In my return to substack, I will discuss the hot topic of the day — new token launches.

Specifically, this post is the first of a 3 part series focusing on issues and misconceptions in the market around new tokens commonly described as “low float, high FDV”. 

Well, at least I think this is going to end up as a three-part substack series. There’s a lot of stuff to discuss and I am not known for being succinct. But perhaps I will get too lazy to finish the whole thing and it will be two parts instead. We will see.

Before we begin – if you’re struggling to know what I’m talking about in this post, a previous post I wrote in 2021 is potentially helpful pre-reading: On the meme of market caps and unlocks, by cobie

And as always, please remember: I am not a financial advisor, I am a biased and flawed human being, I am washed up, I am an idiot, I am mentally beyond my peak and declining into my twilight years, I am stumbling through the world trying to make sense of everything and very rarely succeeding at that. I am literally a participant in the crypto industry which means it is unlikely my IQ is even close to double digits. I try not to write too much about coins that I own but will disclose throughout the article when I do. Did you guys hear RoaringKitty was back and he posted like fifty sick Avengers clips? Okay anyway.

When I wrote that post 3 years ago, I assumed it was the last time I’d probably ever write about the float, FDV and market cap games. Perhaps naively, I expected market participants to become more sophisticated regarding these important dynamics. 

Instead, they ended up picking these new coins as the “best coins to long” citing “no unlocks for a year” as a good reason to buy them, along with other shiny newcoin things, fresh chart, concentrated attention, etc.

To make matters worse — other market actors did become more sophisticated regarding these dynamics. Teams, exchanges, market makers and financiers all adapted to these market mechanics, often using them to their significant advantage.

As a result, it seems to me that the majority of new launches are now effectively uninvestable at market – and market participants’ understanding of the issues is extremely under-evolved, where they spend their time pointing the finger at symptoms of the problem.

In this multi-post series, I’ll explore some of the issues in the current market for new launches and discuss some of the reasons why I would default to staying away from new tokens launches entirely – unless you know what you’re doing and are comfortable doing proper research and analysis.

The majority of upside for new tokens is now being captured privately

In the modern era, virtually the entirety of the asset’s “price discovery” has occurred off-market, being captured privately before the token even exists. And a lot of this price discovery is actually inflated due to private market dynamics.

It is funny to reflect that by 2024 people would be yearning for ICOs once again. It is hard to disagree with them when you take a look at the difference in opportunity between now and then: in certain ways, the ICO era seems significantly fairer than the current dynamic of the market.

Rewinding to ICOs: the bad

Before I am misunderstood, I believe it’s important to stress that ICOs were also actually very bad for a bunch of reasons. It’s easy to look back on the successful ICOs, but there were hundreds that just extracted 8 figures and left or slowly rugged. (Also, I am also overlooking that ICOs are also likely illegal in most major jurisdictions).

Retail investors wasted hundreds of millions of dollars funding non-viable, dogshit ideas that were solely able to fundraise because of the ICO craze. 

Even successful products that had ICOs left investors rugged. There are dead tokens for many otherwise successful businesses where investors received a token that went to 0, and the company received dilution-free funding for their business before simply ignoring that the token exists after a while.

(This kinda even happened in the Binance ICO — investors funded $15m for the building of Binance but received no upside in Binance equity for doing so. Of course, I am sure that nobody who purchased the Binance ICO is complaining since the price was 15 cents per BNB and it was one of the best performing ICOs ever. So, uh, yeah.)

ICOs: the good

Alright, so ICOs were bad, we get it. But they were also kinda good too. And it’s much easier to display why they were good.

• Ethereum raised $16m in their ICO, selling 83% of the supply at the time (60 million ETH) for $0.31 per ETH.

• This prices the public token sale at an effective valuation of around $26m (the mining and staking emissions make it a little more complex but ballpark). 

• Buyers of the ETH ICO received a ~10,000x return in USD (around a 70x return in BTC terms) at today’s prices.

• If you missed the ETH ICO, the cheapest you could ever buy ETH on the market was $0.433 in October 2015, only about 1.5x higher than the public sale price. At that time, Ethereum’s valuation was around $35m.

While Ethereum’s $26m valuation pricing is virtually impossible to find in crypto investing anymore, even for a privileged-access seed round of the dumbest idea you ever heard of, the key point here is that price discovery and upside was open for all participants.

The price discovery from $26 million dollar valuation to $350 billion happened in public, in a way that a regular person could participate in. There was no KOL round, no unlocks and vesting schedules and buying the cheapest ever market price resulted in very similar returns to buying the ICO.

Moving to private funding

After enforcement from major global regulators against ICOs, crypto token issuers stopped raising money from the public and instead moved towards private funding from VCs.

If you compare Solana’s first funding round in 2018 to Ethereum’s ICO, it’s sort of interesting.

• Solana raised ~$3.2m in this funding round, selling around 15% of the supply at the time for $0.04 per SOL. This was an effective ~$20m valuation, similar to the ETH ICO valuation.

• Buyers of the SOL seed round received a ~4,000x return in USD at today’s prices. (It’s likely they actually received slightly higher due to the annual staking returns, too).

• If you were unable to access the limited funding rounds, the cheapest price you could ever buy SOL on the market was around $0.50 in May 2020 — about 12x higher than the seed round.

• Buying the cheapest ever market price resulted in ~300x return. At the time, Solana had a valuation of around $240m and a float of below 5%. Solana only really had a low float for about 10 months — they went from having a tiny float to basically being almost fully unlocked with one huge cliff unlock in January 2021.

The initial rounds being privileged allowed investors to effectively capture 10x of Solana’s price increase ($0.04→$0.5) in private.

(Solana also did some other privileged/private funding rounds too, around $0.20, as well as a CoinList “auction-style” limited public token sale, which was also around $0.20 I believe.)

2021 mania

Solana launched in 2020, basically near enough at the BTC and ETH price lows after the COVID crash. Their gigantic unlocks occurred perfectly in sync with a new wave of users being onboarded to crypto. The resulting success of this model across a variety of tokens, and the “bullish unlocks” phenomenon, led to a huge increase in private market valuations.

ETH and SOL’s initial sales were both around a $20m valuation. By 2021, seed rounds were highly competitive with large VCs often entering in bidding wars. Seed round prices reached 100s of millions. 

(I remember the first time I was pitched a seed round at $100m. I passed in revulsion. Later the project opened at $4bn FDV and I missed out on a 40x. Learning from my mistake, I bought the next 100m seed round that came across my desk. It failed and went to 0 and is no longer active).

While private market valuations were rocketing, on the liquid markets side, crypto traders were claiming “FDV is a meme” while all charts were effectively green lines to the sky. 

Axie Infinity was valued at something like $50 billion, despite only having around 20% of the coins circulating at the time. FileCoin reached something like $475 billion FDV, but a market cap of $12 billion. The increase in supply for high FDV coins were masked by the huge waves of new entrants.

As fully-diluted valuations reached larger figures, VCs became increasingly willing to pay more for private rounds too — “if this project is trading at 15 billion then bidding a round for this other one at $300m is okay, it is a bigger risk to miss out!”.

Founders, of course, willingly accepted these bids — they could raise more money and give away less tokens for doing so. They previously had to sell 10% at a $20m valuation to raise $2m. Now, they can sell 1% to raise $2m, and keep the extra token supply for incentives, community or (...surprise!) for themselves.

If a reputable VC funded a promising project at a $100m valuation, many less-respected VCs would attempt to copytrade them. If the last funding round for a project was at $100m, these thesisless chaser VCs would try to lead a new round at $300-500m as soon as possible. The slightly worse entry didn’t really matter to them, these things were trading at multi-billions anyway.

Founders could easily accept these deals. It made their personal wealth “watermark” higher without requiring market forces, and it added new team players to their side to help their product win. Of course, most of these team players turned out to be net negative, but founders were not to know that yet. 

Through this pattern, as time passed, even more of the value and price discovery has been captured privately.

Private capture

If we take the Ethereum and Solana examples from earlier, and consider them when compared to projects that launched in more recent years. I’m going to choose two comparable projects: Optimism and Starknet.

Consider the following metrics: initial sale valuation, lowest valuation ever on market, % float at that time, returns from market vs. private.

ETH ICO valuation: $26m

ETH’s lowest ever open-market valuation: $35m FDV

Date of lowest market val: October 2015

Float at that time: 100% supply on market — market cap $35m.

Returns from public sale: 10,000x

Returns from market: 7,500x

SOL seed valuation: $20m

SOL’s lowest ever open-market valuation: $240m FDV

Date of lowest market val: May 2020

Float at that time: 2% supply on market — market cap $4m.

Returns from private seed round: 4000x

Returns from market: 300x

OP seed valuation: $60m

OP’s lowest ever open-market valuation: $1.7 billion FDV

Date of lowest market val: June 2022

Float at that time: 6% supply on market — market cap $95m.

Returns from seed round: 183x

Returns from market: 6x

STRK seed valuation: $80m

STRK’s lowest ever open-market valuation: $11 billion FDV

Date of lowest market val: today

Float at that time: 7.5% supply on market — market cap $800m

Returns from seed round: 138x

Returns from market: none

If you take a look at these metrics, a few things are clear. Firstly, seed valuations have increased a lot as time passes.

• Ethereum’s ICO was at ~$26m.

• Solana’s seed round was at ~$20m FDV.

• Optimism’s seed round was at ~$60m FDV.

• StarkNet’s seed round was at ~$80m FDV.

• Modern seed rounds for comparable projects are now >$100m FDV.

As the seed valuation moves up, the team captures this multiple, as they still own the entirety of the supply until the first funding round. If StarkNet were valued at the same as Ethereum, the initial investors would still have a worse financial return since their initial entry price was 4x higher.

Honestly, I find this pretty inoffensive by itself.

It makes sense to me that, as crypto has become more popular and the financial returns of Bitcoin and Ethereum have been proven over time, founders would have better fundraising options. The demand for early stage crypto investments is gigantic, so prices adjust naturally. 

But the most glaring trend evident in the data presented above is that the financial returns from public markets are diverging hugely from the financial returns available in private markets.

• Ethereum’s ICO returns were 1.5x higher than available on market.

• Solana’s seed round returns were 10x higher than those available on market.

• OP’s seed round returns were 30x higher than those available on market.

• STRK’s seed round returns are infinity times higher than those available at market, because today is STRK’s lowest ever price, meaning all public market buyers have lost money — but the seed is up 138x.

As you can see, the returns are increasingly captured in private.

To visualise, consider the private fundraising rounds of the tokens I mentioned earlier:

• Ethereum has an ICO selling 80% of tokens, and no other funding rounds.

• Solana had a seed round selling 15% of tokens, and a couple of other private rounds pre-TGE up to about $80m FDV.

• OP had it’s seed at ~$60m, and then had private fundraising rounds at ~$300m and ~$1.5bn FDV before TGE.

• STRK had it’s seed round at $80m FDV and then also had funding rounds at ~$240m FDV, ~$1bn FDV and ~$8bn FDVs before TGE.

If you imagine a price chart for each of these assets, but try to visualise the private market prices on the chart too. (valuation in logarithmic scale).

All charts start at roughly a similar valuation (20-80m range), but increasingly the majority of this uptrend is captured by private markets.

Both OP and STRK have a similar current market valuation ($11bn) and yet OP has had to achieve a public market 6x to reach $11bn. STRK has dropped 50% to get here.

To reach 11bn, SOL had to achieve a public market 50x, and Ethereum had to achieve a gigantic public market 450x return.

Crypto token investment opportunities with returns akin to the ETH ICO still happen very regularly, but they are nearly entirely captured privately now.

High FDVs are in part due to natural market demand 

Expecting launch FDVs to be in line with launch FDVs from 4 years ago is not an expectation grounded in reality.

The amount of capital in the space has increased 100x, the stablecoin supply has increased 100x, the amount of demand for new good crypto tokens has increased 100x, and so on. New tokens will launch higher because the market demand is much higher now, and comparable projects are valued much higher too.

When looking at FDVs, consider their price appropriate to the rest of the market. 

• Solana’s launch FDV was around $500m. 

• At that time, it would’ve placed Solana into the top 25 coins that existed. 

• It would have been valued at ¼ of BNB’s valuation, which was a top 10 coin at the time.

• It launched when Ethereum was $150 per ETH.

• It launched when the ETHBTC ratio was 0.02.

I am using the ETHBTC ratio here to display market confidence and demand in both Ethereum and the smart-contract chain thesis, which were at historic lows. The doubt around “alt L1s” was even greater. There had been serial failed attempts at “ETH killers”. 

Since then, ETH is up 20x, BTC is up 10x, SOL is up 138x, the general market has priced up hugely and the confidence in smart contract chains as alternatives to Ethereum is at all time high. 

Today:

• A top 25 coin would be >$5 billion market cap, ~10x higher than when Solana launched.

• ¼ of BNB’s valuation is now ~$9bn market cap, ~20x higher than when Solana launched.

• ETH is $3100, ~20x higher than when Solana launched.

• ETHBTC ratio is 0.046, over 2x higher than when Solana launched. 

If Solana were to launch today, using these comparable metrics as proxy for demand, the FDV upon launch would likely be around $10bn – and this may even be underpricing due to these proxy metrics not considering the popularity of alt L1s.

Similarly, when Avalanche launched in September 2020:

• Avalanche launch FDV was around $2.2bn.

• At that time, it would’ve placed AVAX into the top 15 coins that existed.

• It would’ve been valued at ½ of BNB’s valuation, which was a top 5 coin at the time.

• It launched when Ethereum was $350 per ETH.

• It launched when the ETHBTC ratio was around 0.03.

Re-calculating the launch today, using modern prices, would have had Avalanche launching at $15-20bn.

Post-crisis prices

Another way to visualise this is to consider Solana’s picolow valuation in 2022, after the FTX collapse and the demolition of investor confidence.

The valuation of Solana, at the lowest price in a heavily depressed market, was around $5bn. This valuation was one of the best liquid investment opportunities in the last few years, and was only achieved through an absolute exorcism of fraud and leverage in markets. 

Markets have significantly rebounded since then. An Ethereum ICO, if held today, would not only raise $16m. The Solana seed round, if held today, would have billions of dollars in demand.

It’s nice that you want to buy things at prices from 5-10 years ago, but it is sort of like saying “I want to buy Ethereum at $150”. Yeah, who doesn’t?

Older rounds and previous launch FDVs were priced relative to the amount of risk taken, the amount of confidence in those assets and in crypto in general. The demand for those older funding rounds was significantly lower and so they were priced for that demand.

Projects I funded even in late 2020 were struggling to fill their $2-3m funding rounds at tiny valuations. Now, seed rounds for “Pin the tail on the donkey — but on the blockchain” are oversubscribed just by calling themselves “gamefi”.

Think about it like this: if the Solana founders released a new blockchain tomorrow, what valuation would you be willing to buy it at? Would you pay at least a quarter of the current Solana valuation ($25bn FDV)? Maybe even half of SOL’s valuation ($50bn FDV)? 

Of course, the FDV would be very high at even 10% of Solana’s current valuation, because market demand would be very high. And so yes, FDVs are higher now, because the entire market is worth a lot more than it previously was and there is significantly more demand.

Of course, a high FDV is certainly not always indicative of demand in the market for that particular asset. And a high FDV is not always justified or earned.

Recently in particular, it is often not. Market actors have figured out ways to use these levers to their advantage and pin valuations at inflated levels. 

One of the bigger issues in the market is not that FDVs are higher on average — but it’s that many new launches have a high FDV detached from the reality of the asset and they simply try to blend in amongst the other high FDVs.

It has become normalised to launch at multi-billions, even if that valuation cannot be justified by any real data, and projects that may never justify these valuations are apparently indistinguishable from better ones to many market participants. 

Low float is not to blame in isolation

Low float by itself is not inherently a bad thing, and a low float by itself does not create an unhealthy market or represent bad actor status – it is just a variable that investors must consider. Plenty of low-float tokens had good launches and healthy market dynamics. 

Bitcoin’s emission schedule is extremely well-known, with the halving reducing the supply of new coins on the market every four years. Bitcoin’s “float” was <10% for it’s entire first year after the genesis block. 

Solana’s first year float was also very small, before gigantic unlocks 10 months later.

