Bankless: Points expire, unlocking continues, and the market is hard to maintain amidst the competition between VCs and retail investors
The "points" meta has become too obvious to sustain.Original Title: Why This Cycle Is Cooked
Original Author: David Hoffman, Bankless
Original Translation: 深潮 TechFlow
The EIGEN airdrop has sparked discussions about the divide between private and public markets. The large-scale private placements based on points and high FDV airdrop models are bringing structural issues to the crypto industry.
Transforming point programs into billions of dollars worth of low-circulation tokens is not in a stable equilibrium; however, we remain trapped in this model due to a confluence of factors: excess venture capital, lack of new participants, and excessive regulation.
The meta surrounding token issuance is always changing, and we have witnessed several major eras:
2013: Proof of Work (PoW) forks and fair launch meta
2017: Initial Coin Offering (ICO) meta
2020: Liquidity mining era (DeFi summer)
2021: NFT minting
2024: Points and airdrop metaverse
Each new token distribution mechanism has its advantages and disadvantages. Unfortunately, this particular meta starts from a structural disadvantage for retail investors, which is an inevitable consequence of the industry's relentless regulation.
Abundance of Venture Capital vs. Retail Investors
Currently, there is an oversupply of venture capital in the crypto industry. Although 2023 has been a bad year for fundraising in venture capital, the funding from 2021 still has a substantial amount, and overall, fundraising in crypto venture capital is a persistent and ongoing activity.
At present, many well-funded venture capital firms are still willing to lead rounds at billion-dollar valuations, which means that crypto startups have an increasingly long time to remain private. Of course, this is reasonable because if the current issuance price of tokens is a multiple of the last round of funding, even later-stage venture capitalists can still find a good deal.
The problem is that when a startup publicly issues tokens worth $1 billion to $10 billion, most of the upside potential has already been discovered by early participants—that is, no one is going to get rich by buying a token worth $10 billion.
The structural bias is unfavorable to public market capital, thus worsening the overall atmosphere in the crypto industry. People want to get rich alongside their internet friends and form strong online communities and friendships around this activity. This is the promise of crypto, and that promise is currently unfulfilled.
Facing Billions in Unlocks Without New Participants
Several data points should make you start thinking:
Since retail investors primarily hold the long tail of crypto assets, institutional liquidity entering through Bitcoin ETFs will not impact these markets. The capital recovery from crypto-native players selling their BTC purchased at $14,000 to Larry Fink can temporarily support these assets, but this is all internal capital from players with PVP capabilities who understand the mechanics of unlocks and how to avoid them.
Impact of the SEC
By restricting startups' ability to raise capital and distribute tokens more freely, the SEC is encouraging capital to flow into private markets with less regulatory constraints.
The SEC's corrupt and excessive attitude towards the nature of tokens is undermining the value of public market capital, as startups cannot exchange tokens for public market capital without triggering massive bleed from legal teams.
The Compliance Process of Crypto
Over time, crypto has gradually become more compliant. When I entered the crypto space during the ICO frenzy in 2017, ICOs were touted as a way to democratize investment and capital acquisition. Of course, ICOs ultimately evolved into a manipulated scam, but nonetheless, this story forced me and many others to recognize the potential that cryptocurrencies could bring to the world. But when regulators began to view these transactions as clear unregistered securities sales, the ICO meta came to an end.
Then, the industry turned to liquidity mining, undergoing a similar process.
Each cycle, cryptocurrencies manage to obfuscate how they distribute tokens to the public, and with each cycle, hiding this process becomes increasingly difficult—this process is crucial for the decentralization of projects and the nature of our industry.
This cycle has faced the most relentless regulatory scrutiny we have ever seen, and thus, lawyers for venture-backed startups are facing the largest compliance challenges in the industry's history: distributing tokens to the public without being prosecuted by regulators.
Breaking the Balance
Regulatory compliance severely tilts the balance between private and public markets towards private markets, as startups can choose to directly accept venture capital rather than violate securities laws.
The position of the pivot supporting the balance between private and public capital is determined by regulators' control over the crypto market.
Without investor accreditation laws, this pivot would be more balanced.
If there were clear regulatory pathways to compliantly issue tokens, the differences between public and private markets would be smaller.
If the SEC did not engage in the war on cryptocurrencies, we would have a fairer and more orderly market.
Due to the SEC's failure to provide clear rules, we ended up with a complex and confusing "points" meta that satisfies no one.
Points Are Unfair, Market Order Is Chaotic
"Points" leave retail investors in the dark about what they are actually receiving, because if there were a clear statement about what points are (bonds for tokens), the team would expose themselves to potential violations of securities laws (from the perspective of a corrupt and overreaching SEC regulator).
Points do not provide investor protection because providing investor protection first requires granting regulatory legitimacy to this process. As we find ourselves in this extremely unfortunate conclusion, we discover the debate of witches vs. community, where LayerZero is caught in a dilemma.
LayerZero recently announced a plan that allows users to report witch behavior in LayerZero airdrops through self-reporting, prompting Kain Warwick to write this post defending witches, as witches have somewhat supported LayerZero and elevated its status in the market.
In reality, there is no boundary between community members and witches. Since ordinary crypto participants cannot engage in private placements, the only way they gain exposure is through commitments and meaningful activities on the platforms where they want tokens.
As small investors cannot simply write small checks to early rounds of crypto projects, the current token issuance mechanism forces users to engage in witch behavior for the projects they are bullish on. Thus, in this cycle, there is no "community" that will come together to get rich like LINK in 2020 or SOL in 2023. The current token issuance does not allow the community to gain early exposure at undervalued prices.
As a result, attacks on airdrop startups are becoming increasingly common on Twitter—this is an inevitable outcome of the community's inability to express its desires as effective stakeholders in projects. It carries the sentiment of "no representation, no taxation!"
Not to mention another potential issue: self-serving capital exploitatively acquiring tokens and dumping them. Without the ability for small investors to invest in the early stages of startups, these highly coordinated investors must compete with toxic farm operators for airdrops, with no discernible distinction between the two parties.
Inappropriate Balance
The "points" meta has become too obvious to sustain. Both the SEC and scammers are working towards this, and both sides are trying to exploit it for their own gain.
We will have to turn to different strategies, hoping that this strategy will enrich many early community stakeholders while not angering the SEC. Unfortunately, without regulatory provisions for token issuance, this will be a pipe dream.
