Hey, friends!
The total market cap of altcoins are steadily increasing as a consequence of constant new token launches + new supply hitting the market.
I think when BTC.D trends lower and altcoins can run free, there will be a selected few altcoins that will run hard. Not everything as people are used to.
More about this below.
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The problem with points program, “fake” TVL and exchange listing requirements
Why have new tokens in 2024 been down only? This has been a quite hot topic lately, and it continues to consume my brain.
I’ve already discussed low float, high FDV projects here:
But today, let’s look at the problem with points program, “fake” TVL and exchange listing requirements.
But before we get there we need a recap of reflexivity and low float tokens.
New shiny coins are good (until the circulating supply increases).
Since investors are locked up for a long time on low float tokens, this means that when they finally start unlocking it will be a constant sell pressure on the market.
Okay, so more and more supply will hit the market as tokens unlock gradually.
But the question is: where is the demand? Who will buy the tokens VC dumps on you?
You could argue that because of narrative X, Y, and Z, the price will go up, increased TVL in a DeFi protocol, a bullish event, etc., and this can work for a while. But at some point, the supply will outnumber the demand and we will start spiraling downwards due to massive inflation.
Early buyers will get trapped, which leads to bearish sentiment among the community, reduced TVL in the protocol/protocols, devs (if any) leaving for greener fields, team members quitting, etc.
So far this cycle the biggest change is the dispersion in the space. We are conditioned to think that altcoins will pump together. But now there are probably 300 decent projects. There is not enough liquidity for all of them to pump.
Okay, but this is the problem. How and why did it become this way? And is there a solution?
The problem with points program, “fake” TVL and exchange listing requirements
So the game is a little different now compared to 2020/2021. Exchanges has a lot of power in regards the question: “to list or not list a new token project”. During the years it has gotten harder and harder to get listed on Binance. If you don’t have a great backing, huge TVL upfront, great social metrics etc., you stand a small chance to get listed on TGE.
So what did small “unknown” projects do to solve this problem? You got it right: points programs.
The way it usually works is that you get points if you lock up capital in a protocol. If you lock up more = more TVL that the DeFi protocol can flex with. The points you accumulate eventually lead to an airdrop.
So far, so good.
The problem is that it builds up the expectations on what FDV a project should launch at.
A good example is from Ignas below.
Since we know the FDV EtherFi launched at, we can make the same assumption for similar projects measured by TVL.
As you can see the FDV expectations are already there for Kelp.
Why is this problematic?
Expectations build up in the pre-launch phase —> exchanges “forced” to list at higher FDVs
Higher FDV leads to less price discovery and little interest in trading the token for retail because the “juice” is already squeezed in the private phase.
Airdrop farmers/VCs/KOLs dumps their token on listing because they know that it is launched at a high FDV —> leads to down only
Expectations of a high FDV before TGE also lead to interest among people to join seed rounds before TGE. Founders do a seed extension at a higher FDV. Founders are happy because they raise more. Angels/VCs/KOLs are happy because they get short vesting/cliff and do at least a quick 2x overall (often way more).
The way I see it is that those who benefit the most are founders > VCs/angels > KOLs > retail
As I mentioned in a tweet last week it’s bad for price discovery that the dislocation between the liquid token price and the private token price has a huge gap. See tweet below:
So if the yield/money is captured in the point program phase, then why trade the token after it is launched at all?
Eventually this leads to people abandoning the protocol entirely when the point program is finished. Still curious about what will happen to eg. Ethena when their airdrop season 2 will finish. People are locking up USDe for points atm, but will they still hold it when there is no points left to farm? The staked version of USDe makes sense though because of the real yield (funding rate + ETH staking rewards). Not going to ponder more about this now, but let’s see what happens.
Now how should token projects distribute? Is there a solution?
@dunleavy89 describes it well in his tweet.
@reganbozman has suggested that projects should list their tokens at lower prices, to allow retail to buy in earlier and win some of the upside. Artificially lowering the price below the market clearing price just means that whoever trades in the first minute of trading on Binance will capture the mispricing. This would just benefit traders instead of VCs. So it’s not actually solving the problem, just giving the advantage to someone else.
hosseeb says the answer to solve the low float FDV token launch thing is to do nothing. Quoting him:
Free markets figure out this kind of thing on their own. If tokens went down, then other tokens will get repriced lower, exchanges will push teams to launch at lower FDVs, traders who got burned will only buy at lower prices, and VCs will pass along the message to founders. Series B will get priced lower due to public market comps, which will chasten the Series A investors, which finally ripples down to the seed investors. Price signals always propagate eventually.
When there’s a genuine market failure, you might need some kind of clever market intervention. But free markets know how to solve mispricings—just change the prices. The people who lost money, both VCs and retail, don’t need thinkpieces or Twitter debates from people like me. They’ve already internalized the lesson and are willing to pay less for these tokens. That’s why all these tokens are trading at lower FDVs, and future token deals will get priced accordingly.
Okay, while I do believe in free markets I think the reason why hosseeb is happy with the “do nothing”-solution is because it clearly benefits VCs a lot.
dingalingts thinks that exchanges are the ones to blame. He says:
So I guess this leads us to a thought that CEXs currently hold a large portion of the power. Even if this makes you upset, you have to admit that having a token launched on Binance in the current market automatically provides a token with a baseline FDV at TGE that is much higher than what it would be if it weren't listed there.
And he lists up some solutions that CEX can improve:
Funnily enough, a couple of days later Binance posts this where they say that they will list more projects with low to medium valuations going forward.
What we can conclude with is that our voices has power in this industry. If we don’t like something we can collectively raise our voices and try to make a change (as we already did on several toknomics models this year).
Onwards and upwards.
Stay safe.
That’s it for today, anon!
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Love this bro all great info here. Seems like there are so many potential solutions to high FDV problems haha. Huge retail fomo at public market got trickle down into private market to let founders raise at insanely high valuation. I have heard Monad is raising at 3bn FDV now privately wtf the world we are in now.