Why This Cycle is Cooked

Ryan Sean Adams
Bankless nation, we got a bankless takes episode for you today. This is an episode of Hot Takes. Take Merlin, the take today. Why David thinks this cycle is cooked. We gotta explain what you mean by that.

David. Cooked. Those are some strong words coming. Big words. Also, I think we're gonna explain the bad vibes that seem to be happening in crypto right now.

It's like no one's happy, and I think you're gonna give us an explanation for why. Also, there's something to do with token distribution in the dynamic between the VC's versus the people. And finally, I hope we conclude with what happens next, how this all resolves or maybe doesn't resolve. Before we get into the takes, a moment to talk about our friends and sponsors. Transporter, a new bridging app.

David Hoffman
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Ryan Sean Adams
Transporter David, you ever see that Jason Statham transporter movie? They made like three of them, 2000, right? Yeah. And they increasingly started jumping the shark more and more and more. But that was.

Yeah, this is not that, but this is how I feel like when I'm bridging in crypto. Like, Jason Statham takes your assets from. Chain to be great marketing for him. Okay, tell me, why did you want to do this episode? You actually wrote an article, which is kind of like the genesis for this episode.

So we know some thoughts were brewing, probably thoughts. Over the last couple of weeks, we've recorded some episodes, you know, one with Regan about the VC's versus, um, like, the people. And then also there was the Eigen lair experience. But tell us, like, why this episode? I thought there's, there's just an autopsy that's kind of needed about the state of the market right now.

David Hoffman
Autopsy implies that something's kind of dead. Uh, and I actually do think that something is kind of dead. And that is the current meta of token distributions. The current meta of token distributions is always in flux. Crypto chooses to distribute tokens in different ways all throughout its history.

Like in 2013 was fork and fair. Launch 2017 icos 2020 liquidity mining defi summer 2021 token mints, NFT mints. So this is always something that is in flux. And I kind of think as a reaction reflecting on the reaction of the Eigen airdrop and some of the other patterns that we've seen, I kind of think that this current token points and airdrop meta is cooked. And in the rear view mirror now, we still will experience it for a while.

These things don't, like, disappear overnight. But I think the market is ready to look for alternatives for how projects distribute tokens. And how projects distribute tokens is, like, a very meaningful and critical part of how this industry works. It's one of the things that defines every single era in crypto. And so, really, there's just a lot of conversations happening right now about, like, layer zero is about.

About to launch their token. There's a lot of eyes on that. Zksync is after that. And then, like, again, the reflections on the eigen drop, and even some of, like, the mobs that we have seen pre Eigen, there's just a lot of, like, dots, I think, that are worthy and interesting to. To reflect on.

Uh, and this is an attempt, uh, to give our takes about all of the reflections, um, that I can put together. All right, well, we are going to give you guys the autopsy. We're going to cut open the body of this market and see what's inside. See what, uh, you know, killed, killed the victim. I don't know if that's what David's saying, but all of that and more.

Ryan Sean Adams
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That's Team Dash u.com. All right, David, you got to start by explaining yourself here, because the title of this episode and your article is why this cycle is cooked. And I want to define what you mean by cycle. All right, and then cooked. What are you, what are you talking about here?

Ryan Sean Adams
Justify yourself. Why, why are you coming in with this strong language? Yeah, so there's two different cycles that's going on here. There's the one I was alluding to in the intro, which is the token distribution meta, how the industry is choosing to distribute tokens in the current year, the current cycle. And then there's like the bull market cycle.

David Hoffman
I'm very firmly talking about the former, the actual mechanism of distributing tokens. I think that part is quote unquote cooked. The bull market cycle can exist and be independent from this they are highly related, and they have been highly related at times, but they're not perfectly related. So the bull market cycle, the price action of all these things, I'm not really necessarily talking about that. I'm mainly talking about how this particular equilibrium of how teams are distributing tokens is going to change.

And I think the market is ready for alternatives. So I think what you're saying is there's kind of two cycles at play and they're interrelated, but we always get them both during like a bull cycle. And that is one is the cycle of token distribution, right? Kind of like more tokens, more liquidity. And the other is just like the price action bull market cycle, what, what most people refer to when they talk about the cycle.

Ryan Sean Adams
And you think that those two are independent but also interrelated. And when you say cycle, this cycle is cooked, you're talking about the token distribution cycle, the thing that we're in now where we get like this airdrop cycle, maybe this, this points meta, the current distribution attempt that's going on. You think that part is cooked? Yeah. And I titled it this cycle is cooked just because it kind of rolls off the tongue better.

David Hoffman
This meta is cooked just doesn't really ring the saying. But that's really what I mean. This token meta distribution is cooked. And one of the reasons why I think it's cooked is because this whole system, this whole structure, there are structurally bad vibes going on right now. So all of these like super hyped tokens are coming to market, and we're seeing a pattern of angry protocol users that are feeling like they are getting the shit end of the stick.

