Why This Cycle is Cooked | DH + RSA

Today we explore David's idea that this cycle is cooked and Ryan has some question starting with... what does that even mean? On this week's episode of Bankless Takes we answer that question and so much more as we take a deep dive into token distributions and how they're playing out this time around. ------ 📣 TRANSPORTER - SECURED BY CHAINLINK CCIP | TRY IT OUT https://www.transporter.io/ ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2 🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum https://%E2%81%A0https//bankless.cc/Arbitrum 🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle 🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa 🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku 🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance ------ TIMESTAMPS 00:00 Intro 01:30 Why Record This Episode? 06:01 Why There Are Structurally Bad Vibes 15:47 Why it's Like This 29:14 The Problem With The Points Meta 38:29 Recent Airdrop Issues 47:21 Where Do We Go From Here? ------ RESOURCES VC Capital - https://imgur.com/KKqMWBe Sell Pressure - https://twitter.com/pythianism/status/1784958268420522195 Chris Dixon Take - https://a16zcrypto.com/posts/article/memecoins-tokens-regulation-policy/ LayerZero - https://x.com/LayerZero_Labs/status/1786441554816532646 Hayden Take - https://twitter.com/haydenzadams/status/1786784808187621874 ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures⁠

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:03Ryan Sean Adams?

  Bankless Station, we got a Bankless Takes episode for you today. This is an episode of Hot Takes. Take Merlin, the take today. Why David thinks this cycle is cooked. We gotta explain what you mean by that, David. Those are some strong words coming from you. Also, I think we're going to explain the bad vibes that CBP happening in crypto right now. It's like no one's happy. And I think you're going to give us an explanation for why. Also, there's something to do with token distribution and the dynamic between the VCs versus the people. And finally, I hope we conclude with what happens next? How this all resolves, or maybe doesn't resolve?

• 0:40David Hoffman?

  Before we get into the takes, a moment to talk about our friends and sponsors. Transporter, a new bridging app. Over $2.8 billion has been hacked from token bridges. That's about 40% of all the value that's been hacked in Web3. Transporter is built by CCIP, chain links CCIP technology in the background to help securely bridge your assets from chain to chain. So users can bridge ETH, Link, USDC, and all the other assets. Transporter.io, there is a link in its show notes to try out Transporter.

• 1:10Ryan Sean Adams?

  David, you ever see that Jason Statham Transporter movie? They made like three of them.

• 1:16David Hoffman?

  Right, yeah. And they increasingly started jumping the shark more and more and more, but that was kind of the point.

• 1:20Ryan Sean Adams?

  Yeah, this is not that. But this is how I feel like when I'm bridging in crypto.

• 1:24David Hoffman?

  Jason Statham takes your assets from chain to chain.

• 1:29Ryan Sean Adams?

  Be great marketing for him. Okay, tell me, why did you want to do this episode? You actually wrote an article, just kind of like the genesis for this episode. So we know some thoughts were brewing, probably thoughts over the last couple of weeks. We've recorded some episodes, you know, one with Regan about the VCs versus like the people. And then also there was the Eigenlayer experience. But tell us, like, why this episode?

• 1:50David Hoffman?

  I felt there's, there's just an autopsy that's kind of needed about the state of the market right now. Autopsy implies that something's kind of dead. And I actually do think that something is kind of dead. And that is the current meta of token distributions. This, the current meta of token distributions is always in flux. Crypto chooses to distribute tokens in different ways all throughout its history. Like in 2013 was fork and fair launch. 2017 ICOs, 2020 liquidity mining, DeFi summer, 2021 token mints, NFT mints. So this is always something that is in flux. And I kind of think as a reaction reflecting on the reaction of the Eigen airdrop and some of the other patterns that we've seen, I'm kind of think that this current

• 2:32David Hoffman?

  token points and airdrop meta is cooked and in the rearview mirror. Now, we still will experience it for a while. These things don't like disappear overnight. But I think the market is ready to look for alternatives for how projects distribute tokens. And how projects distribute tokens is like a very meaningful and critical part of how this industry works. It's one of the things that defines every single era in crypto. And so really, there's just a lot of conversations happening right now about like Layer Zero is about to, about to launch their token. There's a lot of eyes on that. ZK Sync is after that. And then like again, the reflections on the Eigen drop and even some of the like the

• 3:14David Hoffman?

  mobs that we have seen pre Eigen, there's just a lot of like dots, I think, that are worthy and interesting to reflect on. And this is an attempt to give our takes about all of the reflections that I can put together.

• 3:27Ryan Sean Adams?

  All right, well, we are going to give you guys the autopsy. We're going to cut open the, the body of this market and see what's inside. See what, you know, killed, killed the victim? I don't know if that's what David's saying, but we'll get to all of that and more. But before we do, we want to thank the sponsors that made this episode possible, including our recommended crypto exchange, certainly alive and well. That is Kraken. Go create an account.