To be clear, I don’t mean to argue in favour of low floats. 

I believe a higher float is virtually always healthier for tokens, and I respect projects that have tried to reach 100% float quickly. (There doesn’t seem to be a great way to get more float to market, and projects that have managed it have often done so against their own best interests in the short-term).

I am merely suggesting that a lower float alone is not some glaring red flag, if your evaluation other important factors returns good results. And similarly, a higher float does not instantly symbolise green flag, or imply it is going to be a “better investment” either. 

Where the dynamics of low float do become problematic is when paired with other issues. Unwarranted and inflated FDVs, perverse agreements with other market actors, or active manipulation from bad actors.

A low float market is much easier to manipulate and distort when misappropriated by bad actors – for example, the lower the float, the lower dollar-demand required to pin a token at a high valuation.

And yes, low floats can also cause dislocation between valuations and reality when the float or FDV is misunderstood or ignored by under-researched token buyers. The existence of valuation-agnostic buyers seems very unlikely to me. It seems more probable that token buyers simply do not review or consider these metrics at all. 

To protect and inform themselves, token buyers need to evaluate the equilibrium between the float, the FDV, and the demand for the coins that are unlocking. They should consider: what is the cost basis of the locked supply, what is the OTC demand like for locked coins in private markets, and how eager are the existing holders to sell those locked coins.

Finally, a reported high float could itself be a low float.

A demonstration of this, from what I believe is likely an innocent example, could be this recent popular token launch:

From this chart, you see that ~15% of the float is unlocked.

On closer inspection, you’ll see only ~2% attributed to “community sale”. The remaining unlocked float is attributed to “ecosystem growth fund” which is described as a strategic portion of tokens set aside for growth incentives such as airdrops and for contributors to the project’s ecosystem, including developers, educators, researchers, and strategic contributors.

It is impossible as an outsider to know how this ecosystem portion will be allocated. We do not even know if any of this portion has been allocated at all. The real (sellable) float for this token may only be around 2-3% — despite 15% being reported as the unlocked float. This may imply the market cap is almost 90% lower than stated due to the inactive supply and off-market being included in the float.

This demonstrates that assessing the unlocked float % alone is not enough. In fact, obfuscating and over-inflating the real (trading) float size may actually be a superior technique from bad actors, particularly if market participants default to thinking “low float = bad”.

Token buyers should research who holds the unlocked supply, how it is being used and whether they can distribute that supply or not.

This “private price discovery” takes place in a rigged market and the resulting valuation is deceptive

In my mind, one of the primary issues at the heart of the low float/high fdv debate lies here. 

The issues people have with “low-float” or “high FDV” is in fact actually because the price discovery has taken place in a private market that is either rigged, delusional or both.

Allow me to introduce – the phantom market. (I wanted to call it the shadow realm but I am trying to not get addicted to yugioh again).

Imagine a market where one person, we will call him Kain, controls all of the supply of a new token. In this market, anybody is allowed to bid, but only Kain is allowed to sell. 

Kain sells some tokens to a new investor, called Adam, at a $50m valuation. Adam’s tokens are locked and not transferable. Kain sells more tokens to a new investor, Eve, at $300m valuation. Eve’s tokens are also locked and not transferable. 

Adam and Eve have a great reputation as investors (perhaps due to fame from The Bible?) and so other investors become interested in Kain’s token too.

Kyle, Bob and Taylor Swift are all bidding for the next round at $1bn valuation – Kain decides Bob is the best investor here, Bob buys locked tokens too.

Hurt from rejection and too afraid to miss out on this fantastic new token, Kyle bids at a $2.5bn valuation and Kain sells some locked tokens to him. 

At this point in time, Adam’s investment is up 50x. He is desperate to sell. He has been larping writing twitter threads for the past several years and this is finally a big win for him. In fact, he would even have been happy to sell at the $1bn valuation from the previous round. 

Eve’s position is up around 10x and she is happy to sell anywhere above a $1bn valuation too. 

But since these holders are not allowed to sell – and the one guy who is allowed to sell doesn’t really have many reasons he would ever want to sell lower – it’s a market that is rigged to only go up. 

This “phantom market” that happens pre-token is a delusion. It is not discovering the natural price based on the dynamics of supply and demand. It is simply finding the absolute highest price that a VC investor is willing to pay. This dynamic pushes valuations to prices that the market is unable to bear, evidenced by the graveyard of tokens from 2020-2022 that are trading significantly below their private market valuations. 

When Kain’s token reaches Binance or Coinbase, the phantom market does not stop but evolves a little. 

Imagine Kain’s token is now trading at a 5bn valuation. Even Kyle who panic-bought late is up 2x. Every single investor would now be happy to sell their tokens – perhaps Kain has now been accused of some nefarious things behind closed doors, or some new kid has designed a better version of Kain’s product.

The investors, eager to sell, unable to sell their locked tokens on the market. They are not able to exit their positions until their unlocks/vesting hits. So, once again, these investors attempt to use private markets – sourcing OTC demand at a 60% discount to market price.

Now the real market is priced at 5bn. But in the phantom market, tokens are trading at $2bn valuation. 

This dislocation between the liquid token price, and the locked token price is the real issue in low float coins. 

If the phantom market price is significantly lower than the real price for a token with a low float, the unlocks are clearly going to be exceedingly painful. 

(On the other hand, if the phantom market price is close to the real price, then the low float and upcoming unlocks might not mean very much.  I’m told locked Solana was trading at only a 15% discount to unlocked Solana at times just before their major unlock – and nearly the entirety of the locked SOL tokens had been bought by MultiCoin, Jump, Alameda, or someone else.)

Price discovery in public creates much healthier markets. 

The reason unlocks dump so much in certain assets is because price discovery never actually happened — it just tested what was the highest possible bidder’s price was.

The phantom market price was hugely dislocated from the real price. Most market participants have no way to track the phantom price, meaning it’s extremely difficult for them to evaluate the expected pain from unlocks for any given asset.

Opting out

Part 2 and 3 of this series will explore incentive structures for a variety of other market participants, and use these to further explain the dynamics of new launches. Specifically, who is benefitting, and why new launches are able to maintain such inflated valuations.

These sequels will also discuss ideas and solutions to existing market dynamics that good actors can use to create healthier markets — and will also discuss why that is in their interest to do.

However, meanwhile, there is a simple suggestion I can recommend for readers that do not have power to change structural dynamics at the infrastructural level.

Buying an inflated FDV is your choice – you can opt out, and you probably should

This seems obvious, of course, but the “invest, then investigate” mantra does not seem as suitable to as many of you seem to believe. Either that, or maybe you’re skipping the investigate part.

Token market cap info, and FDV info, is always public — unlocks are typically documented in public somewhere too as long as the project is half-decent. The tokenomics often show who owns the supply. It is harder to find private round prices, but it’s possible.

If any of these basic parts of information are missing — this is a red flag! If any of these basic parts of information seem confusing or obfuscated — this is a signficant red flag.

You do not have to buy these tokens, even if you think the project is good.

In fact, opting out and protesting with lack of participation seems like the correct response to a lot of recent token launches.

Projects, founders, exchanges, and other market actors will have to adjust their go-to-market strategies if the existing ones are failing, or they are being rejected by the market.

I am already seeing projects adjusting their launch and fundraising token plans due to the popularity of memecoins and the rejection of the recent launch meta.

Token buyers should research valuations before buying and, if they don’t like the valuation, then they should refuse to play. 

If you think a new project is the greatest idea on earth and you want exposure, it remains important to evaluate the valuation and unlock schedule. It’s possible that great projects have bad token dynamics until they are fully diluted, or perhaps that the valuation is just way too high for it to be investable at that moment in time.

It is currently not possible to “be early” to new token launches — as we have seen, the private capture of upside happened in an inaccessible way.

Instead of trying to be early, it is better to be disciplined and patient. Identifying projects you’re interested in, and assessing valuations where they become attractive seems significantly preferable than joining your latest CEX-affiliated CT influencer in longing the perps of a coin that launched 30 minutes ago.

The good news is that for most of these tokens (good project, but lots of unlock or VC overhang, or potentially bad token dynamics for a couple of years) is that market actors can learn the wrong lesson about these assets, write them off entirely during their early periods of turbulence periods — perhaps rewarding you with a better-than-expected entry later.

In sum

New launches have become uninvestable, mostly due to the privatisation of price discovery and unhealthy inflated valuations from VC markets that ignore supply and demand. These market dynamics are possible to exploit by disreputable actors, and sophisticated market participants are increasingly using them to their advantage.

While FDVs are higher than years ago, popular and hyped new launches have always priced the FDV of tokens within the top valuations of the market. This has been the case for at least the last 5 years — and this is mostly due to the privatisation of the price discovery. 

The “upside” captured by projects like Avalanche and Solana since their launches were: 

1. Partially driven by overall market returns.

   1. Avalanche’s performance since it’s public market debut until today is ~7x whereas Ethereum is around 9x on the same timeframe.

2. But also driven by additional repricing from their position within the market. 

   1. Solana moved from top 25 to top 5, creating a significant repricing vs ETH and rest-of-market.

   2. Avalanche moved from top 15 to top 10 before moving back down, causing a temporary repricing vs ETH (and rest of market) during the bullrun, which has since been erased.

When evaluating the upside in new tokens, token buyers should consider both the new token’s FDV vs. the rest of the market — but also the trajectory of the overall market. 

If a new launch’s valuation places it in the top 3 of all coins in existence then for this investment to perform well the investor would need a large market-wide expansion, and for the project to retain it’s status in the top 3, since it does not have much room to grow relative to the market.

If a new launch’s valuation places it in the top 30, and an investor believes it to be a top 10 project, then a low float and higher FDV would perhaps hold less importance when evaluating the token.

While a launch at 10bn seems expensive today — if Solana is at $1000 and worth $1 trillion in a couple of years, then yeah maybe $10bn will look cheap in hindsight, and people will be complaining that new launches are all at $80bn.

Judging new token launches by the first couple of months performance can also be a red herring – Solana dropped 50% from listing price and didn’t recover to it’s initial price for a couple of months. It took the inflows of new capital in the bullrun for Solana to reprice it’s position in the market.

Significant early market repricings are unlikely without an ongoing market-wide trend, since a) private markets extract the upside b) it’s difficult to fight market forces to underprice something in a high-demand market, and c) it is possible for projects, exchanges and market makers to fight market forces to overprice something if the float is very low.

Market participants should expect that new launch valuations remain high while the market is in demand. It is no longer possible to be “early” in the privatised-gains meta — instead investors should focus on finding value in the market that others have forgotten, or has become mispriced and out of favour.

Token buyers should aim to become more sophisticated at evaluating the valuation and supply/demand dynamics of new tokens, identifying which high FDVs are based in supply/demand realities, and which have extremely dislocated phantom markets.

Opting out of participating in these markets is voting with capital.

Good founders want to build successful projects and they know that market dynamics will interact with their project’s perception. Memecoin over-performance and new token launch under-performance has caused readjustments in fundraising and launch plans for future founders.

See you soon for part 2, more problems, maybe some solutions, who knows. I don’t know how long this post was. I’m scared to check. I apologise to all of you.

Firstly, none of this is financial advice, because I’m not qualified to give financial advice, in fact I’m not really qualified to do anything. They are my personal thoughts, not those of my employer, because I do not have an employer — likely due to my lack of qualifications.

Secondly, I previously helped to build Lido, which is a topic within this post. I don’t work on Lido anymore, and am certainly not writing this on behalf of Lido. It was back in the early days that I contributed. I haven’t worked on it for well over a year and then some. I didn’t even bother showing this post to anyone that does work on Lido — mostly because I couldn’t be bothered changing the post if they noticed some errors.

And finally — I own some LDO, I own some ETH and I own some stETH. So it is very possible that I am very biased and my thoughts on this topic are bad and can be discarded. But I do strive to be as unbiased as possible because winning occurs when you find the right answer, rather than when you shout the wrong answer at a lot of people on the internet repeatedly. Still, I am hopelessly human and with that comes many flaws.

Cobie, please slow down, what is Lido?

Here’s the blog post I published in October 2020 about what Lido was supposed to be: Introducing Lido.

In short, it’s an opinionated coordination protocol for ETH staking. A staking pool, with a tokenized version of your staked ETH.

You stake 1 ETH, and Lido gives you 1 stETH in return. Your ETH is staked with a validator from a set of node operators that Lido chooses. As this ETH earns staking rewards, your stETH balances changes to match that beacon chain balance automatically.

After the ETH devs finally ship the merge and the fork that follows, stETH will be able to be “unstaked” and the underlying ETH can be redeemed.

Since Ethereum designed their staking a bit weird, and with the beacon chain launching in late 2020 but still no concrete date for the merge, Lido became very popular. For users, it’s the most popular way to stake ETH.

Got it? Alright.

stETH “peg”?

For the majority of its lifetime, stETH has traded near enough 1:1 with ETH.

The first few months of stETH’s life were very volatile, ranging from 0.92 to 1.02 ETH per stETH. As liquidity built up, the stETH/ETH pair got increasingly boring over time.

And then the UST depeg occurred, Luna collapsed, and stETH got hit with some contagion from that. Since then, the price of Ethereum is down around 50% — in fact, the last ten weekly candles for Ethereum are red.

Perhaps because of the historically tight trading pairing (and maybe because “pegs” are the latest ptsd hot topic post-UST) people mistakenly see stETH as “pegged” to ETH. Of course, this is not true.

stETH is not pegged to ETH, and it doesn’t require it to trade 1:1 to ETH for Lido (or stETH) to work. stETH trades at market price based on the demand/liquidity for staked ETH, or the lack thereof.

Lido is not the only liquid staking protocol. Taking a look at other, less utilized and less liquid staking derivatives shows quite clearly that a 1:1 liquid staking market is not expected:

Binance’s BETH:

Ankr’s AETHC:

Both of these staking derivatives work in a similar way to Lido. Ankr was launched a little bit before Lido, and Binance’s BETH was launched a few months afterwards. So they have existed for roughly the same amount of time.

And as you can see, neither has traded at “peg” basically ever in their lifetime. BETH dropped as low as 0.85 ETH per BETH. AETHC dropped down to 0.80 ETH.

Staking derivatives are not stablecoins, or even ‘algo-stables’. Some people are describing them as more similar to Greyscale’s GBTC, or to a futures market with an unknown future delivery date. I don’t really know about those comparisons either. Fundamentally, it is tokenised ownership of locked collateral. Trading below parity with its locked underlying asset should be expected.

Redemption, arbs & pricing staked ETH

You can instantly create 1 stETH with 1 ETH by staking it with Lido.

Because of this, stETH should never trade above 1 ETH. If stETH ever traded at 1.10 ETH, traders could simply mint 1 stETH with 1 ETH and sell it for 1.10 ETH — they could repeat this for easy profit until parity was restored.

This instant arbitrage opportunity does not currently exist in the other direction.

None of the ETH liquid staking tokens (stETH, BETH, RETH, AETHC, etc) can be redeemed until after the merge and after transactions are enabled on eth2.

When the merge happens is anybody’s guess. I would probably go for October this year if I were asked to bet, but it could easily get pushed to the end of the year or the start of next. Post-merge, there’s still the wait for a fork for state transitions too. Who knows how long that will take, it could be 6 months after the merge.

And then of course, there is a limit on how much ETH can unstake at a time. If every single ETH staked by any method all unstaked at once, the unstaking queue probably takes over a year.

After all that is done, liquid staking tokens will have the arbitrage opportunity in both directions. A trader could buy 1 stETH for 0.9 ETH, and redeem it for 1 ETH, and repeat.

Still, liquid staking tokens could still be priced below 1:1 even after this arb route opens up outside of a euphoric bull market. The fair price is likely to be a function of how much % gain buyers will want for the risk of holding through the redemption/unstaking period — where sellers will weigh up the implications of waiting the unbonding period for themselves vs. the discount from selling instantly.

Right now, the lack of current redemption path causes a liquidity discount.

In a bull market, demand for ETH is high. Buying stETH with a small discount is attractive, as traders can see buying stETH for sub 1 ETH as a way to earn extra ETH. Also, demand for liquidity in a bull market is lower. There is less selling pressure on stETH, since investors are happy holding their yield-bearing asset.