They feel like they're getting pittance from the actual airdrops that are going on. So these very hype tokens, they very frequently launch at multibillion dollar fully diluted valuations. And when tokens launch at multibillion dollar fully diluted valuations, that means that most of the upside has already been discovered. Because no one is getting rich buying, investing in a $10 billion asset like that. That is like a long term investment.

That is not like, that's not like the 100 x, the thousand x that people really look for when they come into crypto. And so sure, you can be at a long term investor, but no one's getting rich buying a $10 billion token. And since because of the way that these tokens are being distributed, user allocations, the airdrops going to people are predetermined by the teams and the details around allocation weights and criteria are unknown both before and after the drop. And users really, as a result, feel like they're getting the raw end of the deal for their extremely crucial role in actually providing a protocol with users. And also meaningful decentralization as like every, like, wink wink, dog whistle that every team is saying like, hey, we're going to decentralize our protocol.

Everyone knows that that means token, and users receiving tokens is the act of a protocol decentralizing. And so this is a, this is. Like a right of passage for every single protocol. This is a right of passage for anything that exists in crypto. That's a protocol with a token is how it decentralizes and it decentralizes to users.

And this is critical for the decentralization of our industry. This process. People are not satisfied with, uh, just because of the current meta, the current structure for how these tokens are getting distributed. I think you're making the case for, like, structurally bad vibes. Like, I want to hear your data points for this.

Ryan Sean Adams
Like, why, why are you feeling this? Like, so all agree it's felt this way, maybe from a, not structurally, I'll leave that aside, but just the bad vibes have been here maybe for the past like couple of weeks. The eigen drop seemed to, like, be dropped at a time when vibes were already bad and things kind of like, got worse. But before that, I would say in like March or even earlier in April. And certainly before this year, the vibes were great in crypto.

And like, isn't that just like, correlated with price? I guess what I'm saying is you're making a stronger argument here, and you're saying there's structural, there's structural bad vibes. So I think you're trying to say that it's persistent and it's going to continue because there's some sort of underlying structural reason. But, like, are you sure it's just not a mood? You know, like, we're kind of in a mood.

It's May. I don't know, what is it? Sell in May and then go away? I mean, like, maybe, you know, it's just a momentary mood in crypto, and the good vibes continue for airdrops and, like, points and everything else after this. So, like, what are your data points here?

David Hoffman
I do kind of think that this cycle particularly have, have had some of the worst vibes that I've seen. Like, bull markets. Things are supposed to be like, healthy and happy and everyone's happy. But I don't know if I've, I'm seeing, I'm experiencing that vibes is highly correlated to price action. Of course, it's highly correlated to the supply of liquidity.

And there hasn't been, like, an overwhelming inflow of liquidity this cycle. Like, there has been a last cycle. Bitcoin has seen an inflow of liquidity. Solana has seen an inflow of liquidity, and that's about it. And it hasn't been like, like Regan said in the episode, it hasn't been a rising tide lifts all boats cycle.

Bitcoin is receiving liquidity because of the bitcoin ETF. And so that's net new liquidity. Salon is receiving liquidity because of the meme coin. Meme coin speculation. But there's, other than that, like, the rest of the industry is actually playing tug of war over, like, not that much liquidity.

Ryan Sean Adams
But you're just saying. But like you said, there's something structural here. What's the structural element to this? Yeah, okay, so the structural element is the relationship between, like, how much private capital there is versus how much public capital there is. And also the points.

David Hoffman
Token airdrop meta doesn't do something that's very, very critical for crypto, something that we've seen every other cycle do, which is allow for online communities to get rich together. Fostering Internet bonds by growing wealth together has been like a rite of passage that basically every single survivor in crypto, anyone who's made it through the cycle, has all experienced. I think people, people who, like, don't make it in crypto likely did not get rich with their Internet friends together. As a community, that's been, like, one of the core affordances that crypto is like, hey, online communities can band together and get rich with your friends, right? Um, we're not experiencing that this cycle nearly as much.

Um, meme coin. Meme coins are doing that. Me, like, with online community got rich with your friends. Um, but like, with this whole high fdv token drop meta is not allowing communities to band together around projects and get rich around a project. Um, we saw this behavior with link, the link marines.

Uh, we saw this behavior with, like, the avalanche, uh, army. And all of these people had the opportunity to ride the success of the protocol up. And that's not really something that we're seeing with high fdv token airdrops. But let me push back on that. Isn't that because basically you have to buy during the bear markets?

Ryan Sean Adams
We're in a bull market. Don't you think there's an element of unfair expectation? So one community that there's a tremendous amount of energy in right now is the Solana community, and that's because, like, some of these people rode Solana all the way down to, like, $12 or something like this, and some of them even double down and purchase Solana, and they have gotten, like, rich. What. What are we at now still in the, like, 100 levels or, you know, like, 200 levels at one point in time?