• 3:49David Hoffman?

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• 4:34David Hoffman?

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• 5:17David Hoffman?

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• 6:01Ryan Sean Adams?

  All right, David, you got to start by explaining yourself here because the title of this episode and your article is why this cycle is cooked. And I want to define what you mean by cycle, all right? And then cooked. What are you, what are you talking about here? Justify yourself. Why, why are you coming in with this strong language?

• 6:19David Hoffman?

  Yeah, so there's two different cycles that's going on here. There's the one I was alluding to in the intro, which is the token distribution meta, how the industry is choosing to distribute tokens in the current year, the current cycle. And then there's like the bull market cycle. I'm, I'm very firmly talking about the former, the actual mechanism of distributing tokens. I think that part is quote unquote cooked. The bull market cycle can exist and be independent from this. They are highly related and they have been highly related at times, but they're not perfectly related. So the bull market cycle, the price action of all these things, I'm not really necessarily talking about that. I'm mainly talking about how this particular

• 7:00David Hoffman?

  equilibrium of how teams are distributing tokens is going to change. And I think the market is ready for alternatives.

• 7:08Ryan Sean Adams?

  So I think what you're saying is there's kind of two cycles at play and they're interrelated, but we always get them both during like a bull cycle. And that is, one is the cycle of token distribution, right? Kind of like more tokens, more liquidity. And the other is just like the price action, bull market cycle, what, what most people refer to when they talk about the cycle. And you think that those two are independent, but also interrelated. And when you say cycle, this cycle is cooked, you're talking about the token distribution cycle. The thing that we're in now where we get like this airdrop cycle, maybe this, this points meta, the, the current distribution attempt that's going on, you think that part is, is cooked?

• 7:47David Hoffman?

  Yeah. And I titled it, this cycle is cooked, just because it, it kind of rolls off the tongue better, better. This meta is cooked, just doesn't really ring the saying, but that's really what I mean. This token meta distribution is, is cooked. And one of the reasons why I think it's cooked is because this whole system, this whole structure, there are structurally bad vibes going on right now. So all of these like super hyped tokens are coming to market and we're seeing a pattern of angry protocol users that are feeling like they are getting the shit end of the stick. They feel like they're getting pittance from the actual airdrops that are going on. So these very hyped tokens, they very frequently launch at multi-billion dollar fully diluted valuations.

• 8:29David Hoffman?

  And when tokens launch at multi-billion dollar fully diluted valuations, that means that most of the upside has already been discovered because no one is getting rich buying, investing in a $10 billion asset. Like that, that is like a long-term investment that is not like, that's not like the 100x, the 1000x that people really look for when they come into crypto. And so sure, you can be at a long-term investor, but like, no one's, no one's getting rich buying a $10 billion token. And since, because of the way that these tokens are being distributed, user allocations, the airdrops going to people are predetermined by the teams. And the details around allocation weights and criteria

• 9:12David Hoffman?

  are unknown, are unknown, both before and after the drop. And users really as a result feel like they're getting the raw end of the deal for their extremely crucial role in actually providing a protocol with users and also meaningful decentralization. As like every like wink, wink, dog whistle that every team is saying like, hey, we're going to decentralize our protocol. Everyone knows that that means token and users receiving tokens is the act of a protocol decentralizing. And so this is a, this is like a rite of passage for every single protocol. This is a rite of passage for anything that exists in crypto, that's a protocol with a token, is how it decentralizes. And it decentralizes to users. And this is critical for the decentralization of our industry. This process

• 9:57David Hoffman?

  People are not satisfied with, just because of the current meta, the current structure for how these tokens are getting distributed.

• 10:04Ryan Sean Adams?

  I think you're making the case for like structurally bad vibes. Like I want to hear your data points for this. Like, why are you feeling this? Like, so I'll agree, it's felt this way, maybe from a, not structurally, I'll leave that aside, but just the bad vibes have been here maybe for the past like couple of weeks. The Agen drop seemed to like be dropped at a time when vibes were already bad and like, things kind of like got worse. But before that, I would say in like, you know, March or even earlier in April, and certainly before this year, the vibes were great in crypto. And like, isn't that just like correlated with price? I guess what I'm saying is you're making a stronger argument here and you're saying there's structural, there's structural bad vibes. So I think you're trying to say

• 10:48Ryan Sean Adams?

  that it's persistent and it's going to continue because there's some sort of underlying structural reason. But like, are you sure it's just not a mood? You know, like, we're kind of in a mood, it's May, I don't know. What is it? Sell in May and then go away? I mean, like, maybe, you know, it's just a momentary mood in crypto and the good vibes continue for airdrops and like points and everything else after this. So like, what are your data points here?

• 11:13David Hoffman?