Yet, in a bear market, demand for ETH evaporates and desire for liquidity becomes quickly apparent. Long-term demand for these typically very reflexive assets in particular drops substantially. More people want to exit their staked ETH positions, and a long-time locked asset is less attractive than a short term ETH position.

The stETH discount to ETH will be a function of how much existing stETH holders need liquidity, vs demand for buying this staked ETH derivative at discounted prices.

And some larger players have been expressing their need for liquidity by exiting stETH recently.

Of course, there’s some other factors too. Discount can price in smart contract risk, governance risk, beacon chain risk, “will the merge happen?” risk, etc. While these risks are much more ‘constant’ than the variables of buyer/seller demand, how people evaluate their importance might change as fear in the markets changes too.

It still seems like the macro liquidity preference is the biggest variable, whereas sentiment regarding the merge was much more of a non-factor thus far.

Forced sellers

While many people are focusing on stETH price as the story, likely due to UST ptsd, I think it is possible that stETH is a symptom pointing to a different story.

The factor of stETH discussions that is probably most notable right now is: who are the forced sellers?

It appears there are a couple of groups:

1. Leveraged stakers

2. Entities that require processing deposit redemptions

The first group is identifiable on-chain.

Leveraged stakers

Traders used Aave to “leverage-stake” ETH. The trade looks something like this:

1. Buy ETH

2. Stake ETH as stETH (or buy stETH on market)

3. Deposit new stETH to Aave

4. Borrow ETH against this deposit

5. Stake this borrowed ETH as stETH

6. Repeat

Products like Instadapp (and others) turned this trade into a “vault”, attracting decently sized amounts of deposits into leveraged stETH positions.

Unless traders are able to supply more collateral to these positions, there exists on-chain liquidation prices for them. At the same time, deleveraging these positions requires selling stETH to ETH, which contributes to the pricing of stETH.

These forced sellers could contribute to the stETH price decline materially if their liquidations were triggered, cascading into the further lower liquidation triggers.

CeFi deposit withdrawals

The second group is a little bit more opaque.

There have been rumours and on-chain research that suggests entities like Celsius are having alleged liquidity issues. Of course, since Celsius is a “CeFi” company, we don’t really have a transparent picture of their financial position or treasury management strategy.

As a result, this is entirely speculative, and it’s impossible to really know what is happening internally at Celsius.

But researchers are speculating that the current pace of user withdrawals quickly exceeds the liquid funds that Celsius has.

There is also speculation about previous Celsius losses in DeFi. Celsius allegedly lost funds in StakeHound, Badger and possibly also in Luna/UST.

This research narrative seems to be:

Celsius allegedly used DeFi to yield farm with customer deposits, in order to provide yield. They perhaps lost some funds in exploits and, in addition, they staked a lot of ETH (both using Lido, and directly with non-liquid staking node operators). This staked ETH is illiquid, perhaps for 6 months, perhaps for just over another year.

And to Celsius, even the liquid staking is illiquid, since their position size is larger than the liquidity available for stETH.

If Celsius becomes a forced seller of stETH in order to recover liquidity for user withdrawals, this could perhaps be the event that triggers the liquidation cascade. In fact, even the fear of that event could be the trigger.

Again, this is speculative. We have no idea really what Celsius’ actual financial position is, what tools are available to them, what customer liabilities they have, and so on.

While it seems unlikely that Celsius has lost customer funds entirely, it does seem theoretically possible that Celsius could end up in a scenario where they have users requesting withdrawals, but Celsius has locked those assets on the beacon chain with a unlock date that seems to be continually extending into the future.

How Celsius handles this hypothetical situation could matter a lot. If they are raising debt against these staked assets in order to pay back customers, it might just be delaying their designation as a forced seller, and making the eventual event much worse.

So, who gets fucked?

I won’t pretend to know what happens in the future for stETH price (or BETH, AETHC, RETH and so on).

Instead, I will try to understand who gets fucked in a worst-case scenario: imagine that the Celsius fud is accurate, and the on-chain leveraged stakers can’t post collateral, etc.

Who gets fucked?

Celsius and Celsius depositors obviously get fucked — either they are unable to process withdrawals for everyone until post-merge, or Celsius ends up eating pretty sizeable losses by selling low to process withdrawals prior to merge.

(Side note: if I were Celsius in this alleged position, I would probably exit stETH positions in private OTC at a decent discount in order to save face and maintain some public confidence.)

Leveraged yield farming stakers also obviously get fucked as if their position is liquidated.

And anyone that wanted to exit their stETH position before state transitions on the beacon chain are also inconvenienced: if a trader or investor staked ETH today (or bought “discounted” stETH today) and needed to exit in 3 weeks, or 3 months, it is obviously not guaranteed that the stETH/ETH price would be the same as their entry.

Non-leveraged stETH holders that plan to exit via unstaking on the beacon chain after all the merge-and-etc activities are over are fine, as every stETH has a 1:1 corresponding ETH on the beacon chain.

Are 1:1 redemptions guaranteed?

1 stETH, 1 BETH, 1 AETHC, etc, can each be redeemed for 1 ETH when unstaking is possible on Ethereum post-merge. So, if you have 10 stETH today, you can get 10 ETH back when the eth devs finally do something.

But — what could stop that being true? Two primary things:

1. Slashing — if you have 10 stETH today and Lido validators experienced some slashing, that loss is socialised amongst stETH holders. stETH rebases upwards with rewards and downwards with slashing. 10 stETH could become 9.5 stETH with a slashing event of some kind. I think this is the same for Ankr. RocketPool requires validators to post additional collateral, so it’s different there.

2. Critical protocol bugs — if Lido, RocketPool, Ankr, or whoever, had a critical protocol bug, then it is possible that that could also have implications for the redemption of their liquid staking token.

Both of these things are possible, as they always have been. But slashing has been rare on the beacon chain, and well-curated validator sets exist with most liquid staking protocols I think.

Of course, protocols have also been audited extensively too — but am sure the defi exploit of audited protocol ptsd is as strong with you as it is with me.

While these are very real risks (one minor and one severe), both are quite unlikely in my opinion — and the risk of them has not increased or decreased over time.

There are also some smaller risks, such as eth2 delivery risk (will the merge happen, and will it happen any time soon?) and governance risk too. But again, they are not materially increasing or decreasing.

(Side note — If ETH2 was never delivered, one could speculate what happens to the ETH that was staked. Likely would need to be recovered somehow through social consensus, since liquid staking derivatives are only around 1/3rd of all staked ETH, every single crypto company and exchange has exposure to ETH staking in some way. Would be a much larger problem than just staking tokens.)

Anyway, outside of these risks, 1 liquid staking ‘ETH’ from any liquid staking protocol will be redeemable for 1 ETH when unstaking is available on Ethereum in production — no matter the market rate of stETH/ETH at that time.

Approaching state transitions

For those willing to accept the smart contract and validator risks, the situation presents an interesting opportunity: how long are traders willing to hold stETH in order to arb redemption, and at what prices would they step in?

As merge and state transitions on beacon chain get closer, the arb could become more attractive. The perceived price risk could smaller as the time-to-redemption reduces — but it will still heavily depend on traders market sentiment regarding usd prices.

Alright I’m sick of writing now. I need to go play League of Legends. If anything isn’t clear, I’ll reply in the comments. Or perhaps I won’t, depends if I am in a bad mood after I lose this LoL Clash tournament.

I wanted to write about some of the things discussed openly, since I thought they were interesting topics, but particularly because they were topics that “coin voting governance” is extremely poorly suited to properly solving.

Before I start: I don’t own any ApeCoin, nor am I short ApeCoin, I have owned BAYC at times in the past but don’t have any long or short exposure to any Yuga Labs ecosystem stuff currently. I’m not a financial advisor and it has in fact been long rumoured that I am actually an idiot.

The death of staking

Staking used to mean something. I think it was Peercoin that first launched a proof of stake protocol, so probably about ten years ago now. Since then, POS has become increasingly popular for new blockchains, with all the newer trendy ecosystems sitting on POS-ish chains.

For Peercoin and the POS networks that followed, staking had a purpose. Owners would offer their coins as collateral for the chance to validate blocks, and they would be rewarded for doing so. Staking, therefore, rewarded users risking collateral and doing work: participating in functions necessary to the continued operation of the network or protocol.

Somehow, over time, the word ‘staking’ has been repurposed and redefined. Instead of receiving rewards for contributing to chain security with collateral at stake, modern “staking” just seems to mean idk we give you more coins as a reward if you don’t sell your current coins lol.

These modern staking mechanisms do not have any function in the ecosystem to which they belong. They don’t do anything in any practical or technical sense. They don’t make an ecosystem more robust. They are a shell game, using the name of a different thing to obfuscate their actual purpose, which is to encourage less selling.

When POS protocols issue rewards to stakers, they are buying chain security. It’s a worthwhile use of equity. When DeFi projects offer liquidity mining programs, they are buying growth and TVL. Depending on how the program is designed, it can also be a worthwhile use of equity. Spending equity for things that makes the protocol more sustainable, larger or more secure seems worthwhile.

But these “staking” mechanisms (that do not do anything at all except pay users more coins for staking) are giving away equity for nothing except to reduce potential sellers’ liquidity.

If you don’t stake, your share of the network or protocol is inflated away by new emissions. Plus, staking has no risk! You can’t lose coins, because staking doesn’t do anything! So, lock up your coins! Secure them off-market today… In fact, we’ll pay you to do it!

Simply paying users for not selling, payment received in the same asset that they are not selling, seems like pretty late-stage in the games of ponzi creation.

ApeCoin

OK quick ApeCoin fact-sheet.

There’s 1bn supply. No new coins can be minted or burned, so the total suppy will always be 1 billion APE.

Token ownership looks like this:

• 47% — ApeCoin DAO “Ecosystem Fund”

• 15% — Community airdrop

• 15% — Yuga Labs

• 14% — “Launch contributors” (investors?)

• 8% — Founders

• 1% — Charity

On the vesting side, it looks like generally there’s a one year lockup for Yuga Labs, Founders and Investors — but it does seem like there’s some exceptions to that, with some coins unlocked instantly and some after 6 months.

The remaining vesting schedule seems to range between 1 and 3 years after the cliff, with the entire supply 100% unlocked within 4 years.

Anyway. Back to the point.

ApeCoin staking

There is a proposal live for a staking program for ApeCoin. It’s written by Animoca which seems to be some hybrid crypto gaming VC software company, and their founder is on the board of ApeCoin.

In the proposal author’s words, the goal of this proposal is: to make ApeCoin the preferred token of web3 by incentivizing early NFT adopters and existing and potential ecosystem participants to be participate in activities benefitting the APE Ecosystem.

The proposal itself seems pretty convoluted but I can summarize it for you. The proposal basically says:

We should pay 17.5% of the total supply of ApeCoin to people that stake their ApeCoin over the next three years. We should give them different % returns if they hold BAYC/MAYC/BAKC as well.

It’s not clear to me how issuing APE to people that already have APE is “incentivizing early NFT adopters and existing and potential ecosystem participants to be participate in activities benefitting the APE Ecosystem”.

Isn’t it just paying people in ApeCoin to hold ApeCoin?

In fact, if we are being truly honest about this proposal, what it really means is “lets pay existing holders for not selling while the founder/investor/contributor unlocks happen, and also so we can fake some utility before any is actually built”.

$2.6 billion in rewards, for nothing

The current valuation of ApeCoin is around 15 billion dollars. That means the DAO treasury holds around 7 billion dollars.

Animoca’s proposal suggests giving away $2.6 billion dollars (~37% of the DAO’s remaining tokens) for free to holders of APE over the next three years.

Since this APE staking doesn’t actually do anything practically or technically, it can be imagined simply as a bribe to not sell. It says “we’ll give you more APE if you don’t sell your APE or BAYC!”

The DAO is spending 37% of it’s remaining equity on this bribe, so it must consider the bribe important.

Consider that this equity could be spent on a lot of things: it’s currently valued at 2.6 billion dollars! Lots of value could be created for ApeCoin that could build a sustainable ecosystem as well as attract new, external capital.

From an outside perspective, it might appear that the DAO is spending over 1/3rd of it’s remaining equity in order to bribe people not to sell while the early contributor coins pass their early unlock phases.

But this seems more conspiracy-theory-like than a practical malicious strategy when you consider the supply/demand dynamic that will follow from this staking program.

There is currently ~15% of the supply liquid on the market. This inflation/emissions schedule will increase the amount of supply on the market by ~75% in only the first year. And yet I don’t believe that it will increase the demand for ApeCoin by 75%. Thus, the staking program in isolation could appear harmful to the financial interests of the locked-coin holding insiders.

But, ApeCoin does have a real problem: how does it get additional supply into the market so that impending founder and investor unlocks do not become the lion’s share of the liquid supply?

I personally believe it is good to spend this earmarked equity, but the equity should be spent on growth and progress towards their originally stated goal: becoming the currency of web3. It shouldn’t be spent just giving coins to people that already hold coins.

ApeCoin DAO

ApeCoin DAO’s remaining equity should be spent solving real problems for users.

I don’t know what it means to fulfill the mission of “becoming the main currency for web3” but I do know that there are existing ‘user needs’ within the NFT ecosystem that could be funded or built by ApeCoin DAO.

• Why is OpenSea the primary exchange for Bored Apes? BAYC and MAYC traders have spent ~20,000 ETH on OpenSea fees in the last year. That’s >$60m leaving the ecosystem every year.

• BAYC holders, or NFT holders generally, may want to obtain a line of credit on their NFT while retaining ownership. Can ApeCoin DAO create the primary NFT lending marketplace?

• Why do Bored Ape users keep getting hacked? What educational resources are needed to help people self-custody more effectively? Could ApeCoin DAO launch an attractive custody service?

• etc etc. I am sure the community can think of better ones than me.

The DAO’s equity should go towards building incremental value for APE ecosystem users and potential users. It should solve real problems that exist for users within the NFT community.

The equity should be spent acquiring and incubating utility, building revenue streams and creating a sustainable DAO.

Should a staking program exist at all?

I think there’s a reasonable argument that 15% ‘retail’ ownership is too small, and a staking program in the first year or so (while the only supply eligible for staking is retail) can increase that to more meaningful levels.

I can also see an argument for a 10-15 year emissions program: the APE token has no mint function, and cannot increase it’s own supply. If the DAO spends all of the APE in the first few years, it will have no more firepower to incentivise activity or acquire future value. Plus, you will achieve a wider and more desirable distribution over time by increasing the length of time someone must become an ecosystem participant. This incentivises future “generations” of holders to maintain and grow the ecosystem too.

I can see an argument for why the BAYC NFTs should be the thing staked: to remove users having to choose between joining the community via buying a BAYC, or buying ApeCoin. Plus it’s maybe more likely that new people will be onboarded to the APE community through NFTs rather than fungible coins, since that is how it worked for everyone in the current APE community.

I can see an argument for why the BAYC NFTs should not be the thing staked: ApeCoin is a brand new entity, founded by the BAYC community but not actually directly attached to the NFTs anymore, outside of overlapping owners.

In reality, these arguments are not grounded in much reality, because it is difficult to say: what is the point of this staking program? What is the program trying to achieve?

The proposal says some nonsense about “incentivising participants to do stuff in the APE ecosystem” but the staking proposal itself appears detached from that goal.

If ApeCoin DAO wants the staking program’s goal to be to acquire new members for the DAO, then a credible staking program might include issuing ongoing rewards to NFT holders within the APE ecosystem. The APE ecosystem might even acquire other NFT collections and issue APE to these communities too.

If the staking program’s goal was to support the liquidity of the BAYC ecosystem, then APE emissions would be issued to those providing LP in APE/WETH markets, as well as those providing liquidity to NFTX-style pools and otherwise.

If the staking program’s goal was to simply pump prices, then it would require time-locking assets off market, giving higher rewards for longer time-period locks and strangling supply off-market for as long as possible.

Without the stated goal from the ApeCoin board on what is the purpose of a staking program then it’s difficult to design a staking program that fulfils those goals. Getting more supply onto the market, bribing users to not sell, or providing “fake utility” are not credible goals for a staking program.

Personally, I would design a small program that incentivises introducing increasing amounts of new people to the Ape ecosystem over the next decade, and I would reward existing holders for their continued participation in the ecosystem. It is my personal belief that new users will be onboarded for the NFTs, rather than fungible assets, and thus rewards should be paid to the NFT asset holders rather than a fungible coin paying effectively an interest rate for holding it.

