# Why This Cycle Is Cooked Source: https://www.bankless.com/cycle-could-be-cooked Kiwi News: https://news.kiwistand.com/stories/Why-This-Cycle-Is-Cooked?index=0x663957e09ad52363c6b1d27969e2b63a7b0c8017c6841bf850ad65ab9caac493f79ed9ef Submitted by misha on 2024-05-06 UTC, 8 upvotes, 5 comments ## Summary The author argues that the points-and-airdrop token distribution model has become unsustainable, and that its problems stem from an oversupply of VC capital, few new retail entrants, and what the text calls an overbearing SEC. Venture-backed startups can stay private longer, so by the time a token launches at $1-10 billion, much of the upside has already been taken by earlier investors, and the text cites Vance's estimate of $200-300 billion in sell pressure from VC unlocks in 2024 and 2025. Coinbase's Q2 report is cited as evidence that retail trading volumes remain well below their 2021 highs. The article also says LayerZero's self-report program for Sybil addresses, which offers 15% of intended allocation with a May 17 deadline, reflects a conflict between rewarding durable users and sybil farmers. ## Article The EIGEN airdrop has triggered discussion about the rift between private and public markets. The points-based, large private rounds-fueled, high-FDV airdrop meta is creating structural problems with the vibes of the crypto industry. Points programs that turn into multi-billion dollar, low-float tokens is not a stable equilibrium, yet we nonetheless find ourselves cornered in this meta by a confluence of factors: an overabundance of VC capital, a lack of new entrants, and an overbearing regulator. The meta around token issuances is always in flux, here are the major eras we've seen: 2013: PoW fork-and-fair launch meta 2017: ICO meta 2020: liquidity mining era (DeFi Summer) 2021: NFT mints 2024: the points & airdrop meta Each new token distribution mechanism brought its merits, and each one had its drawbacks. Sadly, this particular meta begins from a place of structural retail disadvantage, a natural consequence of the unforgiving regulatory spotlight that’s hovering over the industry. Who did this? pic.twitter.com/pvpn8vVCkO — Takuiten⚡ (@Takuiten) April 30, 2024 Abundant VC Dollars vs. Retail Right now, there is simply an oversupply of venture capital in the crypto industry. Despite the terrible year 2023 was for VC fundraising, there is still plenty of capital from 2021 raises, and in general raising from VCs in crypto is a persistent, ongoing activity. Currently, an abundance of well-capitalized VC firms are still willing to continue leading rounds at valuations in the billions of dollars, meaning crypto startups have room to stay private longer and longer. This is rational of course, because if tokens are currently launching at multiples of their last raise, then even the late VCs can still find a good deal. The problem is, by the time a startup releases a public token at $1-10 billion, much of the upside has already been discovered by earlier parties – i.e., No one is going to get rich by buying a $10B token. By structurally disadvantaging public market capital, the vibes of the crypto industry are souring. 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, and this promise is currently not being fulfilled. 26/ Man *this week alone* we have seen three token launches alone with $5B+ in aggregate supply overhang Zero fucking chance there are enough institutional bids to eat the supply hitting the market@Arthur_0x can only buy so many of your bagshttps://t.co/fePbu1O7xo — Regan Bozman (@reganbozman) April 19, 2024 Billions of unlocks, no new entrants Here are a few datapoints that together should give you some pause: Vance’s napkin math says $200-300 Billion in sell pressure from VC unlocks in 2024+2025 This is the first cycle where retail is actually paying attention to unlocks. This is a good thing, and I hope they take this into account when making investment decisions. GCR literally had to gather a gang of neets to find this information last cycle. A few points of… https://t.co/QXLXDyr8PH — Vance Spencer (@pythianism) April 29, 2024 Coinbase’s Q2 report illustrates further evidence that new market entrants are not present, at least not in size On Coinbase Retail Trading volumes: Still multiples off 21' Highs, now this can have multiple interpretations, if you're ultra bullish u can scream to the skies "WAGMI, it's so early, we are going so fuckin high" But if you look at Institutional trading volumes, you notice they… pic.twitter.com/9z6ZQIql9Z — Wazz (@WazzCrypto) May 2, 2024 Since there aren’t a meaningful number of new entrants this cycle, VC capital significantly outweighs the demand for the fruits of that capital 25/ TLDR I think a TON of sell pressure hits every token with large unlocks that is more than 10-20x up from ANY private round This is amplified by the fact that these tokens are not THAT liquid - a $1.5M sell moves the Binance $ARB market 2%+ — Regan Bozman (@reganbozman) March 5, 2024 Since retail predominantly owns the long-tail of crypto assets, the institutional liquidity coming in through the Bitcoin ETFs is not going to bid these markets. Capital recycling from crypto-natives dumping their $14k BTC buys on Larry Fink can prop up these assets for a while, but it's all internal capital from PVP-capable players who know how unlocks work, and how to avoid them. The Effect of the SEC By restricting the ability for startups to more freely raise capital and distribute tokens, the SEC is encouraging capital to flow into private markets, which has fewer regulatory constraints. The SEC’s corrupt and overbearing nature