The “points battle” brings false prosperity, which may cause the crypto market to fall into a vicious cycle
Original author: dingaling, crypto KOL
Original translation: TechFlow
In recent years, there has been a lot of discussion about high FDV (Fully Diluted Valuation) and low circulation projects, but these discussions often overlook a core issue. The continued decline in the post-TGE (Token Generation Event) token market has not only occurred on Binance, but also on exchanges such as OKX and Bybit. We have also experienced the launch of high FDV/low circulation projects in the past, but this time is different. Here is my view on the current situation.
In the past few years, top exchanges have begun to strictly require projects to have a large number of users (such as more than 500,000 monthly active users) or high TVL (Total Value Locked, which must reach more than $1 billion) before listing their tokens. These projects will only be listed on the TGE, so they only have one chance to go public. For top projects like Arbitrum and Optimism, these requirements are not a problem, as the speculation of a token airdrop alone can attract a large number of users. These projects are usually guaranteed to generate a lot of hype on Binance and Coinbase on the first day of listing, but the token issuance is still undetermined at that time.
However, for projects that do not have similar venture capital backing or well-known founders, how to meet these requirements becomes a bigger problem. These projects do not have a liquid token to incentivize users, and the potential airdrop alone is not attractive enough to attract users to participate. To solve this problem, projects have begun to launch points programs based on on-chain activity, TVL, or NFT holdings, which almost guarantee that there will be a token airdrop at some point in the future to reward users.
If you are a new entrant, many projects in the past will conduct a TGE on the same day as the product launch and use the token to incentivize dapp activity. If the project does not have product-market fit, both the token and the project will die. If the project gains traction, the exchanges will monitor and list it based on user demand.
The main problem at present is that the points issued by the project have been hyped before the tokens are circulated, causing retail investors to participate with high FDV and limited returns. Only by earning points more efficiently than other users can you get a larger proportion of the airdrop. In other words, this is a PVP game (player vs. player). Do they really care about these protocols? Most of the time they don't care. Will they continue to support the project after the airdrop is over? Most likely not, because the process of efficiently earning points is very tiring.
With the high incentives, any random project can easily get "millions" of users and transaction data, even though most of them are bots. Unfortunately, for a while, the top exchanges didn't care about the authenticity of this data and still decided to launch some questionable projects. This led to a large number of new projects popping up like mushrooms after rain, and directly adopted the points model to obtain tokens and TVL. These projects do the same thing as each other, but each has a different token to obtain.
While the points program has a certain effect in attracting users to experience the dapp or chain, now every project has some form of points airdrop, and the liquidity and opportunity cost in the market have reached an all-time high. An example is: you deposit $10,000 into a protocol, complete tasks every day for three months, and finally get a $5,000 airdrop at the TGE. You find that the FDV is actually $1 billion, while everyone expected the FDV to be $500 million. In the current market environment, the rational choice is to sell these airdropped tokens and move the liquidity to a new protocol.
This leads to inflated FDVs at the time of listing, because exchanges and VCs believe that these projects have great future potential, but in reality they are the result of hype from users and their friends. Now imagine getting the same airdrop value, but you just keep tweeting code every day. Even though you are blocked by all your friends, you still succeed in the end. You realize that this actually helps the project very little, so you decide to sell.
In general, the expectation of market participants has become that all projects must pay users for all their efforts before the TGE, and also get a very generous return. If a project fails to airdrop (price drop or the proportion allocated to farmers is very low), it will be difficult for them to retain high-quality users in the second quarter after the TGE.
This vicious cycle leads to more and more people selling airdropped tokens on the first day of the token listing, further deteriorating the market performance of the new token, destroying any natural demand that may have existed, and affecting other projects that planned to airdrop.
How to solve this problem?
1. First of all, I don’t think VC (venture capital) should be blamed for this. Although they will push up FDV, there is usually a one-year lock-up period. We need to think about why FDV is pushed up. Top VCs are looking for excellent teams, good user appeal/TVL, and good market narratives.
2. Project parties and users should not be blamed. As long as there is profit, they will always show up. This is a major feature of cryptocurrency, not a defect.
From this, it seems that CEXs (centralized exchanges) currently hold a large portion of the power. Even if this makes you unhappy, you must admit that in the current market, listing a token on Binance can automatically increase its FDV at the time of the TGE.
Therefore, I recommend that top exchanges take the following measures:
· List more tokens that are already traded in the secondary market and demonstrate high user demand.While self-hosted launches can earn fees, forcing all projects to adopt a point system before the TGE is actually harmful to the industry.
· Look for projects with actual organic users and market fit, and ensure that the token is naturally integrated into the incentive mechanism.
· Avoid token launches with extremely low circulation (less than 5%).
· Don't be deceived by projects with fake data.
· Reward teams that build real and loyal communities, not those that are only in it for the airdrop.
· Hire analysts who know how to evaluate the quality of token airdrops at the time of the TGE, including plans for token usage after the TGE.
· Consider whether airdrop recipients will sell or hold the tokens, and if the answer is the former, use that as a criterion for rejection.
This is just the tip of the iceberg, many other factors come into play, and others have explored these in depth, so I will stop here.
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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