The Icarus Myth of the Crypto World: High FDV Triggers Project Self-Destruction
FDV is not a Meme.Author: 0xLouisT
Compiled by: Shenchao TechFlow
In Greek mythology, Icarus and his father Daedalus crafted wings from feathers and wax to escape the trap of King Minos. Daedalus warned his son: "Fly too low, and the sea will dampen your wings; fly too high, and the scorching sun will melt them."
But Icarus, intoxicated by the thrill of flying, soared higher and higher, forgetting his father's warning. The heat of the sun melted the wax that held his wings together, and Icarus fell into the sea. The moral of this story is that excessive pride often leads to self-destruction.
In the current cycle, I see a striking similarity to the story of Icarus. Just as Icarus was drawn to the ecstasy of flight, many crypto projects are lured by the temptation of high valuations. In both cases, they lead to their own destruction due to unsustainable promises and inflated valuations.
Why is there this FDV craze?
What are the reasons behind this low circulation and high FDV craze? Several factors are at play:
Anchoring Effect: This cognitive bias affects decision-making, relying on initial reference points. If founders believe their project's value is $1 billion, they might launch with a $10 billion FDV, setting a benchmark in the market's mind. Even if the token drops 90%, it will still revert to what the founders consider a reasonable value.
Venture Capital Valuations: The oversupply of venture capital in 2021/2022 led to inflated private valuations. VCs paid excessively high prices in each funding round, while the public market showed little interest in these high valuations. With no projects willing to conduct token generation events (TGE) at valuations below the last private funding round, they were forced to seek ways to launch at higher valuations.
Incentives and Finances: A paper-based $10 billion FDV enhances the project's finances, allowing it to attract top talent, provide incentives for holding tokens, offer ecosystem grants, and establish partnerships—driving growth with significant paper value.
Supply Distribution: After ICOs and SEC regulatory actions, distributing tokens to the community has become more challenging. Airdrops and community incentives often fail to allocate meaningful token proportions at launch, which remains a significant challenge for the industry.
OTC Sales and Hedging: High launch prices are achieved through discounted OTC sales or by using perpetual contracts to hedge positions, although executing large trades is difficult.
Perception of Success: This reflects our way of thinking. Higher valuations create an illusion of success, attracting people to seemingly successful projects, and everyone wants to get involved.
How did this all start?
If you create a token A with a supply of 1 billion and pair it with 1 USDC in a Uniswap pool, the nominal value of token A is $1, making its FDV $1 billion. This valuation is entirely artificial; the actual value of the token is very limited.
The same goes for high FDV tokens, where the actual circulating supply is only a small fraction of the total supply. After the initial airdrop's selling pressure subsides, most of the supply is held by market makers and whales, who can influence market prices. Thus, a $1 billion FDV can be achieved with just tens of millions of dollars.
Issues Related to High FDV
This high FDV environment leads to a significant imbalance in the cost structure and supply distribution between TGE liquidity buyers and private investors (see chart). This excessive imbalance exacerbates the ongoing tension between these two groups until market prices return to reasonable levels.
TGE buyers incur immediate losses after purchasing, while VCs are incentivized to sell once their holdings unlock. When community buyers realize this trend, they stop buying, which explains the recent sharp decline in interest in new tokens.
A healthier situation should show less imbalance between community and VC prices, promoting genuine price discovery (see below).
In an efficient market, price discovery is inevitable. While you can artificially influence price discovery in the short term, this merely delays the return of prices to their true value. However, the development path of the market is interconnected, making a sustained downward trend much more painful than directly reaching equilibrium.
Conclusion
An important nuance in the Icarus myth is the reminder not to fly too low. Just as Icarus was warned that flying too low could weaken his wings, issuing tokens at undervalued levels can stifle growth potential. This may hinder partnerships, make retaining talent difficult, and impact overall success. Issuing tokens only after the project is sufficiently mature is as crucial as avoiding high FDV situations.
Key Points
FDV is Not a Meme: Avoid issuing tokens at high FDV. Like Icarus, attempting to manipulate the market through inflated valuations is likely to backfire in the long run. For liquidity investors, high FDV tokens are a warning sign—they typically avoid or even short assets with inflation risks.
Raise Venture Capital Wisely: Raise funds only when necessary and in alignment with growth strategies. Choose the venture capital firms you want to partner with, not just the ones with the highest valuations. Avoid accepting unsustainable valuation pressures.
Avoid Early Token Issuance: Do not issue tokens merely because high FDV is achieved in the private market. Ensure there are clear signs of market appeal and product-market fit before conducting a token issuance.
Token Distribution: This is a topic worth discussing separately, but to enable effective price discovery, circulating supply should be maximized at the time of token issuance. The goal should be at least 20% to 50% of the total supply, rather than just 5%. However, the current regulatory environment may make achieving this circulating supply target challenging.
Engage with Liquidity Managers: Liquidity managers are mature investors who will take on project risks post-TGE, thus playing a crucial role in price discovery rather than venture capitalists.