I mean, that's like a. That's like a nice ten x. Like, that feels pretty good. And so we're seeing a lot of energy there. So, like, a.

A multicycler might push back on that and just be basically like, well, yeah, you can't. You can't get rich in one cycle if you're saying that the vibes are bad because not enough retail has made enough money, it's just kind of like, well, when did you enter and, like, what. What did you purchase? Right. Is it.

Is there not the argument that, um, what, you can't expect this in. In kind of, like, the bull market, and so, you know, it is happening in pockets specifically to people who are here during the bear market? Sure, sure. I think that's totally right. Like, but one of the issues with this and one of the reasons why there are, like, Twitter mobs going on is that tokens are launching at multi billion dollar fdv.

David Hoffman
Communities are getting, like, 5%, 10%. Um, but also the high FDV, low market cap gap means that this token has to, like, suffer a ton of sell pressure before it can go up. So, like, yeah, the. The bad vibes are coming because in order for people to get richer on these things, they. They have to go down in price by a lot first, and then they can go up next cycle.

But, like, yeah, now we are experiencing bad vibes because this is what's coming first. There's also, I want to, like, talk about the public versus private market as well. In 2021, there was an abundant amount of raises going on into new funds, like records, amounts of capital going into records, amount of new funds in crypto, VC funds. You're talking about VC funds, like VC. Funds, kind of like private funds that retail couldn't access.

You can see just like, the gargantuans amount of raises that happened in 2021 and 2022. Uh, like $12 billion on average per quarter for, like, three or four quarters in a row going into new funds. All of that capital that was raised last cycle deployed during 2022 and 2023, and it's still deploying to this day. Uh, and now a lot of those investments that all of this abundant VC capital invested in are going into the tokens that you're seeing come onto the market today, uh, with the massive amounts of capital that went into the private markets last cycle. Think of, like, the public versus private markets as a teeter totter.

And, like, there's a lot of VC capital on the, on the private market side of things. And so the path for people, for projects is to raise, like, up to, like, multibillion dollar valuations in the private markets, because there's that much capital out there. There is that much capital from like, a 16 z paradigm, like these massive multibillion dollar funds. So, like, projects can stay private up to a multibillion dollar valuation, up to like a billion dollars plus. And so that means when, and it's rational to do this when tokens are launching at like 510 $15 billion ftvs.

Like, even if you are the last VC fund in through the gate, at a one, two, $3 billion valuation, you're still getting a five x, you're still getting a ten x. So it's still rational to do this. The problem with, it's like, maybe this worked in previous cycles, but the problem now is that there's actually not much new retail interest coming into crypto. And we actually know this from a number of different data sources. But the most recent one was Coinbase's Q two report that just came out institutional trading volume up bigly, obviously, because they are the custodians of all the bitcoin ETF's institutions are here.

They're literally buying our bags. And so, like, one of the sources of new liquidity this cycle is like crypto natives that bought like twelve $15,000 bitcoin during the bear market are buying, are selling like Larry Fink, their $60,000 bitcoin right now. So that's where a lot of this capital recycling is coming from. But the trading volume for retail has not nearly come back to 2021 levels. $56 billion in trading volume this last Q one of 2024, whereas at the peak of last cycle it was $177,000,000,000.01 quarter, or $145 billion.

Ryan Sean Adams
Retail's not here yet, right. This is interesting. If you look at it in terms of, like, mapping to the last cycle, it's much more like 2020 than 2021. In terms of retail participation, we've kind of known that. So retail is not here.

But I guess what you're saying is when you map this chart with the previous chart, which is like all of this vc capital raise this, this to me, it looks kind of like a, you know, like a python, like, trying to eat its meal. And all of this capital has to just, like, go through, like, the python stomach and, like, make. Make its way down the snake. And maybe that's what we're seeing. That's why the vibes are bad, right?

David Hoffman
There is just a huge dislocation between public and private markets. Public markets have no new entrants, few new entrants. And private markets have, like, billions and billions of dollars left over from the 2021 2022 raises. And all of these tokens, the. The tokens that are coming to market things below bitcoin and ETH.

This is what Regan said in our podcast, things. The tokens below bitcoin and ETH are predominantly owned by retail. The market caps of these long tail of tokens in the industry are, like, propped up by, like, retail interest and retail investment. And so for a lot of the VC's who are invested in tokens that are going to market, the price of those tokens is determined by, like, retail interest in those tokens. The problem is there's the teeter totter between VC capital, private market capital, and public market capital is just so heavily weighted towards the private markets that, of course, we're seeing an inevitable outcome of this.

