Bankless: Points are invalid, new participants are lacking, and the market is becoming chaotic in the game between VC and retail investors

Original title: Why This Cycle Is Cooked

Original author: David Hoffman, Bankless

Original translation: TechFlow

The EIGEN airdrop sparked a discussion about the divide between private and public markets. The large-scale private placement and high FDV airdrop model based on points is causing structural problems for the crypto industry.

Converting point programs into multi-billion dollar, low-circulation tokens is not in a stable equilibrium, yet we are still trapped in this model due to the intersection of multiple factors: excess venture capital, lack of new participants, and excessive regulation.

The meta around token issuance is always changing, and we’ve witnessed several major eras:

· 2013:The Proof of Work (PoW) fork and fair launch meta

· 2017:The Initial Coin Offering (ICO) meta

· 2020:The Liquidity Mining Era (DeFi Summer)

· 2021:NFT Minting

· 2024:The Points & Airdrop Metaverse

Each new token distribution mechanism has its pros and cons. Unfortunately, this particular meta starts with a structural retail disadvantage, which is an inevitable consequence of the industry being ruthlessly regulated.

Large amounts of venture capital and retail investors

Currently, there is an oversupply of venture capital in the crypto industry. Although 2023 was a bad year for venture capital fundraising, there was still a lot of money raised in 2021, and in general, venture capital financing in the crypto space is a persistent, ongoing activity.

At present, many well-funded venture capital firms are still willing to continue to lead investments at multi-billion dollar valuations, which means that cryptocurrency startups have more and more room to stay private for longer and longer periods of time. Of course, this makes sense, because if the current issue price of the token is a multiple of the last financing, then even late venture capitalists can still find a good deal.

The problem is that by the time a startup publicly sells a token for $1-10 billion, most of the upside potential has already been discovered by early adopters — that is, no one is going to get rich by buying a $10 billion token.

The structural bias is against public market capital, which worsens the overall atmosphere in the crypto industry. People want to get rich with their internet friends and form strong online communities and friendships around such activities. This is the promise of crypto, and that promise is currently not being fulfilled.

Facing billions unlocked without new participants

A few data points that should get you thinking:

· target="">Without a slew of new players in this cycle, the supply of venture capital has greatly outstripped the demand for that capital outcome

As retail investors primarily hold the long tail of crypto assets, institutional liquidity coming in via Bitcoin ETFs will have no impact on these markets. Capital recovery from crypto native players dumping their $14k BTC purchases to Larry Fink can temporarily prop up these assets, but this is all internal capital from players with PVP capabilities who understand how unlocking works and how to avoid it.

The Impact of the Securities and Exchange Commission (SEC)

By limiting the ability of startups to raise capital and distribute tokens more freely, the SEC is encouraging capital to flow to private markets where regulatory constraints are less restrictive.

The SEC’s corrupt and overzealous attitude toward the nature of tokens is undermining the value of public market capital, and startups cannot trade tokens for capital in the public markets without triggering massive bleeding from their legal teams.

The Compliance Process of Crypto

Crypto has gradually become more compliant over time. When I entered the crypto space during the ICO craze in 2017, ICOs were touted as a way to democratize investment and access to capital. Of course, the ICO eventually evolved into an exploited scam, but regardless, the story forced me and many others to recognize the potential that cryptocurrencies could bring to the world. But the ICO meta ended when regulators viewed these transactions as clear unregistered securities sales.

Then the industry turned to liquidity mining and went through a similar process.

With each cycle, cryptocurrencies seek to obfuscate their methods of distributing tokens to the public, and with each cycle, it becomes more difficult to hide this process—a process that is essential to the decentralization of the projects and the nature of our industry.

This cycle has been subject to the most relentless regulatory attention we have ever seen, and as a result, lawyers for venture-funded startups face the greatest compliance challenge the industry has ever seen: distributing tokens to the public without getting sued by regulators.

Breaking the Balance

Regulatory compliance tilts the fulcrum of the public-private market heavily toward the private market, as startups can choose to accept venture capital directly rather than violate securities laws.

The location of the fulcrum that supports the balance between private and public capital is determined by the control that regulators have over crypto markets.

· If there were no investor accreditation laws, the fulcrum would be more balanced.

· If there were no investor accreditation laws, the fulcrum would be more balanced.

The fulcrum that supports the balance between private and public capital is determined by the control that regulators have over crypto markets.

· If there were no investor accreditation laws, the fulcrum would be more balanced.

· If there was a clear regulatory path to issuing tokens in compliance, the difference between public and private markets would be smaller.

· If the SEC didn’t get involved in the crypto wars, we would have fairer, more orderly markets.

Because the SEC doesn’t provide clear rules, we end up with a complex and confusing “points” meta that satisfies no one.

Points are unfair and the market is disorderly

“Points” leave retail investors in the dark about what they are actually receiving, because if there had been a clear statement about what points are (bonds on tokens), the team would have exposed themselves to possible securities law violations (from the perspective of a corrupt and overzealous SEC regulator).

Points do not provide investor protection, because in order to provide investor protection, the process needs to be given regulatory legitimacy in the first place. As we find ourselves in this extremely bad conclusion, we discovered the Sybil vs. Community debate, where LayerZero is stuck between a rock and a hard place.

LayerZero recently announced a program to allow users to self-report Sybil activity in the LayerZero airdrop, prompting Kain Warwick to write this post in defense of Sybils, as Sybils are in some ways a strong support for LayerZero and boosting its position in the market.

In reality, there is no line between community members and Sybils. Since regular crypto participants cannot participate in private markets, the only way they can get exposure is through commitment and meaningful activity on the platforms whose tokens they want.

Since small investors cannot simply write small checks to early rounds of cryptocurrency projects, the current token issuance mechanism forces users to Sybil on projects they favor. As a result, no "community" will unite to get rich in this cycle, like LINK in 2020 or SOL in 2023. Current token issuance does not allow communities to gain early exposure at low valuations.

As a result, Twitter attacks on airdrop startups are becoming more and more common - the inevitable result of the community's inability to express its wishes as a valid stakeholder in the project. A lot of "no representation, no taxation!"

Not to mention another potential problem: mercenary capital exploitatively acquires tokens and dumps them. Without the ability to get small investors to invest in the early stages of startups, these highly aligned investors must compete for airdrops with highly toxic hired farmers, with no discernible distinction between the two parties.

Improper Balance

The “points” meta has become too obvious to sustain. The SEC and scammers are both working on this, and both sides are trying to use it to their advantage.

We will have to turn to a different strategy, one that hopefully enriches many of the early community stakeholders while not angering the SEC. Unfortunately, without regulation for token issuance, this will be a pipe dream.

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　　Disclaimer: Includes third-party opinions. No financial advice. See Risk Warning.