Original title: Why This Cycle Is Cooked
Original author: David Hoffman
Original translation: Ladyfinger, Blockbeats
Editors Note: In the rapid development of cryptocurrency, market structure and capital flow are facing unprecedented challenges. The EIGEN airdrop event not only triggered extensive discussions on current market dynamics, but also exposed significant differences between private and public markets. This article aims to deeply analyze the complex factors behind this phenomenon, including the excess of venture capital, the involvement of regulators, and how these factors affect the interests of retail investors. By taking a historical review of the evolution of different token issuance models, we attempt to provide readers with a comprehensive perspective to understand the structural problems of the current market and explore possible solutions.
introduction
The EIGEN airdrop sparked a discussion about the divide between private and public markets. The points-based, high-FDV airdrop model driven by large private rounds is creating structural problems for cryptocurrencies.
Points schemes turned into multi-billion dollar tokens with low circulation do not constitute a stable or sustainable equilibrium. However, due to a confluence of factors including an excess of venture capital, a lack of new entrants, and heavy pressure from regulators, we find ourselves stuck in this model with no escape.
Evolution of Token Distribution Models
The model of token issuance is constantly changing. Here are the eras we have experienced:
2013: Proof-of-Work (PoW) Fork and Fair-Launch Meta
2017: Initial Coin Offering (ICO) Model
2020: Liquidity Mining Era (DeFi Summer)
2021: Non-fungible token (NFT) minting
2024: Points and airdrop model
Every new token distribution mechanism has its own pros and cons. Sadly, this particular meta-mechanism starts from a structural disadvantage in the retail industry, which is a natural consequence of the relentless regulatory spotlight hovering over the industry.
Excess of venture capital and disadvantages of retail market
There is currently an oversupply of venture capital in crypto. While 2023 was a bad year for venture capital fundraising, funds raised in 2021 were still ample, and raising funds from venture capital is an ongoing activity in the crypto space.
The fact that there are a plethora of well-funded VCs willing to continue leading rounds at multi-billion dollar valuations means crypto startups can stay private longer. This makes sense, since even late-stage VCs can still make money if tokens are currently priced at multiple times their last funding round.
The problem is that when a startup publicly issues a token for $1-10 billion, most of the upside has already been discovered by others who came earlier, meaning no one is going to get rich by buying a $10 billion token.
The atmosphere in the cryptocurrency industry is deteriorating as it is structurally disadvantaged by public market capital.
People want to get rich with their internet friends and form strong online communities and friendships around this activity. This is the promise of cryptocurrency, and it is currently not being fulfilled.
Billions unlocked but no new entrants
The following is a combination of several data, which should make everyone alert:
Vances rough calculations suggest that there will be $200 billion to $300 billion of venture capital unlocking pressure in 2024 and 2025.
Coinbase’s second quarter report further demonstrates the lack of new market entrants, at least not at scale.
Without a meaningful number of new entrants into this cycle, venture capital has significantly exceeded the demand for the outcomes of that capital.
And retail investors mainly own long-tail crypto assets, so institutional liquidity flowing in through Bitcoin ETFs will not bid up these markets. Capital recovery from crypto natives selling $14,000 worth of Bitcoin bought by Larry Fink can support these assets for a while, but this is all internal capital of players with PVP capabilities who know how unlocking works and how to avoid it.
Market dynamics under SEC regulatory pressure
By limiting the ability of startups to more freely raise capital and issue tokens, the SEC is encouraging capital to flow to less regulatory-constrained private markets.
The SEC’s overreach and regulation of the nature of tokens is undermining the value of public market capital, as startups cannot trade their tokens for public market capital without triggering a massive brain hemorrhage in their legal teams.
The importance of cryptocurrency compliance to market balance
As it progresses, the cryptocurrency industry has gradually become more compliant.
When I got into crypto in 2017 during the ICO craze, ICOs were promoted as a way to democratize investing and access to capital. Of course, ICOs ultimately devolved into exploited scams, but nonetheless, it was a story that attracted me and many others to the potential that cryptocurrencies could bring to the world. However, the ICO model ended when it became clear that regulators were viewing these transactions as unregistered securities sales.
The industry then turned to liquidity mining and went through a similar process.
With each cycle, cryptocurrencies have managed to obfuscate how they distribute tokens to the public, and with each cycle, it has become more difficult to hide this process, which is essential to the decentralization of projects and the essence of our industry.
This cycle has the most relentless regulatory spotlight we’ve ever seen, and as a result, lawyers for venture-funded startups face the biggest compliance challenge the industry has ever experienced: distributing tokens to the public without getting sued by regulators.
The impact of compliance on market balance
Compliance shifts the balance between public and private markets heavily toward the private side, as startups can choose to simply accept venture capital rather than violate securities laws.
Where the balance point between private and public capital lies is determined by how tightly regulators exercise control over crypto markets.
· If there were no investor certification law, then this pivot would be more balanced.
If there is a clear regulatory path for compliant token issuance, the differences between public and private markets will narrow.
If the SEC hadn’t waged war on cryptocurrencies, our markets would be more fair and orderly.
Since the SEC wont provide clear rules of the road, we end up with a complicated and confusing points model that makes no one happy.
Limitations of the current token issuance model
Points provide very limited information to retail users about what they actually received, because if it were clear what the points actually were, from the perspective of an overly intrusive SEC regulator, the team would likely expose itself to securities law violations.
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.Since we find ourselves in this extremely bad conclusion, where Sybil and community discussions have put LayerZero in a dilemma.
LayerZero’s recently announced plan to allow airdrop witches to self-identify as witches has prompted Kain Warwick to write an article defending witches, saying that they are a group of people who significantly support LayerZero’s indicators and improve LayerZero’s perceived position in the market.
In reality, there is no boundary between community members and Sybils. Since regular crypto participants have no way to participate in private markets, the only way they can gain exposure is through commitment and meaningful activity on the platform whose tokens they want.
Without allowing small investors to write small checks to early rounds of crypto projects, the current token issuance model forces users to so-called witch hunts on projects they are bullish on. As a result, no community unites to get rich in this cycle, as they did with LINK in 2020 or SOL in 2023. The current token issuance model does not provide facilities for communities to gain early exposure at low valuations.
In response, mob attacks on airdrop startups on Twitter have become increasingly common. This is the inevitable result of the community being unable to express its wishes as a valid stakeholder in the project, creating an atmosphere of no representation, no taxation!
There is even another potential danger: mercenary capital exploitatively farming tokens to dump. Without the ability to get small investors to invest in the early stages of a startup, these highly aligned investors must compete for airdrops with toxic mercenary farmers, with no distinguishable differences between the two.
The future of markets: finding a new balance
The drawbacks of the points model have become apparent and are difficult to sustain. Both the SEC and scammers will exploit it and try to use it to their advantage.
Ultimately, we will have to move to a different strategy, one that hopefully does not incur the wrath of the SEC but also has a more sophisticated strategy that benefits more early community stakeholders. Unfortunately, without regulatory exemptions for token issuance, this is a pipe dream.