I would supplement this staking program with an aggressive, and much larger, program of purchasing value.

Governance

A multi-billion dollar organisation, which ApeCoin now is, needs to have a sufficiently long time-horizoned plan. There should be a good answer to the question: how do we turn this $7 billion of APE-denominated treasury assets into $100 billion of value over the next decade or two?

Yet the time horizon for crypto investors is not always very long. On average I imagine they don’t care much about what their token projects will be doing in 2 months, nevermind 10 years.

Thus, if you tell the community “hey, we decided there will be no staking program, and we are going to invest growth by paying builders to contribute to the ApeCoin DAO ecosystem” they will likely be very unhappy.

I don’t get any coins for free anymore?? And outsiders get millions of dollars of coins?? Just for building a lending market?? Wtf???

It’s unlikely retail investors rigourously consider the implications of Ohm-style supply inflation to existing holders, nor have they considered the k-factor knock-on effects of investor trust from seeing a price chart go down (even if the staking emissions meant holders are actually up overall).

Thus, governance over complex and multifaceted analytical issues is a strange environment. It quickly descends into politics.

I have extremely little faith that coin-voting communities of retail investors will vote for the best medium-term outcomes, and in fact will more likely vote for damaging medium-term outcomes. I read something today that said Sushi treasury went from $1bn to $30m in a year. I don’t know if that is exaggerated, or fictional, but think this will be a common story of many failed DAOs in time.

In sum

Staking mechanisms should be designed to support the goals of the ecosystem. They should be used to incentivise the parts of a product, community or network that requires people to do work or to take risk.

ApeCoin DAO has 7 billion dollars in it’s treasury. It should use it to incentivise people to take risks, do work, and grow the community — rather than giving it away to existing holders as an interest rate bribe for not selling.

Without utility or value capture, spending 37% of the treasury on staking emissions is not only worthless but could actually be actively harmful to the APE ecosystem’s long-term prospects.

We should’ve protested the repurposing of the term “staking” from being a reward for work in a consensus mechanism, with risk of losing collateral, into this current “idk just lock it off market to receive more coins risk-free lol” but it’s probably too late for that now. I imagine the Gensler-police are very pleased that the conflation has occurred, since the term is now inherently misleading and can mean several different things.

I really hope we don’t live in a world where the primary currency of the internet is called “ApeCoin” but I hope that I managed to keep that glaring bias out of this article and that this is relevant for any DAO finding itself in a similar position: lots of capital, good distribution and the opportunity to land-grab utility.

Section dedicated to me ranting about this staking proposal’s poor quality lmao

The Bored Ape community is famous in crypto for continually failing at secure self-custody.

In response, the ApeCoin board has suggested this that BAYC NFTs will actually ‘contain’ your APE tokens.

How Staking Works for NFT Holders

If a BAYC ecosystem NFT holder wants to stake in pool 2, 3, or 4 (depending on the NFT), they will pair the NFT with their ApeCoin to access the relevant staking pool. The NFT itself isn’t staked — it acts as the key to the “vault” holding the staked ApeCoin. The NFT holder retains the ability to sell the NFT. By default, if you sell an NFT that is actively staking ApeCoin, you are also selling the key to access the associated staked ApeCoin.

To sell the NFT only, without the associated staked ApeCoin, the NFT seller would unstake the ApeCoin prior to listing the NFT.

This means, if you lose your BAYC, you lose your APE too!

You cannot spread your NFT and your APE coins into different wallets. It means if someone steals your BAYC, they don’t have to do anything extra to take your APE. The APE goes with the BAYC by default! Great!

It seems intentionally convoluted, and incurs more bad outcomes than good ones. Even forgetting that you had staked APE behind a particular NFT could be a huge financial error. Really bad design.

The ApeCoin board has also issued this statement:

Why can’t I just stake a BAYC ecosystem NFT?

We believe that everyone in web3 should have control of their assets. In order to provide NFT owners this right, the NFTs themselves will not be staked into the staking pools. Furthermore, by staking ApeCoin rather than the NFTs, the ApeCoin DAO incentivizes and fosters the long-term growth of the ApeCoin holder community.

This seems like straight-up double-speak. Everyone should control their assets, so you can’t put this asset into the contract. But you can put these other assets into the contract!

It actually makes so little sense that I can only conclude it’s treating users as dumb.

The market cap of APE is larger than BAYC, so it’s likely that more assets would be in the contract if it is APE-only staking than if it were BAYC-only staking!

Anyway, what happens after three years of staking?

What happens at the end of the three-year period of staking?

A new AIP will need to be drafted and voted on to determine the future staking mechanism, putting this decision in the hands of the community. Ideally, by the end of the total staking period of 3 years, the DAO will have sustained revenue to keep incentivizing staking and rewarding ecosystem participants.

“Ideally”??? Surely it would be preferable to establish the revenue plans prior to the staking program, then? What if a credible plan for comparable revenue takes 5 years instead of 3? Designing a staking program without understanding a product and revenue plan that it is subsidising in the first place also seems pretty wild.

Not that it matters much anyway, because staking in this scenario doesn’t do anything, it is just a bribe to remain a community member.

Oh also the current staking proposal includes $1.3bn of emissions in the next year (at current prices). This alone would create $700m of sell pressure from new tax obligations alone, assuming all holders were in a reasonably ‘western’ high-tax regime. Pretty cool.

I’ll stop writing now.

Explicating the incentive structures behind financial products and complex crypto schemes is a foresight-superpower in a market populated by retail investors and increasingly obfuscated tokenomics.

“Show me the incentive and I will show you the outcome’ — some old guy, probably Buffett

In many ways, this post is an unintended sequel.

Before I start, please remember I am actually an idiot. I have zero actual financial markets experience, I’m not a financial advisor, don’t understand how money works and barely understand how the coins work. I was born, naked and crying into the cold, sterile hospital light and not much changed since then. These are just my opinions; they might be bad opinions and I might change them tomorrow. Anyway.

Incentives

In crypto, retail investors often seem shocked by market actors’ simple actions: the team sold some tokens, a VC sold their position, the developers did not agree to the proposal to use all of the protocol’s revenue to pump the market and burn the coins, but instead want to invest in “hiring” and “growth”. Monsters.

Surprisingly little time is spent considering the other market participants incentives and deducting their likely actions from their potential actions.

I started writing this due to the LooksRare drama happening on Twitter this week. If you’re out of the loop, LooksRare is an OpenSea competitor with a token that allows holders to share the fees. Some people got upset that the LooksRare team took some WETH from LooksRare rewards through Tornado Cash. It was a typical valentines day. I wanted to write a post about how nobody should have been surprised by this.

While I’ll discuss Looks Rare’s token incentives in this post, I’ll also run through a few other examples of incentives driving markets that perhaps are not well comprehended by market participants too.

Alt L1s

Alternative L1s were a popular trade in 2021. Understanding the crypto market’s retail participants incentives in this instance is very simple: they want to make money and participate in The Great Decentralized Casino.

Alternative L1s provided two useful vectors for these goals:

1. Very cheap fees — low barrier to entry for retail investors who can’t afford to take several actions on Ethereum.

2. “Being early as a service” — investors see other assets near their valuation potential, or having completed significant historic price moves. They want to be early to something, predicting better future returns.

To explore all of the incentives at play in these alternative L1s, imagine a fictional alt L1 called Laguna with a fictional DEX called BubbleSwap.

• Retail investors: they want Laguna’s price to go up in dollars, and they want to be early to good Laguna-based projects and sell them for a profit to increase their overall holdings of Laguna, and thus eventually USD.

• LagunaChain team's incentives: they want the valuation of their network to go up. Practically, this means they want users and builders on their chain. Eventually they want to sell some of their Laguna team tokens to buy a house or a supercar.

• BubbleSwap founder’s incentives: they want to get paid to build something useful and possibly later become rich when they’re able to sell some of their BUB team tokens.

Thanks to ecosystems on established chains, users, founders and investors already know that some projects are likely to be valuable. They know that every chain needs a popular AMM DEX. Every chain needs a liquid stablecoin and money market. And yeah, maybe every chain needs it’s own Ohm fork or a dogcoin or something, but they’re less likely to be guaranteed hits.

LagunaChain’s team are incentivised to fund founders and developers to build a DEX and a stablecoin to make their ecosystem viable for casino-goers. They’re also incentivised to fund other projects for casino-goers to speculate on using that DEX. If LagunaChain commits hundreds of millions of dollars of their treasury to incentivise projects to build on Laguna, they can significantly increase the likelihood of LagunaChain’s longer-term success.

Founders see that they can not only get paid by LagunaChain to build something that, if they execute well, has a high chance of success, but also that they can trivially raise money to build this. VCs are chasing the dragon on returns and they are willing to fund pretty much anything. So it’s just Maker, but on Eos, with a logo of a zombie pineapple? I’m in.

As the basics (DEX, stablecoin, etc) are established on Laguna and reach their valuation potentials based on comparable market metrics, these chains begin to support increasingly fringe projects in order to perpetuate the casino and sustain users. Differently motivated L1 teams begin to reveal their hands: you can see L1s founding teams scramble to keep the attention dynamo churning by funding and supporting meritless projects, or you can see them commit to their existing ecosystem and continue building.

Presale Coins

How is it possible for coins to launch and subsequently only go down in the following 6 weeks? Who are these sellers?

Coins launched with the “Influencer-presale” into “low float IDO” often have a similar chart pattern, because the incentive structure is the same in each project.

Taking a look at Kasta, a token released by popular crypto youtuber ‘TheMoonCarl’ in January.

Kasta’s “all time high” was the very first day of trading ($1.13 — Jan 5th) and Kasta’s “all time low” was today ($0.31).

To study the incentives of all market participants, we must first understand who the market participants are. From the Kasta tokenomics document:

Looks confusing initially, but we can simplify these a little into fewer groups. Who are the coins controlled by?

Investors (18%)

• Seed

• Private

Team/company (71.5%)

• Team

• Advisors

• Ecosystem referrals

• Development

• Marketing

• Operations

• General reserve

• Rewards

Retail traders (2.5%)

• TGE (IDO on Bybit)

Market makers (8%)

• Exchanges & liquidity

Now we know who holds the coins, we should figure out what is their cost basis, their hold length and when their coins become available.

First, when do the coins unlock?

Again, these vesting schedules seem quite confusing, but can be simplified pretty easily.

Investors (18% of supply) — unlocks gradually over 1.5 to 2 years, starting 1-2 months after the IDO.

Team/company (71.5% of supply) — unlocks gradually over 2-5 years (averages over 4 years) starting between 1 day and 6 months after the IDO. Specific vesting depends a lot on the tranche, for example ‘Operations’ coins start unlocking 1 day after the IDO and unlock over 2 years, whereas ‘Marketing’ coins start unlock after 1 month and unlocks over 4 years.

Market makers (8% of supply) — available instantly

Retail traders (2.5% of supply) — available instantly

So, in summary, supply starts unlocking pretty quickly and while some unlocks continue for 5 years, some specific tranches (eg investor coins) vest much more quickly (over less than 2 years).

Finally, what is the cost basis of these holders?

Well, the early investors prices are available in the presale marketing document.

Obviously, the team coins are a cost basis of 0. The market makers coins are also at a cost basis of 0, but they’re generally not intended to be sold on market.

The retail buyers cost basis is harder to calculate now with 6 weeks of coins changing hands, but on the first day of trading is likely around $1.

So, why does the market only go down?

On day 1, there was 37m Kasta tokens on the market, with a cost basis of around $1. By 6 months, there will be almost 200m Kasta tokens on the market, with an average cost basis close to $0.02.

Looking a little closer: on day 1, there was only the IDO coins available. Every retail investor that wanted to buy Kasta lined up on day 1 to buy into the IDO allocation. They put all their money into that 2.5% supply available in the ByBit IDO. For the first 24 hours, they were the only market participants, since virtually all other coins were locked.

But, by day 45, there’s two additional market participants.

Investors coins (cost basis $0.02) have been unlocking for the last couple of weeks, and the team’s Operations coins (cost basis $0) have been unlocking for 44 days.

The market has introduced new sellers:

• Investors are sitting on >50x profits. They are able to sell 2 weeks of unlocked tokens to recoup their entire initial investment.

• Team “Operation” tokens have been unlocking since day 2. The team previously sold tokens in their investment rounds at $0.015 and $0.022 recently, so it seems reasonable that they may also want to sell some tokens at higher prices to secure longer runway.

However, no new buyers have been introduced. Everybody that heard about this product (due to the youtube promotions and otherwise) was ready to buy on day 1. Anybody that waited to buy probably got spooked by the down-only price action. In addition, the product still hasn’t launched, so there is no natural product-based demand.

In fact, the lack of product suggests the rational investors are likely sell their coins on unlock. The $10,000 they invested 6 weeks before the market opened is suddenly worth $500,000. They could sell $100,000 of their Kasta, which secures them a 10x in 6 weeks, and still keep $400,000 invested.

If all private investors want to sell 20% of their tokens, the amount of supply they’d like to sell is 2x larger than the initial allocation available in the IDO.

As prices dip, retail buyers may also want to sell and cut their losses creating more selling pressure.

With lower prices, new buyers might start to become interested. “Well, it’s down 70%, so maybe it’s a good buy here”. And yet even today, seed investors are unlocked daily while still sitting at 15-20x profits, and the team’s coins earmarked for various ‘Development’, ‘Operations’ and ‘Marketing’ activities also are available to sell.

Perhaps the team thinks selling 5-10% of their overall remaining equity to secure long-term fundraising through a bear market is a good idea. Hopefully they can secure that OTC with a professional fund, causing no market impact, but it is within their power to sell it on the open market too. It might even be the right decision long-term for the project to temporarily tank the market to ensure they have the funds to build through a crypto winter. Still, such an action would not be great for the token price in the short term and while the team might not intend to do it, the lack of significant cliff in the vesting makes it a possible action.

This pattern of token incentives is also the reason that popular crypto influencers and youtubers often promote coins they “invested” in — seemingly disclosing their vested interest — but then these coins only seem to go down.

Did the youtuber lose too, are they a bad investor?

Usually no, they’re invested at a significantly lower valuation. The youtuber invested in a presale and will be at a profit even if the market crashes 85%. They are disclosing their financial interest, but not disclosing the asymmetric risk that their audience would be taking. They are invested, but at a much lower valuation that was not attainable for their audience. Meanwhile, the audience has to pile into the low float available at IDO.

Looks Rare

Would like to state before I dive in: I don’t own $looks, I am not long nor short $looks on any perps platform, I don’t own OpenSea equity, I did not buy the $looks seed round. Some of my friends (Ledger, Path, Gainzy) did buy the $looks seed round. Oh I don’t own any Kasta or any short-Kasta exposure either.

Anyway, I started writing this post to explain the tokenomics incentive structures that were public in Looks since day 1. I wrote a thread about it on Twitter but there’s no edit button and threads are pretty useless at long-form writing.

How did the Looks team earn 10,000 WETH?

LooksRare issues the fees earned on the marketplace to users that have staked their $looks tokens. If the marketplace earns 1000 ETH, that ETH goes 100% to stakers of $looks.

On first glance, the tokenomics suggest that this reward is 75% community owned, with only 3.3% going to the early seed investors.

But, not all of these tokens are eligible for staking. For example, the Community’s “staking rewards” and “trading rewards” are earned over several years and thus cannot be staked on day 1.

The “seed investors” strategic sale coins are locked, so they cannot sell them, but they are stakeable, so they earn full rewards from day 1.

If you were to recreate the infographic above with eligible-for-staking tokens on day 1, it would look more like this:

• 70% airdrop

• 20% seed investors

• 10% liquidity management

The team’s tokens also have a staking schedule, making them eligible for staking over time. The staking unlock schedule:

There’s additional nuance, though. There is a mechanic in LooksRare that prevents the Community staking rewards to accrue to the seed investors and the team.

This means that the seed stage backers get steadily diluted over time. Initially they have 20% of the stakeable supply, but as time passes it trends towards 3.3% over a couple of years.

