99% of Tokens are Worthless: Lessons Learned in My First Crypto Cycle

I have lost thousands of dollars investing in crypto. I’ve invested in every kind of crypto asset, from the blue chips and VC-backed projects to the shittiest of shitcoins. The past 4 years in this space have been incredibly eye-opening, and I consider my hardest lessons some of the most rewarding experiences. I count every dollar that I’ve ‘lost’ as my investment into my crypto education — a degree I earned by diving in head first and (accidentally) putting more money than I could afford to lose on the line. Reflecting back on my time in Crypto U, I have some reflections to share with the next class of connoisseurs — those who get hooked by crypto’s thrall throughout this bear market and into the next bull run.

The Hard Truth: Most Tokens are Valueless

The biggest lesson that I learned in the last bull run is that most tokens are valueless. Even those from most of the biggest protocols.

Nearly every project launches a token, but the hard truth is that 99% of these tokens have no intrinsic value. The value of most tokens is derived from pure speculation and artificial volume by market makers. This is the truth that most new investors and entrants into crypto don’t want to hear, but it’s the hardest lesson I learned as an investor and advisor with insights into the underbellies of several projects.

To say that most tokens are valueless is a pretty big claim to make, I know. But after four years of experience, here is what I’ve learned.

Why Most Projects Launch Tokens

The majority of projects release tokens to give exit liquidity to founding teams and early investors. To give these tokens a purpose outside of being purely exit liquidity, their valuelessness is often disguised by governance utility that gives them ‘value’ and ‘decentralizes the protocol.’ But the truth is, without built-in value accrual mechanisms — utility that gives the token and/or network long-term value — tokens should not be released.

Buying a token without a value accrual mechanism is like trying to catch a falling knife. You’re going to get hurt. Examples of value accrual mechanisms in tokens include protocol fee distribution to stakers (for DeFi protocols) or security rewards (for blockchains). If a token has no way for its holders or network participants to earn yields, then it will only be bought and sold based on speculation. Solely a protocol’s popularity does not guarantee the token’s value. For instance, Uniswap’s widespread adoption does not automatically make its token valuable, however, I would consider the Uni token valuable if Uniswap turned on the fee distribution switch (wink).

The valuelessness of tokens emerged from the ICO days of 2017 and was a mistake repeated in the DeFi frenzy of 2020–2022. It’s crucial not to get caught in the next token craze during the upcoming bull run, which will likely be driven by centralized Ethereum rollups.

Rollups: The Emergent Token Mania

The Alt-L1 era lead the inflated token valuations in the last bull run. I believe that rollups will be the next generation of highly speculative token launches. Here’s how the crypto industry went from trying to solve the blockchain trilemma with Alt-L1s to building greater scalability and user experience with rollups, and how rollup tokens come into the picture.

The leading crypto narrative of 2020 and 2021 was the effort to solve the blockchain trilemma. Alt-L1s believed they could build blockchains stronger than Ethereum — more scalable, secure, and decentralized — to ‘solve’ the blockchain trilemma, and many investors believed them. Many highly funded L1 ecosystems outside of Ethereum eventually realized they were wrong, because for every ‘improvement’ made to a blockchain — whether higher TPS, bigger block space, or any other variable change — some pillar of the trilemma is compromised to uplift the other. Major examples of failed solutions to the blockchain trilemma include Solana’s high transactions per second giving way for increased centralization (the chain has been halted more times than I can count), or Avalanche’s low gas fees resulting in weak monetary premium in the AVAX token. Because the blockchain trilemma remains unsolved, Ethereum remains the best design space for building the strongest blockchain ecosystem.

When blockchain developers realized that their “Ethereum-killer” Alt-L1s couldn’t beat Ethereum’s security, the rollup era began. Rollups are layer 2 blockchains that help scale Ethereum without having to worry about security design because they leverage Ethereum’s security. Just like the alt-L1s that lead the last pump-and-dump token craze, I worry that the next class of crypto enthusiasts will fall victim to the emergent era of VC-backed rollup token pumps. Unlike the built-in value accrual opportunities for Layer 1 tokens via staking, rollups don’t need tokens to function because most of them are centralized, but rollup tokens will attract significant investor attention in the next bull run because of the rising popularity of rollups.