  I do kind of think that this cycle particularly have had some of the worst vibes that I've seen. Like bull markets, things are supposed to be like healthy and happy and everyone's happy. But I don't know if I've, I'm seeing, I'm experiencing that. Vibes is highly correlated to price action, of course. It's highly correlated to the supply of liquidity. And there hasn't been like an overwhelming inflow of liquidity this cycle, like there has been last cycle. Bitcoin has seen an inflow of liquidity. Solana has seen an inflow of liquidity. And that's about it. And it hasn't been like, like Regan said in the episode, it hasn't been a rising tide lifts all boats cycle. Bitcoin is receiving

• 11:57David Hoffman?

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

• 12:13Ryan Sean Adams?

  But you're just saying, but like you said, there's something structural here.

• 12:16David Hoffman?

  Yeah.

• 12:16Ryan Sean Adams?

  It, what's the structural element to this?

• 12:19David Hoffman?

  Yeah. Okay. So the structural element is the relationship between like how much private capital there is versus how much public capital there is. And also the points token airdrop meta doesn't do something that's very, very critical for crypto. Something that we've seen every other cycle do, which is allow for online communities to get rich together. Fostering internet bonds by growing wealth together has been like a rite of passage that basically every single survivor in crypto, anyone who's made it through the cycle has all experienced. I think people, people who like, don't make it in crypto likely did not get rich with their internet friends together as a community. That's been like one of the core affordances at crypto is like, hey, online communities can band

• 13:04David Hoffman?

  together and get rich with your friends. Right? We're not experiencing that this cycle nearly as much. Meme coin, meme coins are doing that. Me like with online community got rich with their friends. But like with this whole high F D V token drop meta is not allowing communities to band together around projects and get rich around a project. We saw this behavior with link, the link Marines. We saw this behavior with like the avalanche army. And all of these people had the opportunity to like ride the success of the protocol up. And that's not really something that we're seeing with high F D V token airdrops.

• 13:41Ryan Sean Adams?

  But let me push back on that. Isn't, isn't that because basically like you, you have to buy during the, the bear markets, right? So we're, we're in a bull market. It's like, don't you think there's an element of unfair expectation? So one, one community that there's a tremendous amount of energy in right now is the Solana community. And that's because like, some of these people rode Solana all the way down to like $12 or something like this. And some of them even doubled down and purchased Solana. And they have gotten like rich. What, what are we at now? Still in the like 100 levels? Or, you know, like 200 levels at one point in time? I mean, that's like a, that's like a nice 10x. That feels pretty good. And so we're seeing a lot of energy there. So like a, a multi-cycler might push back on that and just be basically like, well, yeah,

• 14:25Ryan Sean Adams?

  you can't, you can't get rich in one cycle. If you're saying that the vibes are bad because not enough retail has made enough money. It's just kind of like, well, when did you enter? And like, what, what did you purchase? Right? Is it, is there not the argument that? Well, you can't expect this in, in kind of like the bull market. And so, you know, it is happening in pockets, specifically to people who are here during the bear market.

• 14:49David Hoffman?

  Sure, sure. I think that's totally right. Like, but one of the issues with this, and one of the reasons why there are like Twitter mobs going on, is that tokens are launching at multi-billion dollar FTV, communities are getting like 5%, 10%. But also, the high FTV, low market cap gap means that this token has to like suffer a ton of sell pressure before it can go up. So like, yeah, the, the bad vibes are coming because in order for people to get rich on these things, they, they have to go down in price by a lot first, and then they can go up next cycle. But like, yeah, now we are experiencing bad vibes because this is what's coming first. There's also, I want to like talk about the public versus

• 15:30David Hoffman?

  private market as well. In 2021, there was an abundant amount of raises going on into new funds, and like records amounts of capital going into records amount of new funds in crypto.

• 15:42Ryan Sean Adams?

  VC funds, you're talking about?

• 15:43David Hoffman?

  VC funds.

• 15:44Ryan Sean Adams?

  Like, kind of like private funds that retail couldn't access.

• 15:47David Hoffman?

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

• 16:31David Hoffman?

  Path for people, for projects is to raise like up to like multi-billion dollar valuations in the private markets because there's that much capital out there. There is that much capital from like A16Z, Paradigm, like these massive multi-billion dollar funds that so like projects can stay private up to a multi-billion dollar valuation, up to like a billion dollars plus. And so that means when, and it's rational to do this, when tokens are launching at like five, 10, 15 billion dollar FTVs, like even if you are the last VC fund in through the gate at a one, two, three billion dollar valuation, you're still getting a 5X, you're still getting a 10X. So it's still rational to do this. The problem with it's like, maybe this worked in

• 17:14David Hoffman?

  previous cycles, but the problem now is that there's actually not much new retail interest coming into crypto. And we actually know this from a number of different data sources, but the most recent one was Coinbase's Q2 report that just came out. Institutional trading volume up bigly, obviously because they are the custodians of all the Bitcoin ETFs. Institutions are here, they're literally buying our bags. And so like one of the sources of new liquidity this cycle is like crypto natives that bought like 12, $15,000 Bitcoin during the bear market are buying, are selling like Larry Fink their $60,000 Bitcoin right now. Alright, so that's, that's where a lot of this capital recycling is coming from. But

• 17:56David Hoffman?

  the trading volume for retail has not nearly come back to 2021 levels. $56 billion in trading volume this last Q1 of 2024, whereas at the peak of last cycle, it was $177 billion, one quarter or 145 billion.