The logical conclusion, which is a high fdv, low float token with a low market cap, relatively low market cap. And so this is basically what turns into sell pressure. Vance Spencer put out this tweet that did some napkin math, some loose napkin math, and modeled out that there's $200 to $300 billion of sell pressure that is coming into a market because of the high fdv supply of tokens. And so doing some very rough numbers, comes to the conclusion that of all the FDV that's out there, the fully diluted valuation that's not yet diluted, when that dilution comes, it's going to turn into about $200 to $300 billion in sell pressure for a market that requires retail bids in order to support it. But we.

But we just saw, like, the Coinbase Q one, like trading volumes. We had, like, $47 billion of trading volume just on Coinbase from retail in Q one. And we've got 200 to $3200 to $300 billion in sell pressure about, over the next, like, 18 months. Uh, and so that's just like, a lot of sell pressure. There's like, this is.

Ryan Sean Adams
This is the same story. If you. You have too many tokens, not enough buyers, right? Correct. I mean, like a classic story and a lot of these tokens are held by kind of like VC's basically, and that needs to be absorbed by the retail.

By the way, retail has the choice to buy it or not, right. Even when they receive an airdrop, they have the opportunity to kind of sell that. It's interesting, like, a lot of the VC's are locked, right? At least for a year. They have usually three to four year lockups, but many of them are locked up for a year.

Vance also says this is the first cycle where retail is actually paying attention to unlocks, to retail. Starting to get smarter about fdv and lockups. That's a good thing, right? You know, why that's happening is because there's no new retail. It's all people from last cycle who under, who like experienced unlocks.

David Hoffman
So they know the game by one more cycle. These aren't retail. These aren't retail anymore. It's not. It's all.

It's crypto native retail. Well, that's good then. That's good, because then that that will be the market. Smart money retail. But you're saying basically this contributes to this, this malaise that we've seen over the past around structurally bad vibes, around specifically token distribution, specifically around airdrops.

Ryan Sean Adams
You think it's all driven by this? And this is why people, like, get free money in their airdrop and they still hate it. And they still hate it. Yeah, I think this is one half of the answer. The other half of the answer is the regulatory climate, which is also structurally bad vibes.

David Hoffman
But before we get into the regulatory climate, let's just go through like a quick run through history. The points in Airdrop meta is actually just like the current stop on this ever changing meta of how the crypto industry distributes tokens. Like I said earlier, this is like a core component of how crypto works. We make new things, and then new things have new tokens, and then we distribute the tokens. And some things actually like last, most things don't.

2013, we had the proof of work fork and fair launch meta that was actually spawned, funnily enough, by litecoin, which was the only token to really meaningfully last beyond that meta. And I wouldn't even consider litecoin a live ecosystem to this day. 2017. The IcO meta, we do have some survivors out of that. Synthetix is a survivor out of that.

Aave is a survivor out of that. I think Link did an ICO. Some survivors defi summer liquidity mining in 2020. Plenty of survivors there. 2021, NFT mints and now in 2024, the points and airdrop meta.

This just is what happens in crypto. We come up with, like, distribution mechanisms, but eventually every meta ends once it's been identified. And like, you know, good heart's law, when a measure becomes a target, it ceases to become a good measure. Once the meta is known, then the meta moves on. And this is because of two reasons.

Once the meta is identified by both, one, grifters who know how to exploit it, who learn how to exploit it, and two, lawyers who understand how it violates securities laws, then the meta becomes exhausted, like the lawyers put on the brakes on the ICO meta. Once everyone realized that what an ICO is, is an unregistered sale of securities. But then also grifters also identified the ICO meta and they just use it for fraud. And so these two parties are trying to identify the meta, and then once the meta is identified, we move on because the game is up. I think when you say lawyers, I would maybe substitute by, like, kind of like regulators basically, who just kind of like, you know, are a few cycles behind.

Ryan Sean Adams
Like, the lawyers are trying to navigate, like, how to distribute a token in this, like, super opaque regulatory landscape, right? And like, it just kind of like, stops working once, like, regulators start suing. Remember, the ICO meta was like, totally broken by us versus the SEC. And to, like, you know, the regulators kind of stepping in and putting a stop to it, right? Yeah, well, the lawyers are paying attention to the regulators, and then they are advising their projects, like, hey, you can or cannot do that.

David Hoffman
And as the, as the regulators get wise, then the lawyers are like, okay, you can no longer do this. Well, I think the big insight here, though, which is interesting, and I think something that you've talked about for a while, which I think is sort of hidden, that people see, which is like every single bull cycle is also accompanied by a token distribution meta, a new game that's effectively being played, that has some similarities to the previous game, but also has some important differences. Right. Every single crypto cycle has been about distribution, fair distribution to retail of tokens. That is like part of the underlying reason why we even get bull cycles in the first place.

