Crypto tokens allow venture capitalists to dump their investments on an enthusiastic public without regulation, in the midst of a speculative mania

Stephen Diehl 2021-11-29

Context & Ripple Effects

Stephen Diehl's piece is the early warning shot in a sequence the corpus then plays out: tokens gave venture investors a way to sell into a retail mania with none of the disclosure or lockup rules that govern a normal IPO. Within months, the board-seat trade-off showed how far the model went — startups dodged investor oversight entirely, and backers of FTX, which had raised over $1.8B, held no seats at the table.

The aftermath is already in the record: after the 2022 wipeout, limited partners pulled back from crypto-focused funds even during a price rally, and by 2023 VCs were openly asking whether generative AI's huge valuations were repeating the same hype-driven pattern.

First-order effects

Retail token buyers absorb venture positions at peak prices with no registration, disclosure, or lockup protections — the liquidity event that would normally require an exchange listing happens instantly and privately for the VC, not the buyer.
Founders gain a funding route that bypasses the governance attached to equity rounds, since token sales impose no board obligations on anyone.

Second-order effects

VCs competing for hot deals start conceding their own oversight rights — passing on board seats to win allocations — which strips away the monitoring function that is supposed to be their product, leaving even $1.8B+ companies like FTX effectively unsupervised.
When the mania reverses, the same limited partners who funded these vehicles refuse follow-on commitments, so crypto-native GPs face a fundraising wall independent of token prices.

Third-order effects

If the pattern holds, the industry splits between hype-cycle assets that monetize retail exit liquidity and durable returns, forcing LPs to underwrite GPs' discipline rather than their deal flow — and the hype playbook itself migrates to whatever sector is next, which the corpus shows was generative AI.

The trend: Venture capital's exit mechanism is decoupling from regulated public markets via tokens, and the resulting hype-and-dump cycle keeps re-emerging in each successive speculative asset class.

