Four current dilemmas in the crypto market

EIGEN's airdrop sparked a discussion about the gap between private and public markets. The trend of airdrops based on points, large private round financing, and high FDV is creating structural problems for the crypto industry.

Transforming a points program into a multi-billion dollar token with a very low circulation is not a stable equilibrium, yet we still find ourselves caught up in this trend due to a combination of factors: excess venture capital, a lack of new players, and heavy-handed regulators.

The narrative on how token issuance works has been constantly changing, here are the major eras we have seen:

• 2013: Proof of Work (PoW) Fork and Fair Launch of the Metaverse

• 2017: Initial Coin Offerings (ICOs) “Metaverse”

• 2020: The era of liquidity mining (Summer of DeFi)

• 2021: NFT Minting

• 2024: Points and airdrops in the Metaverse

Every new token distribution mechanism brings advantages, but also disadvantages. Unfortunately, this particular “metaverse” starts with structural retail disadvantages, which is an inevitable result of the heavy regulatory scrutiny of the industry.

Abundant Venture Capital vs. Retail Investor Dilemma

The cryptocurrency industry is currently awash with excess VC funding. While 2023 was a bad year for VC fundraising, there is still a lot of money left over from 2021 rounds, and overall, raising money from VCs in the cryptocurrency industry has been an ongoing activity.

The fact that a large number of well-funded VCs are still willing to continue to lead funding rounds with multi-billion dollar valuations means that crypto startups can stay private for longer. This makes sense, of course, because if tokens are currently being issued at multiple times their last funding price, then even late-stage VCs can find suitable investment opportunities.

The problem is that when a startup issues a public token for $1-10 billion, most of the potential gains have already been minted by early adopters, i.e. no one will get rich overnight by buying a $10 billion token.

By structurally weakening public market capitalization, the overall atmosphere in the crypto industry is deteriorating.

People want to make fortunes with their online friends and build strong online communities and friendships around the activity. This is the promise of cryptocurrency, but it has not yet been fulfilled.

Huge unlocking, weak new entrants

Here are some data points for you to think about:

• Vance estimates that VC unlocking will bring $200-300 billion in selling pressure in 2024 and 2025

• Coinbase’s Q2 report further proves that new market participants don’t exist, at least not in significant numbers

• Since there are not a lot of new entrants in this cycle, venture capital far exceeds the demand for investment returns

• Since retail investors mainly hold non-mainstream crypto assets, institutional liquidity flowing in through Bitcoin ETFs will not drive up the quotes in these markets. The circulation of funds from crypto native holders selling their $14,000 purchases of Bitcoin to Larry Fink may temporarily support these assets, but these are just internal funds from gamers who are proficient in unlocking operations and circumventing unlocking.

SEC Impact

By limiting the ability of startups to more freely raise funds and issue tokens, the SEC is encouraging capital to flow to private markets where there are fewer regulatory restrictions.

The corrupt and overbearing nature of the SEC’s token regulation is undermining the value of public market capital, as startups cannot exchange tokens for public market capital without triggering a massive panic among their legal teams.

Cryptocurrency on the road to compliance

As they develop, cryptocurrencies are gradually becoming more compliant.

When I first got into crypto during the ICO craze in 2017, ICOs were touted as a way to democratize investment and access to capital. ICOs of course turned into a scam that was exploited, but it was still a story that attracted me and many others to the cryptocurrency industry and its potential. However, the ICO model ended when regulators viewed ICO transactions as clear unregistered securities sales.

The industry then turned to liquidity mining, which went through a similar process.

With each cycle, cryptocurrencies find ways to obfuscate their methods of issuing 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 projects and the nature of our industry.

This cycle faces the most intense regulatory scrutiny we’ve ever seen, and as a result, teams of lawyers at venture-backed startups face the biggest compliance challenge in the industry’s history: issuing tokens to the public without getting sued by regulators.

Imbalance between public and private equity and regulatory dilemma

The cryptocurrency industry is under tremendous pressure from regulation, forcing startups to rely more on venture capital rather than public market financing. This compliance cost has tilted the market's balance heavily toward the private market.

Ideally, the balance between public and private market financing depends on the strength of regulation:

• If there was no investor suitability system, the public and private equity markets would be more balanced.

• If token issuance had a clear and compliant path, the differences between the public and private markets would narrow.

• If the SEC stopped its regulatory battle against cryptocurrencies, we would have a more fair and orderly market.

Because the SEC refused to provide clear regulatory guidance, we ended up with a complex and confusing “points” model that made everyone unhappy.

Disadvantages of “Points”

The “points” system is extremely opaque to retail investors. Due to the rigor and corruption of regulators, if the project clearly states the nature of the points (i.e. the right to receive tokens), it may violate securities regulations.

“Points” also fail to provide any investor protection, as the premise for providing such protection is the legitimacy of regulation.

In a poor regulatory environment, we are caught in the debate of Sybil attacks vs. community governance, and projects like LayerZero are facing a dilemma.

LayerZero recently announced a plan to encourage Sybil attackers to self-report by airdropping Sybil tokens. This incident prompted Kain Warwick to post a post defending the Sybil group, arguing that they have made a significant contribution by significantly improving LayerZero's relevant data indicators and market position.

However, in reality, there is no clear boundary between community members and Sybil attackers. Since ordinary cryptocurrency participants cannot enter the private placement market, the only way for them to gain token exposure is to actively participate in the activities of the platforms they favor.

Since the current mainstream token issuance method excludes retail investors from participating in early financing, users are forced to obtain tokens of promising projects through Sybil. Therefore, unlike the LINK airdrop in 2020 or the SOL airdrop in 2023, this cycle did not see the community getting rich together. The current token issuance method hinders the community's opportunity to gain early exposure when the project valuation is low.

In response, Twitter mob attacks against airdrop projects have become increasingly common. This is also the inevitable result of the community’s inability to express its legitimate demands as a stakeholder of the project, reminiscent of the slogan “No representation, no taxation!”

Worse still, some profit-seeking funds are taking advantage of the system by swiping tokens and then selling them for profit. Since retail investors cannot participate in early-stage project investments, these highly aligned investors have to compete with malicious swipers for airdrops, with no clear distinction between the two.

Unstable balance

The “points airdrop” model has become too obvious to continue. Regulators and malicious operators alike will target it and try to profit from it.

We must move to a different strategy, one that more thoughtfully benefits early community stakeholders without incurring the wrath of regulators. Unfortunately, without regulators’ special rules for token issuance, this will remain a pipe dream.

The era of “points airdrops” is over, let’s look forward to new ways of issuing tokens.