"The 'points' meta has become too obvious to sustain.
Author: David Hoffman
Translation: DeepTechFlow
The EIGEN airdrop has sparked a debate about the divergence between private and public markets. The large-scale private placement and high FDV airdrop model based on points is causing structural problems for the cryptocurrency industry.
Transforming point plans into tokens worth billions of dollars with low circulation is not in a stable equilibrium state. However, we are still trapped in this model due to the convergence of various factors: excess venture capital, lack of new participants, and excessive regulation.
The meta of token issuance is always changing, and we have witnessed several major eras:
2013: Proof of Work (PoW) fork and fair release meta
2017: Initial Coin Offering (ICO) meta
2020: Era of liquidity mining (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 retail disadvantage, which is an inevitable consequence of the industry being ruthlessly regulated.
Abundance of Venture Capital and Retail Investors
Currently, there is an oversupply of venture capital in the cryptocurrency industry. Although 2023 was a bad year for venture capital fundraising, the financing in 2021 still saw a large amount of funds, and overall, financing in the cryptocurrency field is a persistent and continuous activity.
At present, many well-funded venture capital firms are still willing to continue leading with valuations of tens of billions of dollars, which means that cryptocurrency startups have increasingly longer time to remain private. Of course, this is reasonable, because if the current token issuance price is multiple times the last financing, even later venture capitalists can still find a good deal.
The problem is that when a startup issues tokens publicly at a valuation of $10 billion to $100 billion, most of the upside potential has already been discovered by early participants—meaning that no one will get rich by buying a token worth $100 billion.
The structural bias against public market capital is detrimental to the overall atmosphere of the cryptocurrency industry. People want to get rich with their internet friends and form strong online communities and friendships around this activity. This is the promise of crypto, a promise that has not yet been fulfilled.
Facing Unlocking of Billions Without New Participants
Several data points should make you start thinking:
Since retail investors mainly hold the long tail of crypto assets, institutional liquidity entering through a Bitcoin ETF will not affect these markets. The capital recapture brought by Larry Fink from the crypto-native players selling their BTC bought at $14,000 can temporarily support these assets, but this is internal capital of players with PVP capabilities who understand the unlocking principle and how to avoid it.
Impact of the U.S. 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 towards less regulated private markets.
The SEC's corrupt and excessive attitude towards the nature of tokens is undermining the value of public market capital, as startups are unable to exchange tokens for public market capital without triggering massive bleeding from their legal teams.
The Compliance Process of Crypto
Over time, crypto has become increasingly compliant. When I entered the crypto space during the ICO frenzy in 2017, ICOs were touted as a democratized way of investing and raising capital. Of course, ICOs eventually evolved into a scam that was exploited, but regardless, this story forced me and many others to realize the potential that cryptocurrencies could bring to the world. However, when regulatory agencies viewed these transactions as clear cases of unregistered securities sales, the ICO meta came to an end.
The industry then turned to liquidity mining and went through a similar process.
Each cycle, cryptocurrencies manage to obscure their methods of distributing tokens to the public, and each cycle, hiding this process becomes more difficult—this process is crucial for the decentralization of projects and the nature of our industry.
This cycle has faced the most ruthless regulatory scrutiny we have ever seen, and as a result, lawyers for startups funded by venture capital are facing the biggest compliance challenge in the industry's history: distributing tokens to the public without being sued by regulatory agencies.
Upsetting the Balance
Regulatory compliance severely tilts the pivot between private and public markets, as startups can choose to accept venture capital directly rather than violate securities laws.
The position of the pivot supporting the balance of private and public capital is determined by the regulatory control of the cryptocurrency market.
If there were no accredited investor laws, the pivot would be more balanced.
If there were clear regulatory pathways to issue tokens compliantly, the difference between public and private markets would be smaller.
If the SEC did not get involved in the war on cryptocurrencies, we would have a fairer and more orderly market.
Due to the lack of clear rules from the SEC, we have ended up with a complex and confusing "points" meta that satisfies no one.
Unfair Points, Market Disorder
"Points" leave retail investors in the dark about what they actually receive, because if there were a clear statement about what points actually are (debt to the token), 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 in order to provide investor protection, this process would first need to be given regulatory legitimacy. As we find ourselves in this extremely dire conclusion, we have encountered the Witch vs. Community debate, where LayerZero is caught in a dilemma.
LayerZero recently announced a plan that allows users to report witch behavior in the LayerZero airdrop through self-reporting, prompting Kain Warwick to write this post defending the witch, as the witch has in some ways supported LayerZero and elevated its position in the market.
In reality, there is no boundary between community members and witches. Since regular crypto participants cannot participate in private sales, the only way they get exposure is by engaging in meaningful activities and commitments on platforms where they want tokens.
As the current token issuance mechanism does not allow small investors to write small checks in the early stages of startups, users are forced to engage in witch behavior for projects they believe in. Therefore, in this cycle, no "community" will come together to get rich as LINK did in 2020 or SOL did in 2023. The current token issuance does not allow the community to gain early exposure at undervalued prices.
As a result, attacks on airdropped startups on Twitter are becoming more common—this is the inevitable result of the community's inability to express their desires as effective stakeholders in projects. It's almost like "no representation, no taxation!"
Not to mention another potential issue: profit-seeking capital exploitatively obtaining tokens and dumping them. Without the ability for small investors to invest in early stages of startups, these highly coordinated investors must compete with toxic rent-seekers in airdrops, with no discernible difference between the two.
Inappropriate Balance
The "points" meta has become too obvious to sustain. Both the SEC and scammers are working towards this, and both are trying to use it for their own gain.
We will have to turn to a different strategy, hoping that this strategy will make many early community stakeholders rich without angering the SEC. Unfortunately, this is a pipe dream without regulatory provisions for token issuance.
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