Ryan Sean Adams
And so now we're at kind of the, the most recent one, which is like the points and airdrop type of, of meta. And I think you're calling the top on that. Yes, this is, I'm calling the top on the points and airdrop meta. And like I said, we're still going to experience it for a while. Like, when the top of the 2017 IcO meta was about like November ish, maybe a little earlier of that meta, but you still saw icos going well into 2018.

David Hoffman
It was just like the last fumes of the IcO meta. It lasted like a year. And so I'm kind of like calling the top on, like, the market is now looking for alternatives to the points and airdrop distribution method. And now it's up to some creative founder, some creative team to come up with a new token distribution strategy that makes their community happy, makes their community rich, and is also unique and innovative and does the job that is required, which is kind of obfuscating the fact that there's a token distribution method happening right now. I think we'll get back to maybe the reason why a certain distribution only lasts for a while and also talk about regulators and that being a driving force to this, but really to just camp out on even as far back as proof of work, like bitcoin proof of work, okay.

Ryan Sean Adams
People don't see that as a token distribution play. It was the original token distribution. Yeah. And the reason why is because we are so many years far removed from that where, like, all you like, bitcoin mining is, and ethereum mining is like, or, you know, previously all bitcoin mining was industrial, basically, but there was a time in place where people ran, like, their computers and they mined bitcoin from their laptops in their home in order to receive what the distribution of that bitcoin. Right, right.

It's like it's always been about token distribution to participants. That's part of what drives these market cycles. That's part of what gets people excited. And the more fair, the more legitimate these distributions and the longer they last in kind of their clean, pristine state, like, the better the outcome for the network itself. And I think for the community itself over the long run, because people get excited about these crypto networks because they've made money, because they got in through earning it or through purchasing it at a lower price than where it is today.

David Hoffman
Towards the beginning of the 2013 proof of work fork and fair launch meta, which Litecoin started. Litecoin was inspired by bitcoin. It's like, hey, you can do this blockchain thing with proof of work and then you can spawn a token. I will do that as well. Charlie Lee spawns up litecoin.

And I think, like in April of 2013, towards the earlier stages of the proof of work fork and fair launch meta, bitcoin was at 1.5 billion. Litecoin was at 72 million. And the whole market cap was at like $1.55 billion. Like it was basically 98% bitcoin. But Charlie Lee just made a $72 million market cap.

This was in 2013. No one knew what crypto was. This was unheard of. $72 million out of thin air. And so like the success of Litecoin spawned this like, euthanasia roller coaster, a proof of work fork and fair launches.

Like, oh, we can just make blockchains. You don't have to just own bitcoin. You can also make your own blockchain. Yeah, copycats, just copycats. It's exploded.

And that was the first like cambrian explosion of crypto assets that the crypto industry ever saw. And each one like was trying to distribute their token fairly legitimately. It ended up getting corrupted by grifters because the grifters figured out the meta and that's how it ended. And this repeated every cycle ever since? Well, I think that's the pattern, right?

Ryan Sean Adams
It's going to be corrupted by grifters. And for like anyone that's trying to game the system essentially. And so every system with respect to like a new token distribution is going to get gamed over time. It's also going to get constrained, I think by the regulators. And now 100% we're at this other half of this.

For us, that's the other half of this, right. Because like part of the distribution is to sort of find a way to get these, these tokens in an ungainable way to retail and a fair way to retail. And some of the regulations we have on the books make that very difficult. In particular here, SEC securities law this is a post from Chris Dixon. I think he published this in Fortune magazine or some sort of more normie centric of financial publication, how bad policy favors memes over matter.

And he's basically saying that part of the explanation for the meme coin mania that we've seen is because theres no clear path to a token getting regulatory status, at least in the US. And of course the US drives a lot of these capital markets around the world towards a token actually having some share of cash flows, some share of what traditional finance would consider a fundamental. What are we left with? These much more empty shells of memetic narrative, trading meme coins. And so like you can in every one of these cycles, push some of the reason why the cycle ends and why we've had to create like kind of a news cycle back to regulators and say, well, they're not.

There is a market desire and a market need to do this. And you're not providing an output for that. Instead you're just taking the ban hammer and just saying, no, it's not possible. And so every single cycle there's sort of a different way to like route around this and try to find a way to distribute the token in a way that is like regulatorily compliant. And it keeps just getting more and more restricted, doesn't it?

David Hoffman
And it's a catch 22 where any team that is interested in providing real utility, real fundamentals to a community that violates securities laws. And so like, no shit, the meta has moved towards Solana meme coins, because meme coins just don't violate securities laws. And if anyone ever thought about injecting utility into their meme coin, like straight to jail, like the SEC is like, no, you can't do that. You can't do that. Now you made it.