Discussion

@smdiehl Stephen Diehl on x
Ever notice how there's a huge disconnect between how the VC thought leader class talks about NFTs and crypto coins, and how your average software developer friends talk about it. Let me explain why. The Token Disconnect https://www.stephendiehl.com/ ...
@agnost_ Agnost on x
@mcuban @smdiehl Then please show us the business case for decentralized applications that isn't tied to gambling or illegal activities. If you have a legitimate use case where a dApp would be the best solution out of all the alternatives, please lay it out for us.
@mcuban Mark Cuban on x
I think it might snow in dallas and cancel a Mavs game. I will be able to go to https://dclimate.net/ and IMMEDIATELY buy insurance from a smart contract that takes a Nat weather service feed. If my parameters are met, say 3" of snow, I automatically get paid. https://twitter.com…
@mcuban Mark Cuban on x
@smdiehl You said nothing of substance at all. When i started streaming in 95, it was “we dont need that nonsense, we have tv and radio. You are crazy” And like all the crazy tokens, there were crazy websites. But not all were crazy. Some of us can see the signal from the noise.
@carnage4life Dare Obasanjo on x
This chart from @vitaliqubuterin shows how token allocations are just startup cap tables with a different name. It's rather mind blowing that it's legal to effectively sell stock without regulation if you say it grants voting rights but not ownership. It's a tremendous hack. http…
@thomasbcn @thomasbcn on x
The crypto-token-as-equity-proxy scheme: “Blockchains are a solution in search of a problem” https://www.stephendiehl.com/ ... by @smdiehl
@mcuban Mark Cuban on x
@smdiehl Yes stablecoins will get regulated. And no Smart Contracts don't all blow up. I wrote distributed dbms apps for years. Much of the logic is still the same, but the responsibilities, hosting and security are far different than today's typical cloud based apps.
@masonic_tweets Mason.Eth on x
lol... someone is not paying attention https://twitter.com/...
@mcuban Mark Cuban on x
Sure. I call my bank for a loan. I want to borrow $5k against the $10k I have in a multi year CD. Takes some paperwork. A phone call or two. A few days. I go to https://aave.com/ where I have 10k in ETH. I want to borrow $5k. Takes me about 2 minutes and it's done https://twitter…
@mcuban Mark Cuban on x
@smdiehl Now talk about Smart Contracts and trustless, decentralized applications and the impact they can have. It wasn't TCP/IP that drove the Net, it was the applications on top of it. It won't be blockchain that drives usage, it will be the Dapps written on top of it.
@ruskin147 Rory Cellan-Jones on x
https://www.stephendiehl.com/ ... One of crypto's most trenchant critics @smdiehl dissects why VCs and software devs see it so differently. “If there is any innovation in crypto assets it's not in software engineering, but in financial engineering”
@can @can on x
I know this sounds extremely not me but the only way crypto becomes like a thing thing is if a big tech company, say like Zuckaverse, adopts it fully and you can only take off your headset if you have enough Bozcoins or posted enough racist comments for the day
@jason @jason on x
He's got a valid point. https://twitter.com/...
@annthurium Tilde Thurium on x
“With crypto we've decided to do the most American thing ever, to commoditize our rage at the financial system into a financial product... history is going to have the same lesson to teach us about the perils of greed untempered by reason.” Excellent essay by @smdiehl https://twi…
@blockgeekdima @blockgeekdima on x
really good convo! @mcuban position makes sense to me. https://twitter.com/...
@techwontsaveus @techwontsaveus on x
“If there is any innovation in crypto assets it's not in software engineering, but in financial engineering.” @smdiehl explains how many software engineers can see through the hype, but VCs love it because it effectively offers unregulated securities. https://www.stephendiehl.com…
@j2bryson Joanna J Bryson on x
“To the overwhelming majority of us in the software engineering profession who live closest to the metal, we see blockchain as a technology that barely works and whose use cases (if any) are vanishingly small and niche.” Yup. Via @rodneyabrooks https://twitter.com/...
@riptari @riptari on x
“... the ‘blockchain’, a simulacrum of innovation that organically fermented from the anti-institutional themes in the Western zeitgeist to spawn an absurdly large asset bubble with absolutely nothing at the center.” https://twitter.com/...
@chrisamccoy McCoy on x
Fair critique but the author doesn't get read-write-own. https://twitter.com/...
@niallharbison Niall Harbison on x
If you ever read one thing about Crypto I'd urge that it is this. Superb analysis https://www.stephendiehl.com/ ...
@aidanfeldman Aidan Feldman on x
“Silicon Valley ran dry on large breakthroughs in software, so we decided to invent the “blockchain”, ... an absurdly large asset bubble with absolutely nothing at the center.” 🔥 https://www.stephendiehl.com/ ...
@smdiehl Stephen Diehl on x
“With crypto we've decided to do the most American thing ever, to commoditize our rage at the financial system into a financial product.” https://www.stephendiehl.com/ ...
@phaase Peter Haase on x
“The central myth of the crypto ideology is faith in a fintech deus ex machina that will save us from ourselves, and that's a tough nut to deconstruct.” Once again a great post by @smdiehl: The Token Disconnect https://www.stephendiehl.com/ ...
@davetroy Dave Troy on x
Blockchain skeptics should take note of this seriously cutting analysis from Stephen Diehl today. https://www.stephendiehl.com/ ...
@adamrfisher Adam Fisher on x
Everything you probably feel about crypto but are afraid to say. “The Token Disconnect” by @smdiehl https://www.stephendiehl.com/ ...
@ruchowdh Rumman Chowdhury on x
“The accreditation divide is largely the fuel behind the Valley's obsession with crypto tokens ... [It] looks like a security, swims like a security, and quacks like a security, but is not regulated as a security. In fact it's not regulated at all.” https://www.stephendiehl.com/ …
@madbyk Burak Yigit Kaya on x
“The central myth of the crypto ideology is faith in a fintech deus ex machina that will save us from ourselves, and that's a tough nut to deconstruct.” https://getpocket.com/...
@alex @alex on x
Yeah this is a read https://www.stephendiehl.com/ ...
@eric_seufert Eric Seufert on x
2/ It makes eminent sense: TARP made money for the government but other than that, the American public mostly paid the price for the moral hazard of the pre-2008 financial order. Why should only Wall Street benefit from bubbles? Why not the everyman?
@antoniogm Antonio García Martínez on x
This was sparked by reading a crypto-hater's take that crypto was the new CDO as 1. CDOs are bad, and 2. they somehow went away as crypto will (they did not) As long as we have sophisticated credit markets, we'll have CDOs in some form.
@antoniogm Antonio García Martínez on x
Wonder if the world is finally ready for my “CDOs are good actually” take. Have we all healed enough yet?
@carnage4life Dare Obasanjo on x
“it's also like the 1920s again and you can insider trade, wash trade, and pump and dump and there's basically no enforcement.” Seeing VCs buy up NFTs then pump them to their audience on Twitter knowing it would be illegal if it was stock or product placement has been a trip.
@eric_seufert Eric Seufert on x
I believe that the 2008 GFC inflicted a level of long-term economic & psychological trauma with which various segments of American society still grapple. In this piece, @smdiehl posits that cryptocurrency is a populist reaction to the GFC (1/X) https://www.stephendiehl.com/ ... h…
@carnage4life Dare Obasanjo on x
I had some draft tweets about why VCs and startup founders are so enthusiastic about the financial engineering that's been unleashed by web3/crypto but @smdiehl beat me to it. Tokens basically allow projects to IPO without any regulatory steps. It's ICOs rebranded as web tech. ht…
@carnage4life Dare Obasanjo on x
It's been startling to dig into web3 to find its just crypto where the focus has gone from making your own currency without regulation to selling your own stocks without regulation. It's the future of VCs & Wall Street financialization not the future of the world wide web. https:…

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