Rollup tokens will have little intrinsic value if measures aren’t taken to decentralize the network. Centralized rollups often justify the need for native tokens as a tool for governance (lame — this is so 2020!), but governance can be granted through other cryptographic tools like soulbound tokens or non-transferable assets in exchange for work completed by a participant. Instead of launching native tokens, centralized rollups should focus on strengthening Ethereum’s security by giving utility to Ether in their network function.

Why should investors be weary of centralized rollups launching tokens?

Because centralized Ethereum rollups don’t need native tokens. We’re already seeing the first class of rollup tokens that have no utility to give them value. Both Optimism and Arbitrum launched native tokens within the last year that aren’t used to pay for gas on the network and can’t be staked to participate in network validation — ie, no way for token holders to accrue more value by holding the token. The ARB and OP token’s only utility is governance privileges. If you’re tracking, these tokens resemble guises for exit liquidity from both protocols. See my comments about the Arbitrum airdrop, here.

Because rollups technically don’t need tokens to function, they don’t need tokens. It’s as simple as that. Rollups are a public good, and adding a dangerous financial aspect to public goods could threaten the public’s use of this good, just like how the dumping of DeFi tokens disincentivized user participation in DeFi after 2021. Instead, rollups should be doing all in their power to strengthen Ethereum security, the very reason why they exist as a rollup instead of an Alt-L1.

Decentralized Rollup Tokens: The Light at the End of the Tunnel

You’ve probably noticed that I’ve continued to make the distinction of centralized rollup tokens being value-less, not decentralized rollups. While there is a large amount of rollup functionality that could remain centralized, development has shifted toward building tools to help decentralize rollups — like decentralized sequencers, pessimistic settlement, and permissionless node operation, to name a few. The decentralization of rollups will be reliant on tokens that will help incentivize greater network security and can capture value from network growth, like MEV or fee burning.

In contrast to centralized rollup tokens that are used for governance, decentralized rollups will be reliant on their tokens to effectively operate. To incentivize network participation, these tokens will need to accrue value tied extracted from the growth of the rollup, which gives these tokens great inherent value.

I’ll write an article on value-accrual mechanisms for decentralized rollups, but I just wanted to sound the alarm on centralized rollup tokens in the meantime.

How to Avoid Getting Hurt By Worthless Tokens

To avoid valueless tokens, watch for these red flags:

1. A protocol launches a token that is not necessary for its function. This often indicates that the founding team and early investors seek exit liquidity, which will leave you holding the bag.
2. The token doesn’t accrue value. Value accrual can come in the form of staking rewards for blockchains (e.g. Ethereum, Cosmos) or revenues/fees generated by the protocol and distributed to stakers for DeFi projects (e.g., GMX, Frax).
3. The token’s only function is governance. In this case, expect traders to speculate on the token and rarely participate in governance, preventing true decentralization, which was the ‘intent’ of the token being launched in the first place.
4. The protocol offers unusually high APY in liquidity mining incentives. Traders often sell tokens awarded from liquidity mining incentives, leading to price drops.
5. Tokens with little intrinsic value may experience price surges based on speculation and immature price action, rather than actual value.

Being aware of these red flags doesn’t mean you shouldn’t trade. Profitable opportunities exist, especially if you can front-run the narrative. By understanding the value (or lack thereof) of various tokens, you can make informed decisions when trading.

Concluding Thoughts

Understanding the true value of tokens is paramount to avoid falling victim to hype and speculation. It is essential to recognize the red flags and make informed decisions when investing in crypto assets — not to follow the masses or a youtuber’s investment advice. Most tokens have little to no intrinsic value, and the emerging era of Ethereum rollups threatens to bring a new wave of valueless tokens. By staying vigilant and focusing on projects with solid value accrual mechanisms, you can better navigate the noise, build a stronger portfolio, and become a more sophisticated participant in the ecosystem. The key to long-term success in the crypto space is continuous learning, critical thinking, and an unwavering commitment to understanding the fundamentals driving this rapidly evolving market.