By day 180, 100s of millions of $looks has been released in volume rewards, and 10s of millions of $looks have been released in staking rewards (emitted only to stakers of airdrop and volume rewards sourced tokens), meaning the seed stage buyer’s share is significantly smaller as a proportion of the stakeable supply.

Finally, you must take into account ‘dormancy’. There will be inefficiencies and lack of staking adoption in user-owned coins: perhaps users don’t know about LooksRare, perhaps they didn’t claim or stake their coins yet; at the very least, perhaps they are slow to stake the new emissions and don’t do so daily. While staking adoption is very high (>85%), it does mean some stakeable community supply is not participating and thus a higher share of rewards for seed backers and for the team, since there is much less likely to be inefficiency and staking adoption in team-owned and seed-owned coins.

So… where did 10,000 WETH come from?

It’s pretty simple, I’m not sure why people were shocked. Maybe Tornado Cash just triggers people.

Anyway, the stakeable supply earns the WETH from fees. The team’s share of stakeable supply unlocks gradually. While they’re staking, they get a portion of the WETH from fees.

And the fees have been pretty high. On February 1st, 7,230 WETH was earned in fees by all Looks stakers.

The team’s share of the stakeable supply at this time was around 12%, meaning from this single day of staking the team earned 860 ETH. As you can see, with 860 ETH in one day earned from staking, it’s pretty easy to see that the team made 10,000 ETH from their minority share of staking over the time since launch.

As for Tornado Cash, I’d speculate that the team needs to remain anonymous for regulatory purposes.

The more interesting question is…

Why were users paying 7,230 WETH in fees in a single day?

In addition to staking $looks to receive $looks staking emissions and WETH fees, users can also earn $looks by trading using the LooksRare platform.

Users earn a share of the daily LOOKS rewards proportional to their volume. This ‘volume reward’ acts like a perpetual token sale.

Users trade NFTs on the LooksRare platform and spend fees. However, they receive $looks tokens proportionally to their volume or fee spend. Their fees are reimbursed through $looks. Effectively, they are spending WETH to buy $looks.

Every single day there is a certain amount of $looks available for ‘purchase’ via volume rewards, where the price is derived by the ongoing daily auctions.

Since $looks has a market price, fee-spending wash-traders are aiming to pay less in fees than they earn in $looks.

If $looks is $2 and the daily volume reward is 1,500,000 LOOKS then it’s likely that the WETH rewards for that day will be close to $3,000,000.

It’s unlikely to be significantly higher because then wash-traders have spent $4,500,000 in WETH to buy $3,000,000 in LOOKS.

It’s also unlikely to be significantly lower, because the opportunity to buy $3,000,000 in LOOKS for $1,500,000 will be arbed out by the market relatively quickly.

Some volume-reward earners will be looking to establish long-term $looks positions at best possible entry, and so slightly below market price is attractive to them. However, some volume-reward earners are aiming to earn more in LOOKS +EV than they spent in WETH per day and thus will sell their LOOKS to WETH to repeat this process the next day, compounding their WETH returns.

This means a portion of volume rewards will be daily selling pressure, causing a reduced price of $looks, thus reducing the daily available $-volume rewards, thus reducing the amount of WETH spent on fees and returned to stakers, thus reducing the APY from staking and therefore creating the negative flywheel that we’ve seen tank the price from $7 to $1.50. This may also be impacted as the volume rewards reduce as per the Looks schedule, causing the wash trading to also reduce, reducing the overall WETH fee staking reward.

The main difference in this perpetual token sale from a traditional ICO is that the returns of the token sale are returned to $looks stakers rather than solely to the team. Of course, the team are participating in staking (~10% of staked supply) but 65%-70% of the stakers are community members staking that received coins from the airdrop or from volume rewards.

I’m not sure if this model is good, or bad, but it’s certainly a novel attempt to distribute a community-owned token and build a marketplace with fees returned to all stakeholders rather than disappearing into the Opensea void.

When projects distribute their equity or ownership, they should aim to be buying something valuable in return.

With their aggressive looks-for-fees emission, LooksRare token holders are buying fees (WETH) and attention. I’d actually prefer more of the WETH to go to the team for war-chest building, and personally think there’s stickier forms of user engagement, but since attention is the scarcest resource in crypto it’s likely still an effective investment if the team and stakeholders are able to translate this attention into real, engaged and retained users.

In some ways, LooksRare has been a victim of its own success. The high market price and valuation of LOOKS commanded high $-amount daily LOOKS emissions, in turn generating lots of WETH rewards and a bit of a ponzinomics flywheel. As the circulating supply distributes and fake-volume incentives reduce, LooksRare becomes an interesting community-owned alternative to OpenSea if it is able to sustain real volume.

Fees are already distributing mostly to the community, and their share will only increase over time too.

They could’ve probably made the seed stage share of staking rewards a little clearer, and perhaps figured out some way to reduce the buy-to-dump volume flywheel (volume rewards return locked coins perhaps)… but, then they wouldn’t have a warchest to build with and, well, would we be talking about LooksRare today?

Pls let me know if I fucked up any calculations or whatever. I, as always, am not bothering to proof-read this post. Thank you for being my crowd-sourced editors.

You can hardly blame retail investors for resonating with this populist rhetoric. It feels a bit like the VCs have cheat codes. First, of course, the VCs get access to the best deals and making money is easy for them. And some VCs have a different cheat code — they are simply in the right place at the right time with the right amount of shame tolerance or audaciousness. Finally, the SEC gave all of them the greatest cheat code: they scared founders into only raising from professional investors.

Regular retail investors can only really buy an overpriced IDO or buy on the market. And a lot of the markets look like this.

There’s been enough charts where close to zero retail buyers had the opportunity to win that it’s clear the game is rigged against normal people somewhere in the system.

They don’t even try to hide it. They proudly stick their portfolio on their website, boasting about the 100x gains they made funding Fuck You token without the sentience to recognise that the chart is a straight line downwards and only insiders won.

But in many ways, the frog nation retail trader has the same incentives as a crypto VC who has the same incentive as a Crypto Youtuber: they want to make money. They’re buying something with the goal of selling it to someone else later for a profit. Crypto VCs, anons, retail frogs, whatever. They are human beings existing within adversarial markets, impacted by the same incentives.

VCs

There’s two ends of the spectrum on crypto VCs: the first are legitimate co-builders and crypto native long-term thinkers. They are the ones that keep building alongside their portfolio cos and kept builders alive through bear markets.

The other end of the spectrum are spin-up shops that exist only in frothy bull market conditions. They have no thesis, vision or conviction. They fund short-vesting projects with a goal to quickly flip and extract value from a bull market. They invested in “Polkamon” and shit. They funded technically unsound projects to buy relationships with important market actors.

It’s a spectrum, so it’s fuzzy, and sometimes VCs or funds move along the spectrum in one way or another. The latter type are, in my opinion, demonic entities staffed by sociopaths that would probably steal from their disabled grandma. The first type are quite rare.

Thanks to the wonderful transparency of the blockchain, you can often see which VCs still hold %s of their positions. Lots of “reputable” VCs sold their L1 competitor coins far too early, for example. Some longer-term diamond handed VCs still own 100% of positions established years ago and are almost price-agnostic for now.

You can also see which VCs funded fundamentally or technically meritless projects. Some reputable VCs funded projects that to me look more like a joke than an investment because they knew they’d profit when it got listed on Binance. Others opted to only fund things they believe have long-term merit and are accretive to progress of the industry.

The main incentive structure difference between these two ends of the VCs spectrum is time horizon.

If you want to maximise your returns on a 20-year timeline, you need to be able to access the top 1% of deals for at least the next decade and a half. This means your reputation with founders is extremely important.

Since everyone can see which funds are dumping in real-time, VCs conviction becomes a metric that retail investors can gauge. Since retail investors are also the core users of crypto protocols, a VC’s reputation with founders is also influenced by what these retail traders think.

If a VC is known for regularly backing down-only dump tokens then retail investors will become skeptical of projects backed by such investors.

However, if a VC wanted to maximise their returns on a 2-year timeline, reputation becomes immediately less important. You no longer need access to the top 1% of deals for two decades. You no longer need to care about what founders think of you, and you don’t really care if retail investors learn you dump everything on them in a single market sell as soon as your tokens unlock.

It’s not a surprise that late-entrant VCs are more often in the latter category. These get-rich-quick type VCs entered the market inspired by the $ returns that they saw others were winning, with no long-term conviction in the industry, and thus no need for a long-term reputation.

The origin of the scam: fundraising

In a bull market, founders can almost virtually guarantee investors profits by creating hugely predatory tokenomics that favour only early backers.

This means virtually any project can raise money.

The visionary and high-conviction side of the investor spectrum are willing to take long-term risks: they accept long vesting periods and pay well for founders and projects that they think are important to shape the future. Receiving backing from these investors is usually somewhat difficult.

But raising money from mercenary investors is much easier. A project has several levers available to them. If a founder wants to raise $5m, they could do it tomorrow with just a deck and no other preparation.

Think about it like this.

Imagine you’re given the opportunity to invest in a project and its valuation is $250m, and your tokens are locked for 4 years. They will do a large airdrop, so lots of the supply will be given away for free and used as incentives for the first ten years. If you look at comparative project valuations, there’s maybe 20x upside for your investment. But you have to accept a lot of risk: who knows what state the market is in 4 years down the line, who knows if the team can deliver, the airdrop recipients may just sell it down, and a $250m valuation is still quite high for a pre-product protocol.

Now imagine you’re given the opportunity to invest in a project and its valuation is $10m. Most of your tokens are locked for 3 months, but you get 20% of them on day 1. By market comparison, $10m market cap is really small. In fact, you only need a $50m fully diluted valuation on day 1 and you can sell your 20% to recoup your initial investment. Great news, the project will do an IDO priced 20x higher on a popular Youtuber’s launchpad. This is a great deal. Not to mention, this project has secured an advertising video on another popular Youtube channel, and three top influencers are also buying the seed round! The risk is smaller, since it’s easier to imagine the state of the market in 3 months than it is in 4 years and everyone that has this token on the market will have a higher cost basis than you.

In the former example, you need to make a high-conviction bet that this team can execute and their product is important.

On the second project, it feels like you’re almost being given free money. All you need to do is hope there is enough liquidity to sell your 20% to make it risk free, no conviction necessary.

Founders can offer these “free-money deals” to investors to guarantee that they can raise capital. There is zero signal offered to the market on the team nor the project quality. Investors have just deployed simple math and decided the odds are sufficiently in their favour.

The common man

It is not a surprise, then, that populist rhetoric starts to connect with market participants. Now, projects can appeal to disillusioned market participants in order to effectively build a community. Come, join us instead. Fuck the suits and the VCs and the banks and the exchanges, the system is rigged. You can make money with us.

Community, users and attention is the most important part of building a crypto project. Founders learned they have a cheat code of their own.

But since the incentives are the same, you can apply the previous spectrum mental model from VCs to basically any other market actor, too. They are all just people trying to make money with different time horizon goals.

Some anons treat their anon identity as a highly valuable multi-decade pseudonym. Others treat it as a mask for the next couple of years until they have enough $ that they can bail.

Some builder-personalities are high-conviction long-term market participants and others are dollar-whores that end up effectively pumping tokens.

Projects using anti-VC rhetoric as a community growth mechanism are not immune to the market’s adversarial incentive structures. You’re not allowed to be surprised when your favourite anon twitter account is dumping on you after telling you to fuck the suits.

And certainly you shouldn’t be surprised when that YouTuber that you like doesn’t have your best interest at heart. They are certainly not taking symmetrical risk in the markets on the coins they promote to you. It’s free: you are the product.

Incentive structures

Explicating the incentive structures behind financial products and complex crypto schemes is a foresight-superpower in a market populated by retail investors and increasingly obfuscated tokenomics.

“Show me the incentive and I will show you the outcome’ — some old guy, probably Buffett

Most crypto projects, regardless of their sector or style of marketing, can be reduced to simplistic variables that are useful to inform your choices in the market. If you know the other participants in the market and you understand their incentives, it is unlikely that much will be surprising.

Yet crypto market participants seem to have quite a (3,3) mindset implicitly. It’s the only financial market where somebody exercising their right to sell an asset is seen as a betrayal to a community.

Perhaps it comes from the same place that “wagmi” or “hodl” came from. Perhaps it is rooted in the reason we ended up in these markets: all in it together, escaping from the tyranny of the old power structures that held us down.

But this ideological opposition to adversarial incentives often leaves retail holding bad investments way too long. It enables bad actors to abuse these ideals as they tweet “wagmi” while funding the seed round of Let Them Eat Cake Coin — which they don’t actually believe in but they know the tokenomics will allow them to profit anyway.

There is a reason “don’t trust, verify” became a popular Bitcoin phrase way back when. Think many market participants would benefit from adopting this mindset and trusting individual market actors much less than they currently do.

If you are making decisions without understanding the financial incentives of those playing on the same field as you then I hope you’re not betting more than you can afford to lose.

It was one of the two cheat code phrases that you could use in 2021 to bypass the critical thinking of LPs when raising your first ever fund, with the other being “metaverse”. Congrats, you now have one billion dollars to deploy because you learned the trendy words and you went to a good school, glhf.

Despite the deluge of undistinguished thinkpieces issued by the dominie of the day, nobody really agrees what web3 actually even is. Depending on which tribe you belong to, web3 is a scam, web3 is the future, web3 is tokenizing the world, web3 is VC exit liquidity, web3 is just another name for crypto, you get the idea. Even the crypto community can’t make their mind up on whether Bitcoin is web3.

If nobody really agrees on what web3 is, and the term only really rose into buzzword circulation over the last half a year, I think it’s fair to conclude that web3 doesn’t really exist yet. And yet, clearly, there are a lot of ideas and experiments circulating on converging topics that are inciting inspiration, creativity or outright dismay amongst observers.

What is the point of web3?

In an attempt to avoid embracing this dispute’s futility, instead it might be more useful to think about what web3 could be? Do we even need to move on from web2? What is web3 solving?

There are two topics that I think are important themes:

• Decentralization of power — There is increasing mistrust in concentrated power. Whether it is government, central banks, or global omegatech corporations that have become more powerful than nations. The trend of deplatforming, behavioural mandates and censorship has created new interest in building trustless and censorship-resistant platforms that can empower ordinary people and fractionate existing power structures.

• Ownership of value — With Web2, the web changed from “read” to “read and write”. The web became social and participative; the age of user-generated content began. Modern tech companies host content sourced from users and then monetize it privately. They exploit our desire for social interaction and compound them with addictive product-patterns, interweave adverts and extract all of this user-generated value for shareholders. By the time you’re able to to become a shareholder in these companies, they’re already valued at multiple billions and insiders already got rich.

An open and equitable web

I understand the excitement of proponents.

An idealised future web might be able to address these issues in a way that not just contributes in a positive way to these social issues, but also enables founders with powerful growth and retention tools to compete with incumbents.

We could build a web where users are able to share in the value that they create and supercharge adoption. One where techgod majority rulers don’t decide what we’re allowed to talk about or how many adverts we have to look at every day.

Perhaps it can empower regular people who have spent thousands of hours acting as batteries for big companies, their attention harvested into profits for private shareholders.

Maybe the web can become more cooperative instead of extractive.

Ponzification of everything

Probably even moreso, I understand the fear of critics.

A pessimistic future web might be littered with tokenised microtransactions seeking rent on all possible user actions, needing users to own native tokens to properly operate their toaster.

It might be a web built on selling worthless ERC20s to retail investors to fund failing projects and extracting value much more directly than spending years selling adverts.

And it could be a web with fewer tools to deal with harassment or evils like child abuse content. Online crime becomes more difficult to prevent.

Perhaps the financialisation of everything benefits only sophisticated algorithmic hedge-funds and gigantic early megaVCs that became majority owners of these tokens in private seed rounds.

Which way to go?

If you’re able to imagine both a pleasant future and a dystopian future, I wouldn’t blame you for expecting the worst one to be the most likely to become reality. Modern businesses have evidently often made the web more…. annoying. Cookie permissions, gdpr requests, banner ads, paywalls, lootboxes and pay-to-play or pay-to-win — it is easy to expect suboptimal or anti-user changes.

And if you look externally into crypto, outsiders can’t really be blamed for seeing things that look extremely similar to scams. Wealth effect has driven exuberance and arrogance amongst market participants, and the self-referential ironic nature of crypto culture is alienating to non-natives.

