Web3 promises an internet owned by its users, when in reality, the cash behind it now resembles a carnival barker’s till. Regulators are accelerating enforcement, courts are handing down multi-year sentences, and talent is migrating to sectors where equity rewards genuine traction.
Global venture financing declined to $23 billion in April this year, according to Crunchbase data, representing barely a third of its total in March. Yet, a stubborn share of that smaller pie still pours into token deals explicitly designed for rapid exit rather than durable revenue.
Unless capital breaks this fixation on high-velocity token churn, the idealized decentralized future will suffocate under the weight of its own exploitation.
Traditional venture capital (VC) tolerates early losses to cultivate long-term value, while token-centric funds invert that equation entirely.
Liquidity is pulled forward through initial exchange offerings, staking subsidies, and insider unlock schedules, while product-market fit is often put on the back burner — sometimes permanently.
The United States Securities and Exchange Commission (SEC) case in April highlights this fact quite clearly. The $198 million fraud case, in which the SEC alleged that insiders had siphoned $57 million from investors, all while touting “risk-free” yields.
This example is not an outlier but a blueprint, as these structures function as rolling Ponzi schemes that demand a constant inflow of fresh buyers to subsidize yesterday’s promised rewards.
When macro funding tightens, there are too few latecomers left to fleece. The result: a graveyard of zombie protocols kept on life support by artificial emissions and empty liquidity pools.
Tokens as Exit Strategy
In a healthy network, a token serves as a coordination device that fuels governance, staking, or bandwidth, among other functions. One thing it is not is a golden parachute for insiders.
Despite this, 2025 term sheets routinely demand one-year cliffs and two-year full vesting, effectively guaranteeing early investors a liquid market long before a product ever even reaches beta.
The consequences may have slipped by before, but now they come backed by legislative force.
Criminal liability is no longer hypothetical, as evidenced by a New York federal judge sentencing the co-owner of three virtual-currency platforms to a 97-month prison term after he raised over $40 million on promises of guaranteed returns.
It should come as no surprise that the money was recycled to pay earlier investors and finance personal luxuries. The case turned on classic Ponzi scheme hallmarks, including fabricated trading bots, forged account screenshots, and relentless reference bonuses.
No amount of glossy branding can disguise the emptiness that held it all together. It’s a painstaking space to navigate through, as talent drain accelerates, reputational discount compounds, and Web3’s social license steadily erodes.
Engineers lured by inflated token grants soon discover that maintaining an abandoned codebase is professional quicksand. Institutional allocators, once happy to sprinkle 5% of a portfolio into digital assets, are quietly writing down those positions and redirecting risk capital to sectors with more transparent accounting. The list goes on…
Each collapse or indictment in Web3 hardens public scepticism and furnishes ammunition for critics who argue that all tokens are thinly veiled gambling chips.
Developers building decentralized identity or supply chain provenance tools are now finding themselves guilty by association. They’re forced to justify the very existence of tokens before audiences that no longer distinguish between utility coins and outright scams.
The common denominator among all these determining factors is a funding model that rewards narrative over substance. As long as term sheets treat the tokens as the exit, entrepreneurs will optimize for hype cycles instead of actual user needs.
Code quality will remain an afterthought, and every bull market will give birth to a larger class of disgruntled bagholders in the current state of the industry.
Reclaiming Web3 from Ponzinomics
Regulation can raise the cost of hollow token launches, but capital must finish the job.
The European Commission’s decision to tighten stablecoin oversight under MiCA, despite the European Central Bank’s objections, signals the arrival of adult supervision and a real recognition that consumer protection matters more than maximalist ideology.
Circle’s IPO in June raised over $1 billion at $31 per share and doubled its share price on the first trading day. It was just another echo of the same fast-exit dynamics that dominate token rounds that show that even “mature” crypto listings still provide VCs with near-instant liquidity.
Precise reserve requirements and pan-E.U. disclosure rules will force issuers to prove collateral rather than continue to print promises.
Limited partners should now demand utility milestones, such as measurable throughput gains, audited security proofs, and real user adoption, before any token unlocks.
Funds that replace 24-month vesting calendars with five-year lockups linked to protocol fee share will filter out rent-seekers and redirect resources to genuine engineering.
Web3 still has potential. It offers censorship-resistant finance, novel coordination tools, and programmable ownership. However, potential is not destiny, and the gears need to turn in harmony and the right direction.
If the money continues to chase quick-flip ponzinomics, the movement of Web3 will remain a slot machine masquerading as progress, while innovators capable of delivering the future steadily walk away.
Break the cycle now so that the next decade can see Web3 fulfill its promise of an internet that serves people, rather than serving them up for Ponzi VCs as exit liquidity.