No fundamentals for retail, only memes for retail, right? And so this kind of identifies the current problem with the points meta. People have now understood that points kind of suck. Why do they suck? They offer point collectors zero assurances on what they are actually receiving, because the relationship between points earned and tokens received must be opaque.

The disconnect between the points and the tokens is the COVID that startups are receiving. That's the COVID the regulatory cover that they have from the SEC. Like, points aren't securities, they're just points. Oh, and then we just also happen to release a token for completely unrelated reasons to people. But point, the points are separate.

Ryan Sean Adams
So it's funny you say points suck because I'm old enough to remember, David, three months ago when points didn't suck, or, or like, even like six months before that when they were basically the way you could kind of like pre release and make a drop of your token much more fair, right? And I think that's the, that's the point of this entire conversation, right? When a new distribution method for tokens is kind of like started at first, it doesn't suck at first, it's actually really good. But you can start to see like the fault lines in that distribution and how it'll fall apart in the, in the early stages of that. And it leads to some gamification of it, it leads to eventual exhaustion, exploitation, and it leads to the meta eventually sucking.

But like, points don't inherently suck from my perspective, they're just like a tool that's being used. And it wasn't too long ago where many people on crowd, I think we did an entire episode about how points are cool, what some of the trade offs are all of these things. So they don't just suck, it's just. Now they're starting to the nature of the people that use them that can suck. And we should be wary of that.

David Hoffman
Um, like, again, the, the investor protections around points are zero. Uh, retail has no clarity on like what a point actually gives them, uh, or what their rewards are. So like, for the points, if you're receiving points of like any particular protocol, like what is that a claim on? Is that future? Is that 5% of the future tokens?

Is it 15% of the future tokens? Some points are worth more than others because some actions are deemed more valuable by the project than others. Like, not all points are created equal. And so the investor protections around points are basically zero. And we talked about some of the pros of points.

Like points are kind of the regulatory sandbox that projects have been asking for so that they can tinker with the issuance of their token without actually it being permanent. And so like these are, these are there, it's like a, it's a pencil of a token rather than a pen of a token. And so some projects have been able to leverage this property just to iterate before they ink out the actual real distribution of their token. And I think that's like an enjoyable fact, having some sort of pseudo regulatory sandbox that we just discovered rather than received, but nonetheless points as an assurance of rights over the value being contributed to a protocol by retail and versus the value getting back to retail. There's like, this is all completely opaque because if there was any sort of explicit articulation of the relationship between points and tokens, that project that made that articulation would be in violation of the SEC and securities laws.

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Ryan Sean Adams
One is in motion I think right now, which is layer zero, and they're doing something different. I wasn't fully up to speed on this, but there's some sort of anti Sybil kind of mechanism at play. What's happening with layer zero and why is that? One to watch both layer zero and. Eigen layer, and I think really anyone issuing a points based airdrop, everyone is just stuck between a rock and a hard place.

David Hoffman
I believe all of these protocols are asking in their best intentions and none of them really deserve to be like mobbed. But the mob is a result of the fact that like of the rock and the hard place that a lot of these projects have found themselves in. Push in, pushed there by the SEC. One of the current issues going around that I think is an interesting thing to watch is Layer Zero's Sybil reporting initiative. And so layer Zero is saying, hey, if you are sibling our airdrop, if you are spitting up puppet accounts and you are just kind of pushing fake activity using many, many different wallets, if you are doing that activity, just self report yourself as a Sybil and we will give you 15% of what you would have otherwise earned.

If you don't report yourself, we're going to give a bounty for somebody else to report you, and they're going to earn, like, 10% or 5% or some minority of share. Oh, wow. If you report yourself and we find out through some other way whether someone else reports you or we find out. Then you get zero. You get zero, and there's a bounty for people who report you.

And so it's basically a big sell Sybil like pruning mechanism. Kane Warwick wrote a thread saying that this is actually not a good strategy for by layer zero. And actually, it's not the right thing to do because layer zero has benefited from the metrics of all these different siblers. Quote unquote siblers, because, like, look at all the activity going through layer zero, look at all the assets going through layer zero. Look at all the volume and all the users and all the transactions.

Clearly, the metrics behind layer zero support them as an ecosystem and have supported their ability to raise at a very high valuation. And so Cain is claiming that layer zero has benefited from the Sybillers, but now they are pruning Sibyl ers from their token distribution. And so there's, like, an is ought gap between these things, whereas, like, layer zero is benefiting from Sibyl attacks, but then they're pruning away the siblers in the token distribution. And one of the problems here, again, created by the SEC, created by this cornering of crypto companies into this meta, is that somebody who is a small time retail investor has no way of gaining exposure to layer zero. Say, like, some individual is just like, really bullish layer zero.

And they, they want upside to layer zero. How do they do that as a community member? The only way to do that if you are especially bullish layer zero, pre token launch. Pre token launch, yeah. Is to Sybil attack layer zero.