I get it. The past sucked sometimes and the present sucks sometimes, so the urge to reject ideas that you can poke theoretical holes in is potent. You don’t have to think very hard to imagine ways decentralised systems could be exploited, and you don’t have to look very far to find examples of regular people being exploited by token projects.

But at the same time, you don’t have to look far to see the power of ownership and self-autonomy in existing owner-operated systems.

Bitcoin moved from “darkweb drug money” to an institution-grade store of value asset in the space of a decade without a central authority to guide it.

Ethereum evolved from from “techbro ponzi scheme” to a massive owner-operated network that transactions multi-billions in value daily.

Businesses, users and third parties contributed to creating incremental value for both of these networks and the reward was shared amongst them for doing so. Anyone could participate and value could accrue back to them, instead of only accruing to founders or financiers.

Even purely fun social consensus projects like ConstitutionDAO could perhaps be an example of user-generated value creation shared amongst all. The DAO became worth more despite failing to secure the constitution, and that value accrued back to the participants.

Perhaps this shared ownership can be a forcing function to break existing conventions on how tech companies can or should operate.

Inequality

The rise of inequality has become increasingly evident. During the pandemic, asset prices skyrocketed and the already rich got richer. Meanwhile, small businesses struggled and the working class virtually instantly spent their stimulus cash. Apparently over 50% of Americans have less than 3 months worth of emergency savings.

Wage growth has been virtually stagnant but the cost of a home is up over 400% over the last 40 years. People have started to feel stuck in a system rigged against them with the chance to afford the future they want rapidly slipping away.

No wonder there has been a rise in RobinHood retail options traders and Dogecoin buyers. Lottery-ticket style investing has become a viable option to people that don’t see a path to their financial goals through saving and investing.

Perhaps a more socialistic model of equity or token ownership can act as capitalism’s answer to a Universal Basic Income. Instead of the state printing a bit of cash for families, taxing future generations to pay the current one, maybe people sharing in the wealth they generate can create a more equitable world.

If users vote with their wallets by choosing companies that will let them be rewarded for the value creation that they already participate in, these companies will discover huge network effect tools to grow quickly and unseat incumbents. Real people could opt to own some of the value they collectively created, instead of forfeiting it all to founders and investors.

If all else were equal, a user offering two identical services would be incentivised to use the one where value accrued back to them.

Immaculate conception

When Bitcoin was created, it was another immaculate conception. Satoshi delivered what may prove to be one of the most important creations in history to the world on fair terms for all to participate. They didn’t take a share of coins privately, nor give any to private investors. They mined their own coins on terms that were equal to all other participants. Yes, they mined millions of coins because they were early, but they had no extra advantage over anyone else that learned about Bitcoin.

When Ethereum was created, they premined coins and held an open free-for-all ICO. They sold 60,000,000 ETH to any one that wanted to participate. Ethereum was sold for around $0.30 per ETH. Ethereum founders did keep some coins for themselves and for the Ethereum foundation. Vitalik, founder of ETH and the single largest premine recipient, received less than 1% of the entire supply of ETH which is a pretty small ownership share when compared to traditional equities.

While Ethereum’s inception was slightly less “fair for all” when compared to Bitcoin, it still had a relatively fair and open participation model. Through 2017, ICOs replicated this model, but started to be degraded with pre-sales and private sales to insiders.

By 2018/19, free-for-all fair terms for participants became a thing of the past. The SEC enforced against ICO projects in an attempt to protect retail investors. Regulatory pressure and lack of clarity led crypto-builders to raise privately from VCs instead of the general public. It stopped being possible for non-insiders to buy on the early, cheap terms that VCs were now able to purchase at.

You can focus on the trend of a free-for-all fair-launch network with no founder rewards transitioning to VC-funded privatised gains with large founder allocations and be extremely pessimistic. It appears the purity and beauty of Satoshi’s creation has been corrupted by the greedy.

But the truth is that crypto is just popular now. When Bitcoin was launched, it was less obvious to many that crypto may have value. Bitcoin proved that it could. Ethereum compounded that belief. Charts going up only for ten years attracted a lot of risk-seeking capital.

When Satoshi launched Bitcoin, mining difficult was so low that people were able to mine 50BTC block rewards with solo PCs. The undiscovered nature of Bitcoin made it a hobbyist’s fair launch, not a hedge fund playground. If a project tried to launch in the same manner today, the already-rich would simply take over all of the hash and accumulate all of the coins, paying electricity providers for a share in this new project. In such an environment, founders may as well just sell to them directly and secure long-term funding.

I would prefer open sales available to all on the same terms, but understand that founders don’t want to risk unnecessary regulatory headaches and therefore dealing with professional investors is easier and lower overhead generally. Not to mention the vectors for abuse and that most 2017 ICOs went to zero.

Does it matter if some people get rich while building the future?

I don’t think anyone will argue that Vitalik does not deserve to own 0.7% of ETH’s supply for his contributions to Ethereum. I don’t think anyone would argue that Satoshi’s 1M coins were unfairly mined.

And yet it is impossible to ignore the irony in the largest proponents of web3 being historically successful venture capitalists. Yes, no surprise that these entities are attempting to become the super-financiers of this apparent utopian shared Community-Owned Economy by buying a majority stake in discounted seed rounds.

It’s also impossible to ignore cash-grab founders and investors have exploited existing market dynamics to create ponzinomic-style bull market projects to enrich themselves.

Thus, I think four things are true:

• There is consensus that founders getting rich when they create huge value in the world is deserved and expected.

• There is rough consensus that VCs or angel investors that fund something early are providing a service and should be rewarded for that when what they funded creates huge value in the world.

• Many people believe these funding opportunities should be open and fairer, rejecting existing accredited investor rules as excessively parental or counter-intuitive (yay, now we get to buy the top from VCs!).

• Everybody absolutely fucking hates it when founders or VCs get rich from something that does not contribute value to the world in any way.

There’s no denying that the latter bullet point has become prevalent in crypto now. Many pre-product CEOs becoming overnight billionaires from launching a token and making some promises about an NFT-driven video game, or building a “web3” platform that attracts only double-digit active users.

In sum

Web3 doesn’t really exist yet. But evaluating its merit on superabundant bull market ponzis is probably doing it a disservice, the same way ignoring those market dynamics would be dishonest.

The social problems with the world, and with web2, I think are valid and worth solving and there’s a lot exciting stuff to consider in the promises of web3.

I think open, transparent and permissionless systems replacing trusted central authorities is good for the world and can rebalance and decentralize power.

I’m hopeful that the financial exuberance in crypto markets can attract brilliant minds away from selling people ads to instead build a more equitable and cooperative future.

But I ain’t gonna be surprised if crypto founders are too rich to care anymore and the new web gets built by late-stage capitalism greedcorps that make you buy a fractionalised micropayment NFT on Cardano to operate your electric toothbrush.

Post-credits

I am aware that I have been baited into a philosophical and fairly inactionable debate between tech billionaires who all got rich off the Facebook-era of the web. And that, truthfully, the outcome of their debate doesn’t matter much because they are no longer the risk-taker builders of the future. Perhaps they are the financiers, but then their power law curve models already assume they’ll be wrong more than they’ll be right.

So, in this post, I will show you how to see the future.

Seeing the future

Successful crypto veterans know that crypto trading is a probabilistic outcomes business. Probabilistic thinking is basically just trying to estimate the likelihood of a specific future outcome becoming reality.

To my knowledge, seeing the future is currently impossible. Traders must instead predict the future by first seeing every possible future.

Oh, and none of this is investment advice. I’m not a professional and mostly am stumbling my way through the world the same way I was at age 13. Just documenting and sharing some thoughts and none of it is a science. I, like everyone else, am simply an aged baby walking blindfolded into a forest, startled by my own humanity.

Anyway, to illustrate with reality rather than a Marvel movie reference, let’s go back in time. Here’s what the 1D ETHUSD chart looked like at daily close on May 19th.

When the market crashed in May, it took 8 days for Ethereum to go from around $4400 to below $1800.

During the crash, you could consider four possible scenarios for the future. I tweeted about them as we broke down below $2000.

In case it helps, I have drawn some embarrassingly lo-fi versions of what the future charts might have looked like in each scenario.

1. The market has experienced another 2017-style boom/bust cycle and the top is in. We can expect a classic crypto “complacency shoulder” pattern.

2. The market will cool off before experiencing a 2013-style double-bubble and be bullish again towards the end of the year.

3. The market will go down-only and experience an almost unprecedented level of rekt.

4. The market will instantly recover and rocket to new highs very quickly.

There are of course slight variations of each idea above, as well as other potential scenarios that I didn’t bother considering because I thought they were too unlikely (eg. sideways forever).

After accounting for all the possible things that could happen, good traders will evaluate how likely they believe each scenario to be. At the bottom of the crash, they could be weighted something like this:

• p(1) = 45%

• p(2) = 45%

• p(3) = 5%

• p(4) = 5%

In effect, you believe scenario 1 and 2 are equally likely outcomes at 45% each and they are also the two most likely possible outcomes, but you are also considering that 3 and 4 may be possible too.

If you evaluate the best possible trade for each scenario above, they are pretty simple:

• 1 — buy: buy the lows and sell the classic complacency shoulder pattern

• 2 — buy: buy the lows and hold for new highs

• 3 — sell: it’s going to actual zero

• 4 — buy: new highs by end of day, lfg

By these estimations, buying is the best trade in 95% of scenarios. There is an estimated 50% chance for new highs, a 45% chance for selling slightly below the previous all-time-high, and a 5% chance of getting completely rugged.

Specifically:

• 45% chance of +80% pnl (buying $2000 and selling complacency shoulder around $3600)

• 50% chance of more than +100% pnl (buying $2000 and selling above new highs)

• 5% chance of -20% pnl (buying $2000, market to new lows, cutting losses at $1600)

Now the trade seems simple: buy at $2000, re-evaluate near $3600, and stick to the exit plan in case of the scenario where the market is getting rugged into new lows. 95% scenarios make at least +80%. 5% scenario loses -20%. That seems worth the risk.

If a trader was already holding and hadn’t yet exit, either before the crash or early during the crash, they could still use this information and estimates to decide to hold, rather than panic-selling into Alameda’s bids at the lows.

Doge & Elon

I spoke about this a little in the previous post wrt attention, but I think it’s relevant here as well.

Elon tweeted about Doge a bunch through 2019 and 2020. During this bullrun, he started shilling Doge again below $0.01. I actually don’t remember exactly and I certainly don’t care enough about this blog post to do research. Let’s just agree that it was at $0.01. The chart looked like this:

The future scenarios may look like this:

1. He keeps shilling it and it goes up.

2. He keeps shilling it and it fails to go up.

3. He doesn’t shill it anymore but it pumps anyway.

4. He doesn’t shill it anymore and it goes down.

Where:

• p(1) = 75%

• p(2) = 10%

• p(3) = 7.5%

• p(4) = 7.5%

Since Elon shilled it throughout 2019 and 2020, you can say it’s actually probably quite likely that he will lean into the euphoria of the markets looking better and effectively pump doge a bit.

Of course, he might shill it but be ineffective at pumping it. And he might get reigned in by a compliance team or some advisor and not tweet about it like he did in 2019 and 2020.

In the scenarios where it goes up (p(1+3)=82.5%), a finger-in-the-air but conservative estimate has an upside of 350% (which would be doge hitting 3 or 4 cents). In the scenarios where it doesn’t (p(2+4)=17.5%), it would be possible to sell somewhere between current price and failing to keep the previous sideways price floor — maybe down 50% in the worst case scenario.

By these estimates, there’s a 82.5% chance of making a 3-4x multiple on this bet, and a moderate to small chance of losing 50% of the bet. Again, seems worth the risk.

How do you estimate probability of a scenario? Or price upside?

I am intentionally oversimplifying this a lot and I promise not to write about cumulative distribution function of returns or anything, but do think it’s worth exploring some of the nuance in estimating possible futures and probabilities.

I assume the primary questions are: How do you come up with the potential scenarios, and how do you estimate their likelihood? Honestly, you just kinda guess. And you hopefully get better at it over time.

A good way to inform your guesses about the future is to look at what has happened in the past. This anthropological reflection on markets and assets can give hints about what might happen in the future, since the past was created by a crowd of people who were likely similarly intelligent, and dumb, and emotional, and irrational and etc as the current crowd of people existing in the present.

You can ask simple questions of history, such as:

• Has there been a drawdown of over 50% that didn’t signal the end of the bull market? If so, what was the previous max mid-cycle drawdown?

• What happened after -30% drawdowns in the past? Is there any reason why it would be different this time?

• How did Doge perform against Bitcoin historically in bull markets? What are some conservative upper targets for DOGE/BTC pair?

• How did extremely high-attention and hyped altcoins grow in the past? What did their charts look like? Are there charts that look like currently hyped ones look?

• What multiple did Bitcoin increase from the previous all-time-high (2013) to the next one (2017)? Is that multiple reasonable for assets that have a similar market cap to what Bitcoin did in 2017?

• What usually happens when an asset gets added to big exchanges, like Coinbase, Binance, etc?

History doesn’t repeat itself, of course. But Twain might tell you that pattern matching to historic data from directly or tangentially related markets can help inform a model of estimates about the future: where prices might go, and how likely a scenario is.

Experienced traders know a lot more about markets, so instead of answering simple questions like above, they’re more likely to ask to significantly more complex questions about the past and including multiple market metrics into those questions. They’ll consider stuff like open interest, order flow, volume profiles, entropy or who knows what they find reliable or informative. But it’s the same general idea and approach even as the historic comparisons get increasingly complex.

Don’t try this at home

Retail traders are often bad at evaluating the attributes of a crypto asset, as they are unfamiliar with the technological or fundamental merits — but they’re also quite bad at evaluating the price behaviour of a crypto asset, since they are unfamiliar with trading concepts, price charts and financial markets. And if a trader is making shitty or biased estimates as to what could happen in the future, then they’re calculating bad probabilities and probably losing all their money.

Realistically, I think 95% of people reading this should probably not be actively trading crypto markets. Simply having exposure to the fastest growing asset class of the last decade is good enough, and the potential upside of winning some trades is not worth the risk of you losing that exposure. If crypto does fulfill its societal mission, there is still a gigantic amount of long-term upside and it’s better to just survive than try to maximise short-term gains.

But I know many of you are absolute reprobates so I will be realistic with my request. Instead, I will only take this moment of your attention to encourage that you take off a little risk. Take things a bit slower. Push out your “get rich quick” time horizons. Start to journal some probabilistic thinking into your trades or investments and reflect afterwards on why you lost your money without blaming market manipulators or Three Arrows Capital. Although it probably was Su’s fault, so I sympathise.

Anyway, not investment advice, this just some of the ways I and others I have spoken to think about short/mid term price action in an attempt to stay rational. But Sam says go all-in and he’s a deca-billionaire so I’m reconsidering things.

In reality, the only scarce resource in crypto is attention.

Risk-seeking capital is certainly not scarce. People that joined crypto in summer 2021 are raising multi-billion dollar funds to explore “the metaverse” and to decentralize Uber. One billion dollars is not very much money anymore.

Crypto assets are not really scarce either. Of course, this is a little intellectually dishonest. Bitcoin and Ethereum themselves are scarce due to their hard-cap supply or deflationary tokenomic designs; Crypto Punks are scarce because there is a finite and fixed supply; and yes, there will probably only ever be 5,200 Crypto Dickbutts. But the amount of things you can speculate on in crypto is ever increasing and theoretically interminable. More specifically, the infinity-billion dollars in risk-seeking capital are not entirely dedicated to buying the bags of crypto OGs.

There is ample dilution in the destinations for new dollars into crypto. It is more prominent in a bull market — particularly towards the thrill-stages, when long-term value theses seem to retreat from the cognition of money managers that recently discovered themselves to be geniuses.

Yes, there’s only 10,000 Crypto Punks. But there’s also 10,000 BAYC, MAYC, the kennel one, a bunch of cool ArtBlocks and CoolCats and Meebits and Hashmasks and, yeah, you get the picture. Sure, Ethereum launched EIP1559 and they’re burning billions of dollars of ETH and it is increasing in scarcity as time passes. But if people feel like they’re late to ETH, well then there’s AVAX, SOL, LUNA, ONE, NEAR, even ADA.