towards the nature of tokens is nerfing the value of capital in the public markets, as startups cannot trade their tokens for public market capital without triggering mass aneurysms among their legal teams. Enjoying this article? Subscribe to Bankless or sign in Crypto’s March Towards Compliance Crypto has slowly become more compliant as it has progressed. When I got into crypto, during the 2017 ICO mania, ICOs were touted as a way to democratize investment and access to capital. ICOs of course devolved into an exploited grift, but nonetheless it was a story that compelled me and many others toward the potential that crypto can bring to the world. But the ICO meta ended when it became apparent that regulators were viewing these transactions as clear unregistered securities sales. The industry then pivoted into liquidity mining, which went through a similar process. Every cycle, crypto manages to obfuscate its method of distributing tokens to the public, and every cycle, it becomes a little harder to hide this process – a process that is crucial to the decentralization of the projects, and the nature of our industry. This cycle has the most unrelenting regulatory spotlight that we’ve ever seen, and thus the lawyers of VC-funded startups have been given the biggest compliance challenges the industry has ever experienced: distribute tokens to the public, without getting sued by regulators. Disrupting the Balance Regulatory compliance shifts the fulcrum of the public-private market to be heavily weighted towards the private side – since startups can choose to simply accept VC capital instead of potentially violating securities laws. The position of the fulcrum that balances private vs public capital is determined by the strength of the chokehold that regulators have over the crypto markets. If there were no investor accreditation laws, then this fulcrum would be more balanced. If there was a clear regulatory path for compliantly issuing tokens, then the differences between public and private markets would be smaller. If the SEC wasn’t engaged in a war on crypto, then we would have far more fair and orderly markets. Since the SEC won’t provide clear rules of the road, we end up with a complicated and convoluted ‘points’ meta which satisfies no one. Points are unfair, disorderly markets ‘Points’ give retail users zero clarity on what they are actually receiving, because if there was ever an explicit articulation of what points actually are (a claim on tokens), the team would expose themselves as potentially violating securities laws (from the perspective of an overbearing and corrupt SEC regulator). Points offer no investor protections, because in order to offer investor protections, the process needs to be given regulatory legitimacy in the first place. As a result of this extremely shitty conclusion that we’ve found ourselves in, we’ve discovered the Sybil vs Community debate, in which LayerZero is stuck between a rock-and-a-hard place. We believe it is in the protocol's best interest to distribute tokens to durable users — not sybil farmers. If you are a sybil, you have two options: – Self-report sybil addresses for 15% of your intended allocation. No questions asked. The deadline to do so is May 17th. – Do… pic.twitter.com/Kme9ZKckC7 — LayerZero Labs (@LayerZero_Labs) May 3, 2024 LayerZero recently announced a program for airdrop Sybils to self-report their Sybil attack on the incoming LayerZero airdrop, which triggered Kain Warwick to write this thread defending the Sybils as a group of people who have significantly supported LayerZero’s metrics, and have raised LayerZero’s perceived status in the market. In reality, there is no line between a community member and a Sybil. Since your average crypto participant has no way of engaging in the private markets, the only way they have to gain exposure is pushing through committed and meaningful activity on the platform they want the token for. In the absence of simply letting small-time investors write small-time checks into early rounds of crypto projects, the current token issuance meta has forced users to Sybil the projects they are bullish on. As a result, no ‘communities’ are banding together getting rich this cycle, like they did with LINK in 2020, or SOL in 2023. The current meta of token issuances don’t give affordances to communities gaining early exposure at low valuations. As a reaction, Twitter mob attacks on airdropping startups are increasingly common – a logical consequence of communities of not being able to express their desires as valid stakeholders in a project. Big "No taxation without representation!" vibes. This is to say nothing about the other snake in the grass: mercenary capital exploitatively farming tokens to dump. Without the ability for small-time investor to invest in earlier stages of a startup, these highly-aligned investors have to compete with toxic mercenary farmers for an airdrop, without any distinguishable difference between these two parties. An Inadequate Equilibrium The ‘points’ meta has become too explicit to be sustainable. Both the SEC and grifters are coming for it, and both will try to exploit it to their benefit. We will have to move on to a different strategy, hopefully one more thoughtful about making many early community stakeholders wealthy while also not triggering the ire of the SEC. Sadly, without a regulatory carveout for token issuances, this is a pipe dream. The meta is dead – long live the meta. ## Comments **tim**: This is pretty high value and I‘m glad David Hoffmann wrote it. I loved the section where he talked about the value of the blue