And not, not even attack, just Sybil layer zero. Like, I'm so bullish layer zero. I'm gonna put ten wallets, spin up. Ten wallets as an individual, push, like, ten e through in, like, 17,000 different transactions, because you are so bullish layer zero that you want that token. So you're gonna Sibyl layer zero, which unfortunately makes you identical to somebody who is maliciously attacking layer zero with the intent to immediately dump that token.

Ryan Sean Adams
You're just saying there's no way, like, in. So they just climb the fence. Basically what you're saying is that's a charitable explanation for why individuals might engage in this type of behavior. Not to discount, though, there are actual industrial civil farms that are just actually doing this unethical way possible, and they are exploiting, and that's why protocols like layer zero are trying to stop them, because it's a massive cost. No one wants that outcome.

Retail doesn't want the outcome of all of these tokens going to industrial airdrop farmers, and certainly the projects themselves don't. And that could be like a lot of money, a lot of the value of the project on the line going to these industrial farmers. So you can understand why they're trying to prevent it as well. Totally. And this is just the unfortunate cornering that I think the SEC has placed the crypto industry in.

David Hoffman
And what this meta allows for is that retail people bull retail individuals who are bullish on layer zero cannot differentiate themselves from mercenary vampiric, like, high industrial, highly scaled airdrop farmers who are going to dump that layer zero token as soon as they get it. Retail doesn't have a chance to differentiate themselves unless they are just an honest individual user. But then they lose out to the mercenary airdrop farmers. And this is why both regulatory and grifter pressures always end token distribution metas. And this is what we are seeing right now.

Ryan Sean Adams
One other factor that I know I've mentioned in previous episodes, we just haven't named them here, is those industrial airdrop farmers as well. They're not just Sybil attacking protocols by spinning up tens of thousands of addresses, potentially. They are also Sybil attacking the social layer in the narrative. If they could spin up a bot, basically to create kind of like a fake identity to be a recipient of their airdrop, you think they can't do that on Twitter? Of course they can.

Of course. This is like another context. Another layer of the question here is, like, when I see some of these mobs, there's definitely some portion of it. I can't say the percent because it's just like really difficult to tell. There's some portion of this.

There's actually like retail who legitimately wanted exposure to the project, is just climbing the fence to get it because there's no other way to get into the project. So this is what they have to do. There's also a portion that I know that I'm certain are like industrial farmers attempting to farm the narrative as well and exploit the narrative. And like, they're doing that at scale. And I think sometimes they pull others into their extreme positions, right?

And it's like, so how do you even know what's real or what's not? I don't think we have a very clear pulse on like a voice of retail here, at least on crypto Twitter that, you know, like the primary way you receive this. That's another compounding factor is it's not just the protocols themselves being gamed, it's actually the social layer. Because if they can push a project into distributing more tokens to their industrial farms, essentially, like, it's totally worth it. How much does it cost to spin.

Up a whole bunch of bots on Twitter? So again, I'm not saying that's all of the activity here. It's certainly not, but it's some portion of it. And they can also just, you know, move the Overton window by taking an extremist position to be like, scam, scam, scam, scam, scam. They pull some retail in that direction who are already predisposed to thinking of like, yeah, why do I have to climb the fence anyway?

Right? And like, so that's at play as well. Structurally bad vibes. And so you have like the community members who like we talked to inside of the bankless discord were like, I feel disregarded by these protocols. Sure.

David Hoffman
And then, and then you also have like our chat box on YouTube, which is just literal bots going scam, scam, scam, scam, scam, scam, scam as fast as possible where there was like 500 people watching that show, but there were like 500 comments every single minute. Like, I'm sorry, that's, that's a bottom. But nonetheless, retail still feels like they are getting the shit under the stick because they kind of are because of the unbalanced amount of capital in the private markets versus the public markets. And oh, by the way, the whole like nerfing of teams distributing tokens to the public market incentivizes anyone who can to invest as LP's in VC companies because that's where the regulatory constraints don't exist. They only exist once they go public.

And so there's a huge nerfing by the SEC of public market capital. And so anyone who has gotten over the fence of being an accredited investor chooses to lp inside of a VC fund instead of buying tokens on the public market. There are a few drops to, I think, watch one. One is of course, we mentioned layer zero. It's going to be interesting to see how ZK sync kind of handles this.

Ryan Sean Adams
That's going to be another drop that, like I got to imagine happens this year. There's also an alternative to all of this, which is what friend tech is doing where I think they distributed 100% of their tokens to the community. This is still early, but that's another chart that I'm going to be watching because I guess that's like the, you know, a completely fair way to do things, at least according to friend Tech. Yeah, I don't understand how friend tech released 100% of the tokens to users. Like, that's pretty cool.

David Hoffman
But then also like, but what about the team? Is that sustainable for the team? Like, why? Why would the team work on friend tech if they own zero tokens? Right?