Over time, the truly valuable crypto assets have shown to be incredibly scarce. Crypto assets that outperformed Bitcoin over more than one bull/bear cycle are limited, most of them died entirely. It’s not unrealistic to imagine that something similar happens again on a medium-term timeline. As exultation abandons us, we will emerge naked and sober. Coming down from a manic episode. Reflecting on these decisions we made during this out-of-body experience with the taste of reality and shame. Capital will return to value. And it’s likely the pool of “value” is much smaller than previously imagined to investors now operating with their euphoria hangovers.

But for now, the brand new $1bn fund managed by ex-Citibank “innovation division manager” turned wagmi-punk-2383, is spoilt for choice in a dilutive and ever-expanding toilet bowl of investment opportunities. They have LPs knocking on their door to take more money, they have 100 founders per day building cross-chain defi metaversal gaming scholarships.

The only thing truly scarce is attention.

Attention

Attention is a currency on the modern web. Web2 companies figured this out ages ago. Users pay for a service with their attention. Companies capture this attention to ultimately sell something to the user at some point down the line. Usually the company doesn’t sell something specifically themselves, they just act as broker between user’s attention and businesses with something to sell.

Attention as a currency in the token economy is much more evident and direct. Each day there is 50+ IDOs happening, all competing with each other to take your $ and add you to their community. Airdrops have been flowing non-stop for the last 12 months, rewarding users with financial incentives for using and supporting their product.

Traditional companies will pay you $5-10 to use their product. Sign up, and you get $10 off your first Uber ride. In web3, the fight for attention is so large that 9-figure incentive programs are the new normal, and 5-figure airdrops to users are not uncommon. Crypto youtube influencers are commanding 5 to 6 figure advertising costs per video. Attention is scarce and it is in high demand.

Attention-based asset valuations

In the last post, I wrote about bull-run crypto markets being more similar to a video game than to investing. If crypto is a massive multiplayer game where the score is kept in dollars, then attention dictates a lot of that shorter-term metagame.

The majority of people playing the multiplayer crypto game cannot themselves sufficiently evaluate a project’s technical and fundamental merits. Instead, retail investors reliance on signaling and social proof in decision-making is quite large.

If you over-simplify crypto prices to be some equation of supply/sellers and demand/buyers changing over time then you can explore the impact of attention scarcity.

Evidently, prices go up if there’s more demand or if there’s fewer sellers. But the underlying factors impacting demand and supply do not change as rapidly as the cadence that players are playing the crypto bull market video game.

More specifically, protocol development and builders’ creation of value happens on multi-year timelines whereas crypto bull market trader-gamers are operating on at-most multi week timelines and frequently shorter than that.

Attention is the only factor impacting the supply & demand variables that changes on the same cadence as the players, because it is directed and controlled by the players.

Becoming favoured

During thrill stages of a bull market, good players are not trying to buy the “best” assets. Instead, they are trying to buy the assets that are about to cross an attention chasm, or realise their valuation potential.

Good traders know that they do want to buy “Winners” to achieve maximum returns. They want to buy projects that will move from “Niche” to “Winners”. They would even prefer to buy projects that have a chance to move from “Rekt” to “Retail Trap”, though they know that this is obviously much more risky, since there is less chance of a bad project becoming popular. Projects can also move from Rekt to Niche with a product pivot, change in tech, or change in leadership. Traders know that any project moving upwards or to the left in the chart above provides an opportunity.

“Winners” are the best assets for long-term investors and casuals, since they’re easy to identify. But for crypto-gamers playing daily, they are very likely to be lacking in relative opportunity, since they will probably grow closer to the market average and good traders are looking to outpace the market average significantly. An obvious example of a “Winner” would be Ethereum. Of course, winners also have downside risk, in that they can move to “Niche” or even to “Rekt” slowly over time as the crypto landscape changes.

“Retail Traps” are also likely to be lacking in relative opportunity vs. market average, but also have more risks than “Winners” since the project has bad tech or a bad team and worse long-term prospects. They could become good projects, but that is unlikely and can take a long time. Best case scenario, they continue to grow closer to the market average. Worse case scenario, they move from Retail Trap to Rekt as the market realises they are a bad project and they lose popularity.

As projects increase in popularity and awareness, they become favoured amongst traders. This period of “becoming favoured” is where asset-valutions experience the most change.

Once a project has become favoured, the amount of market participants that own this asset increases to saturation. Once saturated, it requires (a) the entire crypto market to grow for that asset to continue to grow, or (b) for the fundamentals behind the asset to continue to improve relative to the market. That’s why owning “Winners” (or “Retail Traps”) during thrill stages is less desirable to the most hardcore crypto-game players, since (a) and (b) move too slowly for these video game addicts. There is gigantic opportunity in crypto markets, and thus similarly gigantic opportunity cost.

Good crypto game players are trying to find projects valued much lower than their potential valuations, and then selling those good projects when they approach those valuations. They sit in “Winners” while they look for better trades.

Longer-term investors don’t care so much about the game. They’re happy to buy the “Winners” and bet on good projects growing with the overall market or becoming more important over time.

$SOS, Loot, BAYC

There are many examples of the sudden injection of attention into markets.

The recent airdrop of $SOS is good to consider. $SOS was airdropped by a third party to Opensea users based on their previous NFT buying history. This is interesting because giving virtually every single serious crypto “game player” some amount of free money is a very good way to rapidly increase attention amongst all crypto game players.

Keep in mind at this point $SOS has no product, no fundamentals, it is purely a market of speculative attention catalysed by the crowd’s desire for an OpenSea token or competitor.

When a game player’s attention is directed to $SOS, they have three main choices:

1. Sell their airdropped coins for Ethereum or USD

2. Hold their airdropped coins and see what happens

3. Buy more $SOS from airdrop sellers

When attention is directed to this new market, crypto game players ask themselves “how do I make money from this new thing?” which of course is the ultimate point of the video game. If enough people decide to take action (2) and (3), such that $ from (3) is greater than $ from (1), the price of $SOS will go up and the $SOS chart will look good.

If the chart looks good, more people will talk about $SOS, presenting the same set of decisions above to more people and a new cohort of people. Now, market participants that never used OpenSea, or didn’t use it enough to get a good airdrop have to decide to:

1. Buy $SOS and participate.

2. Wait or ignore this market entirely.

Some of these people will pick (1) which in turn causes the price to accelerate further. While the price is going up, people are happy they’re making money, and continue to talk about this trendy new thing.

But, ownership catches up to attention, and quickly the project has moved from the Niche/Rekt level of popularity/awareness towards the Winners/Retail Trap level.

With prices higher, more people decide they’re happy to sell their airdrop. As charts stagnate and attention drops, less new people decide to own $SOS. Since $SOS is less shiny and new, and suddenly is just a token with no product, less people will talk about it and k-factor of the asset reduces. As the initial level of attention is unsustained, the majority of the remaining attention is from existing holders.

Once an asset has entered the consciousness of many players, it is easier to get all players to think about this asset again, but achieving sustained attention without a product and without users is much harder.

I think you can argue Loot may have also followed the blueprint above to some degree, too. And this maybe also explains why the best performing NFT PFP series of the year, BAYC, was able to flip the Punks floor while competitors launched at similar times went to 0. BAYC focused on building a community via building value for that community — and an engaged community become perpetual promoters, creating sustained or growing attention.

Doge

Doge was another interesting attention injection for 2021.

Throughout history, Doge pumped relative to Bitcoin quite routinely. However, from its inception until the end of 2020, those pumps stayed pretty much within the same range. You can see the chart below, from 2014 to end of 2020, the chart is basically just sidways zigzagging for 7 years.

When people learn about Dogecoin, they have two choices:

• Buy doge

• Ignore doge

You can imagine that for 7 years, the ratio of decision making remained roughly constant. Lets say for every 100 people, 90 of them ignored it, and 10 of them bought doge.

Then, in 2021 a new attention catalyst was introduced. Elon became the cheerleader of Dogecoin, changing two things:

1. More crypto-native people were convinced to buy doge

2. Entirely new market participants were convinced to buy crypto for the first time, starting with doge

So when Elon started shilling Doge, it was actually a pretty interesting moment in markets. You could say to yourself: if Elon continues to draw attention to this, what is the max audience it can reach? How will the buy/ignore ratio above be affected?

Thinking about it this way would’ve made betting on Doge in some capacity quite an easy trade. If he continues to shill it, increased attention will change supply/demand hugely in the favour of doge holders for a while - perhaps you could estimate a 5x or a 10x upside. If he doesn’t, you could probably cut your losses at -33% of your investment. Decent imbalance in risk/reward.

Eventually, though, it felt like virtually everybody in the entire world that might decide to buy doge already knew about it. It was a fucking segment on SNL. By this point, attention is flat at best, because there’s a saturation of people who know about doge and those that would be convinced to buy it have already bought it. Attention is now concentrated amongst puzzled observers and people that already bought the maximum they’re willing to buy. The rate of change of attention has dropped which leads to far fewer new participants willing to buy, and it has become favoured with the only remaining attention from bagholders.

Smart traders start selling as ownership and valuation have caught up with attention.

ADA

Cardano is another interesting example. It has performed very differently to Avalanche, Solana and Luna throughout 2021, despite the core thesis behind the asset being the same.

Cardano reached huge amounts of attention as the bull market began. It became a Crypto YouTube’s favourite coin with all the well-known names and faces putting it as one of their top 3 assets. Of course, the founder is kind of a Crypto YouTuber himself, Charles’ streams often reaching 50k viewers.

Yet, since the beginning of 2021, Cardano is down 93% when priced in SOL.

Perhaps this can be explained the same way we described SOS or BAYC.

When projects receive a huge injection of attention which outpaces ownership, they often reprice upwards. Cardano was a leader in retail “eth killer” attention towards the end of 2020 and in early 2021. Plus, the bull market was just getting into gear, so lots of new participants were joining the market adding further attention.

But throughout the year, other L1s such as Avalanche and Solana have created vibrant and engaged ecosystems — similar to how BAYC did. They are constantly acquiring greater mindshare and attention of users, developers and speculators. New projects and opportunities to make money are rapidly being launched on these L1s.

These communities become eternal promoters and, since crypto game-players don’t like to be idle, these DeFi/gaming/whatever projects become a positive feedback loop of sustained attention. And since attention is scarce, all of these L1s are competing with each other for mindshare simultaneously. Solana and Avalanche winning user mindshare can be considered loss for other L1s.

Cardano is very popular, but since users can’t do much there at the moment, and there isn’t an ecosystem of crypto-game-players living on Cardano day-to-day to win points in the crypto game, it feels as though it has transitioned more into ‘Retail Trap’ than ‘Winner’.

In sum

Attention is the only scarce resource in crypto.

The rate of change of attention and the saturation of ownership are useful metrics to observe or estimate when valuing crypto assets or playing the massive multiplayer crypto trading video game.

The best thrill traders are hunting for low relative popularity assets that have lots of space for their valuations to grow if they are able to cross the chasm from obscure to popular. They are selling them when ownership catches up with attention.

Holding “Winners” through thrill-stages is only for the mentally-stable, functioning human beings with well-balanced lives. Maybe I will be one of them one day.

Oh and don’t listen to most crypto youtubers. They’re turning your attention into a product for their advertising businesses.

Most competitive modern video games have an ever-evolving metagame. The metagame can be described as subset of the game’s basic strategy and rules which is required to play the game at a high level.

The meta

In League of Legends, the metagame changes frequently as characters, items and abilities are made stronger or weaker by the developers. Sometimes assassins are extremely strong, sometimes the optimal way to play the game is to play a particular subgroup of extremely strong “jungle” champions. Since certain characters are strong, other characters that are good in response to these meta characters also become popular as a “counter” strategy since they are well-suited to exploiting the weaknesses of these over-powered characters.

I don’t play Magic: The Gathering but the internet tells me the metagame is dictated by the strong/popular decks, the banned/restricted card list and the best responses to those strong and popular decks.

All other variables equal, knowing and utilizing the metagame gives the player the maximum chance to win the game.

In the bull-market-thrill-crypto video game, there’s a metagame too. Knowing and understanding the metagame is not required to score some wins, but pretty important to continually win when playing at the highest level.

Ethereum killers

Sometimes the metagame is obvious and enduring: throughout 2021, there has been a very clear “Ethereum killers” metagame. Alternative smart-contract platforms have remained one of the best trades of 2021. The “SolLunAvax” metagame sustained & strengthened virtually all year, and their popularity caused this metagame trend to flow down into obscure or fringe alternative L1s too. You could say things like “which L1s have not pumped yet relative to market average?” to participate in this metagame, without even really knowing what that L1 does or if it is actually a good protocol.

Since Ethereum’s fees are exclusionary and broken, this metagame has been durable. Crypto markets are a video game and market participants want to play: they don’t like to be idle during a bull-run. They want to make moves and capture opportunity. Ethereum is too expensive to be active for lots of people. Until that changes, this metagame is likely to remain strong.

Crazy Caterpillars & Dizzy Ducks

Some metagames are fleeting and unsustainable.

For a while in 2021, new NFT mints were a popular metagame. The popularity and success of Crypto Punks inspired projects like Hashmasks and Bored Apes; in turn their success inspired a mimetic trend of market participants confidently searching for “the next big profile-pic NFT series”. These mints were over-subscribed, causing hyped secondary markets. People that missed out on the mint were fomo-buying ‘rares’ after the mint. The profits for early minters further inspired more confidence in participating in these mints. Players begun to see minting these projects as “risk-free”.

Of course, none of these projects were the next BAYC. They were uninspired trend-followers at best and cash-grab scams at worst. Real, sober secondary market demand was virtually zero. Market dilution increased since it was lucrative to be an NFT PFP founder and mint-to-flip was seen as a risk-free trade, thus the best use of capital. Of course, if the best use of capital is to be the mint-to-flip buyer, buyers are focused there and there’s much less money hunting secondary markets. The market quickly reveals that in 99% of cases the person buying on the secondary market is the loser. Secondary market buyers dry up even further, which then makes the mint-to-flip buyer the loser. And suddenly the trend has cannibalized itself with an unsustainable incentive structure.

The biggest winners of this trend were those aware of both the metagame as well as the incentive structure behind the metagame.

Evolution of the metagame

If you go through the last couple of years, the metagame has evolved quite a lot.

In summer 2020, there was DeFi summer, categorised by lots of yield farming and eventually food coins. Towards the end of 2020 there was a Bitcoin dominance run, which then turned into a revival of “blue chip” DeFi with the market being led by Aave. There was an NFT boom, with NiftyGateway sales being extremely profitable. There was a shitcoin season, alt L1 season, and another NFT season but this time dominated by OpenSea. At some point there was an Art Blocks season and a “very old NFTs are good” trend. Alt L1 season evolved into alt L1 ecosystem season with BSC, Avax and Luna coins having their own flourishing ecosystems to varying degrees. Sol-coins did not do so well. Ohm forks eventually became meta. You get the idea.

You’ll notice that it was possible to win the crypto video game by ignoring this changing metagame altogether. You didn’t need to be early to Dani coins to have made good investments in 2021. But, to play at the highest level and maximise wins, you had to identify and exploit the hot-ball-of-money rotations between assets at least a few times.

Maybe more importantly, the biggest losers were formed when players misidentified the current metagame as something else. Anyone that believed the early-2021 metagame was actually a long-term investment thesis ended up holding ROOK from February 2021 through to a -80%. Or, they over-invested into 4th-tier NFT PFP trends that became illiquid and irrelevant.

Usually, metagames start with a long-term investment thesis transitioning to popularity, and end in mimetic exuberance.

Is knowing the metagame enough?

I think for some market participants, simply following the changing metagame is good enough. Especially for those that are able to control their euphoria or are natural skeptics. I’ve seen plenty of people able to spot a trend, jump in, jump out with decent profits and move on without turning their trade into a church.

Yet, for most people, understanding the incentive dynamics behind a metagame is probably way more important.

If you’re playing League of Legends, you can do well by knowing that a champion called Nocturne is the strongest character in the meta at the moment. You can simply play it until it’s no longer in the meta, and have a slight natural edge from the character’s strength.

