Analyzing On-Chain Behavior Can Help Web 3.0 Startups Find Suitable Investors

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During the 2021 bull run, venture capital (VC) funding for Web 3.0 companies and blockchain startups reached a record $25.2 billion. Even in June 2022, VCs invested $3.67 billion in Web 3.0 projects despite the ongoing bear market. Most of this investment came from institutionalized investors and big corporations.

However, existing funding mechanisms often go against Web 3.0’s core decentralization and community ownership principles, making them highly problematic. So much so that Twitter’s founder and former CEO, Jack Dorsey, once tweeted that users don’t own Web 3.0 – VCs and their limited partnerships (LPs) do. One might not altogether agree with Dorsey’s comment but it has its merits.

The Web 3.0 community must take the necessary steps to shift towards a more decentralized investment ecosystem. But it’s easier said than done. Finding suitable retail investors is still a challenge for the founders and developers of Web 3.0.

Finding reliable investors – the need of the hour

Web 3.0 startup funding is a symbiotic process where investors and founders share a reciprocal relationship. To begin with, project founders need to gauge investor sentiment and understand what kind of projects they are willing to fund.

Founders must also identify suitable investors who share a similar goal and vision as themselves. Because even if some investors are enthusiastic about a startup’s potential, they may be ill-suited for long-term funding.

Since 2021, emergent decentralized platforms have increasingly democratized venture capital funding, boosting retail investor participation. Besides equity distributions, these platforms also help startups build active user communities. Yet, by and large, finding investors capable of adding long-term value is still a challenge for founders in Web 3.0.

According to a Forward Partners report from 2021, only 47% of founders think that their investors have enough domain knowledge or expertise. Moreover, 92% of founders feel duped because they don’t receive the expected support. This compels Web 3.0 founders to bear the additional burden of conducting due diligence and vetting investors before accepting funding propositions.

On-chain analysis – the search for investors is now easier

Blockchain technology stores data immutably on a distributed ledger, generating a vast digital repertoire of incorruptible data. Public blockchain networks like Ethereum (ETH) allow analysts worldwide to study on-chain data freely.

This reveals crucial information about market sentiments and helps understand investor activity and predict their behavior. Thus, on-chain analysis cuts through the noise and overemphasis on dominant market trends, focusing on the fundamentals instead. It benefits both founders and investors.

On one hand, investors can use metrics like the number of active wallet addresses and daily transactions to determine a project’s market demand. They can also gauge a token’s transactional value using parameters like network value to transaction (NVT) ratio.

A high NVT ratio helps differentiate between speculative value and utility value, which is key to recognizing overvalued projects and tokens. Moreover, investors can use the NVT ratio in tandem with the price-earnings ratio to understand a company’s financial health before investing.

On the other hand, project developers can use on-chain metrics like realized capitalization and HODL waves to understand investor behavior better. These measures use the unspent transaction outputs (UTXOs) mechanism to determine how wallets store or transfer assets like Bitcoin (BTC).

Realized capitalization helps identify long-term investors. Founders can predict an overheated market and speculative investing conditions if the realized capitalization starts divulging from market capitalization. Speculative investors don’t usually support Web 3.0 projects long-term since they primarily intend to book profits from price swings.

The UTXO model also allows project founders to determine how many investors are HODLing by calculating the time when they don’t move their tokens. HODLing behavior suggests that investors are confident about an asset’s future performance. HODLing leads to a controlled circulating supply and puts positive pressure on token prices.

Bridging gaps with on-chain analysis

The current bear market is turning into a long and dreary crypto winter, weighing down heavily on the industry. But as the previous crypto winter amply demonstrated, this is the perfect time for startups to build their best products. Web 3.0 founders with a long-term vision will now hibernate to focus on innovative technology development, only to emerge stronger.

Rather than playing on hype and mind-boggling figures, innovators must now focus on building communities and ensuring sustainable growth. Web 3.0 needs startups and investors who aren’t in the game merely to make some quick bucks. And this is where on-chain analysis ensures much-needed transparency. It also provides unique insights into a project’s status and investor behavior.

Thus, leveraging this method helps bridge the gap between startups and investors while upholding principles like decentralization and community ownership. By treading on this path, Web 3.0’s founders can find the right investors and deliver their best products in the coming years, scaling new heights with every endeavor.

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Hatu Sheikh is a co-founder of DAO Maker, building the future of venture capital.

 

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