the population rely on it directly or indirectly due to some form of oppression real or perceived due to political opinions, a long investment thesis on bitcoin can make sense.

I am not a bitcoin holder once this is said. Arrived at the party too late IMHO, and i have better investment options for now from a risk-adjusted perspective.

However if i had more cash to invest than i know what to do with, i'd definitely take a long position on bitcoin.

>even if as little as 1% of the population

1% of 8 billion is 80 million. Coordinating that many people onto a particular platform or alternative is a gargantuan task. It's not "little."

I think you are making a big deal out of nothing: today adoption is tiny but there isn't any coordination problem. Anyone wanting to buy or sell bitcoins, even for very large amount has no problem doing so.

As adoption increases, liquidity (which may be what you allude to when you talk about coordination) will be even better.

I'd also note that facilitating liquity can indeed be a complex problem, but there are people specialized in making money out of it and who therefore have an incentive to continually keep the market liquid, read about "market makers".

Author here. There's real overlap with that comparison, and I wouldn't dismiss it entirely. The receding horizon and community dynamics around belief reinforcement do look similar. Where I'd draw the line is the specific organizational failure mode: a product team whose feedback loops get hijacked by token economics. Bitcoin doesn't have a product team in the same sense. But the broader point (that a financial instrument can make belief liquid and self-reinforcing) applies more broadly than just token-funded ventures. I'm less certain where Bitcoin falls on that spectrum than I am about chains driven by ecosystems funded primarily by their tokens.

Only very small % of bitcoiners believe the ad absurdum thesis as you outlined it and yet to all bitcoiners the investment makes sense long term. That's something that you will have to reconcile on your side.

I love the ending footnote, its the perfect statement to prove his thesis. Just because you understand the problem does not mean you are immune to it. Just because you know smoking is bad for, and you understand the mechanisms of addition, does not mean you manage to quit smoking.

Thanks for noticing that detail!

  Good products come from tight cycles: ship something, listen to users, iterate. Token economics break that cycle by introducing a competing optimization target. The team stops asking "what do our developers need?" and starts asking "what supports the token narrative?"

In other words, the team starts asking "How can we maximize the token price while delivering as little product value as possible"?

This is why 99.99% of crypto projects are a scam.

No, your token investors don't give a damn what you deliver. They only care about the price of the token. Lie if you have to. Hype up your project like it's the greatest thing in the world. Do whatever to enable security fraud.

When teams discover that lying does more for the token price than actually building, they quickly switch incentives. Now they'll just lie, sell tokens, repeat, until a final rug pull to scam the remaining bag holders.

Yes - but the sad thing is how badly this has bled back to the real markets. That's how you get things like https://en.wikipedia.org/wiki/Nikola_Corporation

I'm concerned we may not be able to pull back from low-trust society in which most investments are fradulent; eventually it will become impossible to raise money for real ventures!

Yep!

People in the Bitcoin space have been screaming at the top of their lungs about this for decades at this point, but it's hard to work against the marketing machine that comes from these ICOs.

The weird thing is that this outcome was always obvious.

Token-driven projects were clearly just penny stock boiler room scams dressed up in a trenchcoat made of jargon whitepapers.

Author here. The essay's argument is actually the opposite of that. The team was talented. Proof-of-Transfer was a real technical contribution. The SEC qualification was historic. What I'm describing is how structural incentives bent a legitimate effort toward narrative optimization over time. That's a harder problem than fraud. There's no villain, just a system that rewards the wrong things. Reducing it to "scams" makes it too easy and misses the lesson for anyone building with a financial instrument attached.

If you'll humor a cheeky substitution:

> No, your VC investors don't give a damn what you deliver. They only care about the valuation. Lie if you have to. Hype up your project like it's the greatest thing in the world. Do whatever to enable security fraud.

People are quite good at recognizing this dynamic amongst crypto startups.

Yet they pretend it's not the driving force in both the VC world and Big Tech.

Clever comparison, but the key difference is there’s no mechanism for a rug pull for most startups. Unless they reach a huge valuation, the stock is absolutely not liquid. There’s no way to cash out.

The incentives are the same. Rug-pulls just make it faster to cash out.

> There’s no way to cash out.

There are precisely two: Go for an IPO, or get acquired by a major tech firm.

Both of these run near-exclusively on hype. So long as the company isn't showing actively fraudulent numbers, you can IPO with a terrible product that doesn't turn a profit.

It's not just that crypto lets you cash out faster - it lets you do it with zero notice, accountability, or diligence.