But, if you understand why Nocturne is strong in the meta, and the changes that happened in the game to cause that boost in strength, you’ll be able to identify the scenarios to exploit those strengths, the pitfalls to avoid, and generally how to maximise your chances to win with this unfair advantage. You’ll also be the first to know when this advantage is no longer applicable (by changes in the game), because you know why the meta exists.

In crypto, understanding the dynamics of why or how a metagame works is much more important than understanding it in League of Legends.

Sol DeFi vs Avax DeFi

A good example of why understanding the metagame’s incentive structure is important is a simple comparison between Avax Defi and Sol Defi.

From a high-level, these two things can look the same. The hypothetical investment thesis is virtually identical.

• Avalanche is an alternative smart contract platform, an Ethereum killer, and has been a top performer this year. Native AVAX DeFi is a chance to be early to DeFi in a new ecosystem. If Avalanche is the eventual winning L1, AVAX DeFi is a great buy.

• Solana is an alternative smart contract platform, an Ethereum killer, and has been a top performer this year. Native SOL DeFi is a chance to be early to DeFi in a new ecosystem. If Solana is the eventual winning L1, SOL DeFi is a great buy.

So, why did Avalanche coins make so many CT traders rich and Solana coins just stole your SOL? Aren’t they just the same thing, betting on DeFi on an alternative to Ethereum?

Well, being “early” is not about buying the coin on the first possible day. Being “early” is about buying the coin at a valuation that is lower than its potential.

The Solana ecosystem had it’s own “very high FDV” sub-metagame, whereby the only people that were really early were the people that funded the seed round.

Much of the Solana ecosystem’s tokenomics benefited founders and financiers, but meant that the projects were valued as though they had already succeeded and many projects needed to grow into these valuations.

The popular Avalanche coins were much more community orientated and started at reasonable valuations, meaning that as Avalanche grew its userbase, you were able to capture the upside from that growth driving valuations.

It’s a simple example, but shows how understanding the dynamics behind the metagame could have allowed someone burned on soldefi to be more confident on avaxdefi.

Watching winners & solving problems

Usually the crypto meta is rooted in successes. Something works well, and it inspires new founders and investors.

Ethereum has been a huge success. It has inspired thousands of founders and enabled a dynamic and interesting on-chain ecosystem. The success of Ethereum has created multi-millionaires out of believers and supporters.

Often, the crypto meta is also enabled because of failures.

Ethereum has failed at scaling in a way that allows the chain to be used by regular people. It’s prohibitively expensive to use on L1 and the L2s are very new and have their own UX issues.

The “Alt L1” metagame is rooted in Ethereum’s success and enabled because of its failures.

“Winners” are a good catalyst for a meta. People are inspired by the success of a project and they want to look for things that are similar. Founders decide they can build something like that, but better! Investors want to be early for the next version of this great idea.

Axie Infinity’s success created a tidal-wave of capital flows into gamefi. Not only did AXS become one of the best performers of the year, but other thematically related assets also started to perform well, even if they did not have the same metrics or usage to back up their valuations. It spawned an entire metagame. Gamefi became trendy.

Problems and failures are also a great catalyst for a meta. Everyone feels the pain of the problem and trivially sees a world that would be better if that problem were solved. Thus, they rush to be early to buying the solutions. Often the winning solution is not yet clear, but that’s to be expected, because it’s never clear when you are early.

Watching the winners & locating the problems in crypto can be a way of identifying potential metagames in advance.

Community > problems

Sometimes the meta is simply enabled because of the community’s like-minded desire to be early. New market participants simply refuse to buy the bags of rich OGs and instead opt to create their own value.

Some trends in DOGE, SHIB, BSC, BAYC, AVAX, GME, etc can all be seen as having elements of this. They see that something was successful and they have simply decided “we aren’t playing their game, it’s our turn to be rich”.

Perhaps every generation opts out of the previous generation’s ponzi and instead decides to create its own.

Non-narrative metas

There are metagames within crypto that do not rely on the crypto-investment asset narrative too.

• There was a period of time where FTX market listings were virtually always bullish, since it was an injection of attention in the middle of a bull market onto a new asset.

• For a while, there have been people front-running Binance and Coinbase coin listings. They figure out, either through insider info, an API leak, or whatever method which coins are going to be added to a major exchange, they buy that asset in advance and they sell that asset upon listing.

• Follow-trading certain VCs has had it’s moments of being meta. As long as you don’t follow Barry.

• On-chain analysis and whale wallet watching has had moments of meta.

• There is also a meta in presales whereby bad projects can get funding by all-but guaranteeing profit to their early backers. They raise money at a tiny valuation, offer extremely short vesting, choose investors with big audiences and host an IDO at 20x the valuation that early backers were granted. They get funded, seed buyers are virtually guaranteed a profit, and early backers with large audiences get to say “here’s a thing I am an invested in” as a disclosure (which IMO completely misrepresents the imbalance in risk between their investment and their audiences’ potential investment but I guess is legal). In this meta, founders win and early backers probably win. The meta is weighted against everybody else.

Using the meta

As with video games, using the metagame in crypto gives the player the maximum chance to win. Identifying the metagame allows you to figure out the easiest and most lucrative opportunities at any given time.

A trader called TheDogKennel or something created a portfolio of every single dog coin after the early Doge pumps. He identified there could possibly be a dog-coin meta, and turned $15,000 into multiple million dollars. Possibly the smartest dumb idea I’ve seen all year.

Traders that saw “defi-summer” style dynamics on Avax were able to buy-and-hold the best native Avax dex from sub-1 penny to over $4 because the understood the meta and the dynamics behind the meta.

Identifying the meta and the dynamics behind the meta are probably the most important skills of any shitcoin trader. If you understand the dynamics and incentives, you can figure out whether a metagame has some positive-feedback loop or sustained vector of growth. Or you can figure out if it’s a wildfire rapidly burning out of natural resources leading only to its own demise.

Of course, identifying the meta early, buying the meta coins and selling them into meta exuberance is the ideal and obvious way to use the meta. In general, the most successful altcoiners I’ve met have used the metagame to increase their value-holdings over time (ie. trade meta to stack BTC or ETH).

But the meta is useful for a handful of other reasons too.

Sometimes you can simply see that you missed the current meta and use that info to exit positions that are out of meta to preserve value, or just take a break and restore mental energy. As the meta and attention shifts to new things, capital bleeds out of previous metas. People sell the last meta they fomo’d for the next one. It’s a video game. Players want to play, they don’t want to be idle.

Traders use the meta to exit/rebalance longer-term positions. If you had a big position in some token, which suddenly became meta, even if you have a long-term thesis around the asset, it might be a good idea sometimes to rotate out of it at exuberance and rotate back in when the meta has moved on to whatever is trendy next to compound your position size.

The meta can be used to help decide which assets to leverage trade on derivatives, or to construct pair-trades around. Longing the meta or best-performing assets when you think the general markets look good rather than longing majors has rewarded traders hugely in 2021, where longing SOL and LUNA from the June depths hugely rewarded you vs longing BTC and ETH.

Many traders are stuck using different metagames that are not currently reality. Lots of people have spent the year charting Bitcoin Dominance charts and modeling potential dominance runs because they are referencing a metagame model based on 2017. Other traders have spent the year relying on the Stock2Flow model to inform their trades. Identifying these mental models/metas can help you think more independently about what is happening and identify biases in thinking.

The worst thing you can do is run head-first into a metagame that is reaching exuberance. So, if you already thought 5 or 6 times about taking a trade, weeks/months have passed, and you have finally plucked up the courage to do it: you’re probably too late. It doesn’t feel risky anymore, which means it’s probably maximally risky.

Usually when the meta is common knowledge amongst all participants, the meta is already shifting to something else.

The market cap of a crypto asset is the price multiplied by the amount of coins/tokens that are currently in circulation. 

FDV means “fully diluted valuation” which is another valuation metric. FDV is the price multiplied by the total amount of coins/tokens that will ever exist (for that asset). 

The market cap is always smaller than or equal to the FDV. 

The FDV is larger because the term “market cap” counts only tokens that can be bought or sold currently, which omits certain locked tokens that are pending vesting or unlocks. These locked tokens are usually from a bunch of different categories – they can be team tokens and investor tokens and therefore relevant in the next few weeks to years, or they could be tokens in a mining schedule that will be emitted over the next 100 years.

Market cap = demand, FDV = ??

You can imagine the “market cap” as the total $ public demand. This rises and shrinks as the price goes up/down and demand changes – but market cap is basically the total amount of public $ that wants to buy a token at current price. 

Where market cap is a measure of public $ buying demand, FDV is not a measure of demand at all. Instead, it is a measure of supply. This is why the fully-diluted valuations get confusing.

As demand increases for unlocked coins and the market cap increases, the FDV increases proportionally, even though demand for these locked coins does not necessarily increase. As a result, the FDV increases 1:1 with market cap even if those locked coins could perhaps have happy sellers at much lower prices.

Scamnario 

Imagine a scenario where a project holds a fundraising round, raising $2.5m at a $50m valuation for private investors in January. Private investors are able to purchase at a price of $0.01 per token, but their tokens are locked for one year.

The project launches in February and in March the early users receive an airdrop. This project is under the radar and only a few people found out about it. Because it’s not well-known yet, there’s only $5m of public buyers wanting to be allocated to this new token at any price. The token only reaches a market cap of $5 million in March. 

However, the airdrop was for 1% of the total supply. The market cap is $5m and the FDV is 5m*100 = $500m (since the $5m market cap represents 1%). Token price is now $0.10. Seed investors are up 10x.

Now imagine that by May, this project has become the greatest hype project in existence. They’re listed on all major exchanges. They have rumoured integrations with Apple, Disney, Oprah Winfrey and God. 

YouTubers are making videos about this project. Now lots more public $ wants to be allocated to this token, so they go to Binance to buy it. The amount of public $ that is willing to be allocated to this token has grown 20x from $5m to $100m.

No new coins have been unlocked because team and seed tokens are locked for 1 year. The market cap is now $100m. The price is $2. The FDV is now $10bn and seed investors are up 200x.

This $95m increase in market demand has caused a $10bn increase in “valuation”. The $2.5m invested in the seed round now sits at a market valuation of half a billion dollars. The team’s tokens are now “worth” $4bn.

However, the seed investors with locked tokens are willing to sell anywhere up to a 5bn valuation, which nets them a 100x profit. That means they are still happy sellers even at a 75% drop from current prices when their tokens are unlocked.

The team are willing to sell tokens at any valuation above 1bn in order to secure long-term funding. They are happy sellers even after a 95% drop when their tokens are unlocked.

Bullish unlock?

So, if unlocks increase supply but not demand, how does a bullish unlock actually happen?

Well, locked tokens can actually have an active market of their own. Professional and sophisticated investors trade locked coins using trust & legal enforcement as their guarantees. Basically, they buy or sell locked coins with a discount to the market price and sign contractual obligations with their counterparty to send the coins as they become unlocked. Sometimes these locked coins even have their lock extended during this OTC sale (particularly if the team is the seller).

Imagine some initial seed investors sold their locked position for a 10x profit to another VC, and this VC in turn sold their position for a 5x. The tokens that are now coming “unlocked” have a cost basis not too far away from the current market price, some market participant’s expectations were that the holders were sitting at a 100x profit. Since some investors expect the unlock event to be bearish, but it is actually neutral, this removal of a bearish catalyst can result in a net bullish event.

If there has been quite an active OTC market for the locked coins and ‘weak hands’ have sold to higher conviction investors, then an unlock event is effectively just the removal of “fear”. 

This is kind of what happened with Solana where SOL SAFTs were being sold for 66-80% discount leading up to the Dec 2020 unlock. There was lots of fear amongst locked-coin holders that the unlock would cause the prices to go down, and higher conviction buyers bought up lots of these locked coins. When the unlock happened, these professional investors are sat at a 3-4x instead of much higher multiples.

If there is no OTC market and no demand for the locked coins, then the only way for locked investors to realize profits is to dump them into AMMs or on Binance when they become unlocked and these events can kind of be a game of chicken amongst seed investors.

I would imagine that 90-95% of unlocks happening through 2022 are bearish.

How to identify whether an unlock is bullish or not

Usually professional funds will decide whether it’s a better risk-adjusted trade to buy locked coins for a discount or open market coins. Longer-time horizon investors will generally try to get the lowest priced entry possible and therefore don’t mind buying locked coins. 

Without actually just trying to participate in the OTC market (contacting locked buyers, bidding with OTC services, subscribing to OTC ask lists) the main way to figure out if an unlock may be bullish is just to evaluate “is this project good?” – good proxies are perhaps active users, TVL or product-market fit. 

If any token has institutional interest, it’s likely that funds have tried to purchase locked tokens if there are any.

Longer-time horizon investors also generally have more sophisticated models of valuation, so imagine them being more like “smart money”. They try to buy at the best valuation they think they’ll get with a 10-year time horizon, so if they think they can buy lower in a couple of years, they’ll likely wait. They’re less likely to fomo buy into parabolic prices like retail investors. 

This means as prices go parabolic, the valuation of locked coins and valuation of open market coins detach because smart money is less likely to buy inflated valuations and the locked coin holders are increasingly incentivised to sell (and become happier with larger discounts). In contrast, when markets have grown organically and steadily over time, it’s more likely that the cost basis of locked coins could move up to be closer to the open market valuation.

As bull markets get to later stages generally, smart money risks off and prefers liquidity, so this can be a factor too — later bull market unlocks are more likely to have not recently changed hands.

Unlock schedules

Also important to know the unlock schedule as well as estimating the off-market tokens current cost-basis. 

Bitcoin currently has a market cap of $970bn and a fully diluted valuation of around $1.07t. But this extra 100bn unlocks over the next 100 years as part of the ever-reducing block reward. If you were to plot a graph of Bitcoin’s “tokens” becoming “unlocked” through the process of mining throughout history, it would look something like this:

Bitcoin started at a supply of 0 and then increased at 50 coins per block, reducing that reward roughly every 4 years. This will continue to happen until all 21m coins are mined.

On the other hand, projects that raised with private fundraising and issued tokens behind locked vesting to investors may have a supply schedule that looks like this:

In this example, the coin supply starts above 0 (maybe they did a sale to the public, or an airdrop) and then insider tokens get unlocked in large tranches every year. 

There’s many other possible examples of graphs with different inflation schedules, I just used two ends of the spectrum as examples. 

The most common forms of vesting schedules for team or investor tokens in crypto that I have seen are usually of the format X years locked, Y years unlocking linearly where 0.5<x<1 and 1<y<3.  The most common I see for great projects is 1 year locked, 2 years unlocking linearly. Founders can make vesting terms more favourable (less lock/quicker vesting) if they are struggling to raise money.

Why does this matter?

It’s important to be able to figure out any changes in supply and demand throughout the duration of your trade or investment. A “small cap gem” can quickly become a large cap with a poorly timed unlock that you’re not aware of.

But equally, coins with high FDV with upcoming catalysts might occasionally be good trades, since locked tokens could be off the market for a while and other traders may be scared by the high FDV.

Knowing both market cap and FDV is important so you can compare both to similar “peer” projects, too. Trying to get info or a good estimate on locked coin holders’ cost basis is important because it can help inform whether there is additional bid demand from professional investors, or lots of high-profit multiples itching to be sold.

Every single high FDV project’s fully diluted valuation will eventually become unlocked – people should consider the implications of when and how that happens. Sometimes projects will have to execute exceptionally well just to maintain and justify a sideways price. 

In sum

Crypto valuation models are difficult because the ceiling is very high and direct financialisation of everything with 24/7 liquid markets is kinda new. Relative valuations can also be misleading due to some kind of anchoring effects. 

Project, investors and founders seem incentivised to maximise their fully diluted market cap (and thus private wealth) by funneling as much open market $ into the smallest float possible. By doing this, a project can create vast paper profits for investors and the team. 

Some projects will try to force price-agnostic demand through gatekeeping mechanisms such as “you must own this to participate”, mostly recognisable in gamefi but common in crypto generally. Usually in these projects, public valuation detaches the most from private valuation and also from reality. 

If a project has a higher “fully diluted” valuation than some of the world’s bigger tech companies, just a year or two since being founded, it’s probably worth wondering: who is holding this massive new wealth, what price did they get it for, and who are they going to sell it to?