Ryan Sean Adams
But that's another experiment at play and like a possible emergence of a next new narrative around this or a next new meta around this, as you call it. So let's end this episode by talking about where we go from here. And I want to bring up this concept to you, David. I know you're familiar with the Red Queen like concept from biology, which is like, you're on kind of this treadmill of adaptation in like a competitive world environment. So you never actually talk about evolution.

You're talking about evolution. Here's a chat. GPT the concept from evolutionary biology that suggests species must continuously adapt and evolve, not just for reproductive advantage, but just simply to survive, right? That's like the Red Queen effect. You see this with, with organisms, you're never done, essentially always something going to be gamed in a competitive landscape.

David Hoffman
In chess terms, this is defined as like, if you don't make the best possible move, then you are making a losing move, right? So what we have essentially here is a red queen problem. And like, red queen problems never go away, essentially, they always remain. And so I think that, um, this problem is not going to be fixed by any, like silver bullet regulation or a new SEC chair or like, like Congress finally gets things together and like, we're able to figure out what tokens are versus securities and have a clean line in the sand. Or we uncover this, like fair launch.

Ryan Sean Adams
That is actually fair because what we've seen is at the beginning of each of these token distributions, it has been pure, right? Like, it has been like bitcoin, the immaculate, you know, crypto project to launch. Ethereum had its sort of like ICO, which was actually pure in that time, before icos got created, you had compound which is looked at favorably from a drop perspective. Uniswap was probably the peak of the, you know, the Defi summer sort of token governance drop. And you have some examples from this cycle as well, but it's always going to be gamed.

You have a red queen problem, so it's never actually going to be completely solved. It's just going to evolve in another direction. So is that the essential prediction is like, be aware of that. That's what's going on, that that's the game that that's going to be, that's being played here. Be aware when it's over and look on the horizon for the next one.

David Hoffman
Well, that's why we're titling this episode. The cycle is cooked. I think that this meta is cooked and we are. The market is now looking for alternative teams to distribute their tokens in creative, egalitarian ways that allow communities to do one of the core affordances of crypto, which is to get rich together online with your Internet friends. And right now, the high FTV airdrop points, Meta is not doing that.

And so as soon as some scrapping young team, some smart creative founder finds a new way to distribute a token that allows people to get rich with their Internet friends, then that the new meta will go there. And I think right now, as a result of like the mob attacks and the Silbel farming, that's very simple and toxic versus like the Silbel farming of like highly committed users, the fact that we can't differentiate between those people. The market is now looking for a new meta. We are looking for like a new phase. Uh, we don't.

Someone needs to invent it, somebody has to get creative. But right now, I think this meta is cooked and we need to look for a new one. And hopefully we find a new one in the context of, of this cycle, because it feels price cycle. Yeah, this price cycle. So let, let's zoom out to the price cycle, uh, for, for a minute, David.

Ryan Sean Adams
So uh, you are not saying that this cycle is over. No. We might uncover a new distribution, uh, meta in the bounds of, of this cycle. It seems very clear that retail has not entered at all. This is all kind of crypto natives playing games with one another at this point in time.

Um, but like retail hopefully will enter at some point this cycle. So how like, do you have any predictions for the price cycle then? If this meta is dead, do we get another like token distribution meta in this cycle? And like, will number go up still? Well, let's talk about the sectors of the crypto industry that all of this cooking of the points meta is not affecting.

David Hoffman
And that's bitcoin. Bitcoin ETF's will still grow. We're in a little bit of a. One month long hiatus right now from the growth of the bitcoin ETF's. But those will still grow meme coins unaffected.

So, like, meme coin sector will live or die for independent reasons other than the points meta. And so that's why this cycle has been defined by these two things right now, like meme coins and the bitcoin ETF. The ETH ETF is still a thing. Whether it gets approved this year, next year, whenever it's eventually going to be approved. And if we can discover a new, fair, egalitarian, token distribution mechanism inside of this bull market cycle, then, like, it's a plus one to, like, the super cycle or, like, a longer, bigger cycle concept.

Uh, if it takes a while to discover this new meta, uh, and then the. Also the ETH ETF doesn't get approved and the becoin ETF flows don't happen, then, like, maybe you see a stunted cycle and we kind of got to wait for next turn. Um, there's a number of different permutations of, like, futures here. Well, let's just end it there, then. David, as always, got to let you know, crypto is risky.

Ryan Sean Adams
You could lose what you put in. But we are headed west. This is the frontier. It's not forever, everyone. But we're glad you're with us in the bankless journey.

Thanks a lot.

Why This Cycle is Cooked | DH + RSA

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1: Introduction

2: The Problem with Current Token Distribution

3: Market Dynamics and Regulatory Impact

4: Looking Forward

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