chip VC projects going public being perfectly priced internally already so that prior investors can dump on retail. And besides, yeah there are no more „fuck ups“ in the sense that someone accidentally underprices an early stage company or whatever. Ideally u got ur nepotism down and you know who to call to get into this round! **0xeD0D...87F5**: Missing the old days of retrospective airdrops without any notice. Just fresh tokens to users' wallets. **m-j-r.eth**: if any project ran a month-long (30 days) campaign where every participant has to commit to a daily binary choice, that would be a billion different ways to describe participants. some "descriptions" would have thousands of instances, and token distributors would be able to discern that these instances are not. instead, we have bundled activity like "like + retweet + follow + reply" quests. maybe some linear system where the whales fight the shrimp for some weighted deposit meta. at some point the sober perspective is that the market is not as fluid or a la carte as it can be, regardless of external scapegoats. This probably isn't a well-liked concept, but the responsibility of a value proposition does not default to the commitment of bagholders to secondarily distribute it. while it is true that algorithmic referral rewards are longer-tail incentives than KOL-amplified TGEs, this is only a step forward, not a leap or the end of the journey. the first step of recovery is checking the unrealistic expectations around these incentives. it's not reasonable to think that retroactive punishment is as constructive as retroactive rewards. central banks figured out dilution is easier to stomach than taxation, so why the hell are tipping systems killing their unit bias? this could have just been more tokens. analogously, multiplayer video games don't nerf the broken meta & piss off their userbase, they just buff everything else into balance. the other omission is clearly demonstrated by the current fantasy.top meta. all our attentive eggs are in one skinner box of a basket. all of the influencers are optimizing for distribution at any social cost. to me, this is a reinvention of hamster racing but now it's people compelled to inform their audiences that they'll be parasocially punished for not monotonously endorsing the "hamster's" constant progress. there's also a very unhealthy dependency on professed ignorance to duck accountability. it shouldn't surprise anyone that a bitcoiner proselytizing the OSU commencement speech was booed. I don't doubt the possibility that many will act blindsided when there's vitriol directed at lobbying efforts. plutocracy only goes so far. the more compelling idea is being immersed in the practical, consistent comfort of crypto that frees oneself from their troubles. this has been, & will continue to be, a challenge to articulate the whole truth surrounding the give & take of all participants. that is not contingent on regulatory climate, it is universal to every industry. we need to graduate from latecomer PnD & buff the risk-takers. /rant **tim**: that's such an awesome comment, I want to print, frame and hang it in my room! Actually, I thought what you said about video games was super interesting > it's not reasonable to think that retroactive punishment is as constructive as retroactive rewards. central banks figured out dilution is easier to stomach than taxation, so why the hell are tipping systems killing their unit bias? this could have just been more tokens. analogously, multiplayer video games don't nerf the broken meta & piss off their userbase, they just buff everything else into balance. you mean MMORPGs like WoW? I was playing a lot of arena and I can see what u mean. U wouldn't nerf a rogue if it was systematically OP because the player already committed time and energy to level up the char and learn to play it. Instead, basically, what you're saying is that they instead buffed all other chars until the OP'ness of the rogue went away. :) **m-j-r.eth**: not just MMORPGs, but also MMOFPS. all the dopaminergic activities follow this idea, it probably translates to sportsbetting as well. what would happen if parlay bets got outlawed? users would most definitely riot. what happened with the U.S. TikTok divestment? same thing. on the supply/design side, if I was a 100% hypercompetitive capital allocator anticipating a bounty of billions of $, I'd definitely be raising & throwing millions of $ at community nichebuilding as a significant fraction of the technical capex. There would be frontloaded question: "how are you, some random trustless account, identifiable by your decisiveness?" that means compartmentalizing the low-effort, low-SNR gmooors. it also means compartmentalizing the angels that want to only deal in $$$ & technical feedback. it means a paradise that would convert a lurker into sincere word-of-mouth distribution. In other words, I'm nonplussed that so many participants, by the consistency of their conduct, seem to want 7-8 figure shitcoins discussed only by bots, traders, & cultists. if the desired payoff was bigger, that incentive would drive preemptive hyperstition (high-SNR memes) & feedback-seeking (a satisfied community). people wouldn't stop at a multisig presale, at the very least they'd hardcode emission for farm2 onchain (and add clout over social as well). they wouldn't use the excuse of regulatory arbitrage or bot-hunting to cull tens of thousands out of the distribution. the stated intent by KOLs is belied by the predictably low aspiration inherent to the results. the rants will continue until the technical sophistication improves.