Startup exits (IPO or acquisition) often have a big chunk of hype associated with them. But often the hype is backed by factual numbers of revenue or user-base. Even if it's pure hype, there will be mountains of legal paperwork. Hundreds if not thousands of hours spent by professional lawyers checking that whoever is putting up the money really is getting what they're paying for, even if what they're buying is a dream. If not, somebody has broken the law (fraud) or a shocking amount of incompetence has occurred. Your typical crypto scam thrives because there are no such procedural guarantees.

Not the same because VCs can only make money when the startup gets acquired by a bigger company or by IPO. Both of them will require professional due diligence. So it's far harder to fool investors than crypto which prey on the least sophisticated investors.

The due diligence stops the fraud that is rampant in crypto. It doesn't change the incentive structure of hype-over-substance though.

So long as you aren't (caught) overtly lying about the startup, all hype is fair game. Sam Altman can spout his ridiculous claims until the sun explodes.

The reason I left the security fraud part of the quote in is that the line is entirely demarked by what the SEC will enforce, not what's actually illegal according to the law or not. (And under the current admin, the SEC isn't gonna do shit.) There are a lot of tech startups doing securities fraud that'd get them hit by the regulators in any other part of the west.

So... his takeaway after taking 7 years to realize that "blockchain ecosystems" are an empty hype machine... is to start a project that brings blockchain into LLM coding agents.

Author here. Neotoma has nothing to do with blockchain, at least for any foreseeable future. It's a structured memory layer for AI agents. Think: entity storage with relationships, provenance, and queryable state. No token, no chain, no crypto.

The whole point of the essay's ending is that I chose not to issue a token and instead shipped a developer release to collect real feedback from real testers.

The takeaway wasn't "blockchain bad," it was "feedback loops matter and token economics break them." Neotoma is built around the opposite approach: short cycles, real users, and no financial instrument that makes belief liquid.

Seems like you could get a very similar phenomenon in lavishly funded hot startups.

The company's stock is the product. The product only has to be good enough to look plausible. Growth can be bought by selling $1 bills for $1.50 and by plowing money into marketing. The most important thing is to keep the hype up and raise the next round and make sure it's not a down round, or even if it is who cares... the execs just pay themselves fat salaries or work side sales of stock into there to cash out even if the main stock price is underwater.

You get inherent problems when you're selling a promise or a certificate not a product.

Author here. Agreed that overfunding of any kind can break feedback loops. When you have more money than signal, narrative fills the gap.

The structural difference with tokens is liquidity and breadth of exposure. In a VC-funded startup, equity is illiquid and held by a small number of employees and investors with board seats. There's still a corrective mechanism, even if it's slow.

With a token, the instrument is liquid and held by thousands of retail participants with no effective governance rights. Everyone (treasury, employees, community) shares a direct financial interest in maintaining the story, and there's no board meeting where someone says "the numbers don't work."

I remember Blockstack from the first crypto bull run. It was the product I thought had the most potential after Ethereum, building off of tools like Sia. The white papers [1] laid out a technical plan for fully building an internet on blockchain. It felt like the “decentralized internet” from Silicon Valley (the show), and must have inspired that plot point.

For an industry that was full of hype and fake products, it was one of the few you could download and get some use out of. I remember a very janky Google Docs clone running on the chain. Sad to see that they’ve lost their way. For now crypto still only has one value prop: token go up.

[1] https://cs.brown.edu/courses/csci2390/2019/readings/blocksta...

Author here. I felt the same way when I joined. Gaia and the decentralized identity work were genuinely interesting, and the early developer community was real, with people building things and giving honest feedback. That's what made the shift frustrating to watch from the inside.

I'd refine "lost their way" slightly: the incentive structure was always going to produce this outcome once the token became the primary funding mechanism. The team didn't lose direction; the path was bent by the economics.

I can't believe this field turned into this. It used to be so cool and rewarding.

Does anyone else find this kind of LLM written stuff tiring to read.

Admittedly I only read the titles.

'read the title' is not the same as reading an article.

Im also not sure why this would be LLM written and i have not seen a lot of / relevant amount of LLM written articles especially on hn

I have a feeling that people who shout this (I gotta be careful, I call out a bunch of articles as LLM-written) do not always know what to look out for. Em dashes aren't inherently LLM, neither are some of the phrases it uses.

One pattern I look for is; how is the end part written? Does it tie into the whole story? Is it extremely generic? Did the author put something real / raw / personal in it? If not, its a grey area, any other hints will lean my conclusion to real or fake.

The author even copied ChatGPT's website design!

Author here. I do use AI tools in my writing process. I build AI agent tooling, so that's how I work now.

But the ideas, analysis and seven years of firsthand experience are mine. And I write "with" AI very closely, not handing anything over blindly.

If you read past the title you'll find lots of personal details I lived through. It would be hard to prompt-engineer that from the outside.

Reply on news.ycombinator.com