• 18:12Ryan Sean Adams?

  Retail's not, retail's not here yet, right? This is interesting. If you look at it in terms of like mapping to the last cycle, it's, it's much more like 2020 than it is 2021 in terms of retail participation. We've kind of known that. So retail's not here. But I guess what you're saying is when you, when you map this chart with the previous chart, which is like all of this VC capital raise, this, this to me, it looks kind of like a, you know, like a python, like, like trying to eat its meal. And all of this capital has to just like go through the, like the python's stomach and like make, make its way down the snake. And maybe that's what we're seeing. That's why the vibes are bad.

• 18:49David Hoffman?

  Right, there is just a huge dislocation between public and private markets. Public markets have no new entrants, few new entrants, and private markets have like billions and billions of dollars left over from the 2021, 2022 raises. And all of these tokens, the tokens that are coming to market, things below Bitcoin and ETH, this is what Regan said in our podcast, things, the tokens below Bitcoin and ETH are predominantly owned by retail. The market caps of these long tail of tokens in the industry are like propped up by like retail interest and retail investment. And so for a lot of the VCs who are invested in tokens that are going to market, the price of those tokens is determined by like retail interest in those tokens.

• 19:30David Hoffman?

  The problem is there's the teeter totter between VC capital, private market capital, and public market capital is just so heavily weighted towards the private markets that of course we're seeing an inevitable outcome of this, the logical conclusion, which is a high FDV, low float token with a low market cap, relatively low market cap. And so this, this is basically what turns into sell pressure. Vance Spencer put out this tweet that did some napkin math, some loose napkin math and modeled out that there's 200 to 300 billion dollars of sell pressure that is coming into a market because of the high FDV supply of tokens. And so like doing some like very rough numbers kind of comes to the conclusion that of all

• 20:13David Hoffman?

  the FDV that's out there, the fully diluted valuation, that's not yet diluted, when that dilution comes, it's going to turn into about 200 to 300 billion dollars in sell pressure for a market that requires retail bids in order to support it. But we, but we just saw like the Coinbase Q1 like trading volumes, we had like 47 billion dollars of trading volume just on Coinbase from retail in Q1, and we've got 200 to 300, 200 to 300 billion dollars in sell pressure about over the next like 18 months. And so that's just like a lot of sell pressure.

• 20:46Ryan Sean Adams?

  So this is, this is the same story. If you, you have too many tokens, not enough buyers, right?

• 20:50David Hoffman?

  Correct.

• 20:50Ryan Sean Adams?

  I mean, like a classic story, and a lot of these tokens are held by kind of like VCs basically, and that needs to be absorbed by the retail. By the way, Retail has the choice to buy it or not, right?

• 21:00David Hoffman?

  Right.

• 21:01Ryan Sean Adams?

  Even when they receive an airdrop, they have the opportunity to kind of sell that. It's interesting, like, a lot of the VCs are locked, right? At least for a year. They have usually three to four year lockups, but many of them are locked up for a year. Vance also says, this is the first cycle where retail is actually paying attention to unlocks, to retail starting to get smarter about FTV and lockups. That's all a good thing, right?

• 21:22David Hoffman?

  You know why that's happening? Is because there's no new retail. It's all people from last cycle who like experienced unlocks. So they know the game by one more cycle. These aren't retail, you don't retail anymore. It's crypto native retail.

• 21:36Ryan Sean Adams?

  Well, that's good then. That's good.

• 21:38David Hoffman?

  It is good.

• 21:38Ryan Sean Adams?

  Because then that will be the market.

• 21:41David Hoffman?

  It's literally smart money retail.

• 21:43Ryan Sean Adams?

  But you're saying, basically, this contributes to this malaise that we've seen over the past a couple of weeks. Around structurally bad vibes around specifically token distribution, specifically around airdrops. You think it's all driven by this and this is why people like get free money in their airdrop and they still hate it.

• 22:02David Hoffman?

  And they still hate it, yeah. I think this is one half of the answer. The other half of the answer is the regulatory climate, which is also structurally bad vibes. But before we get into like the regulatory climate, let's just go through like a quick run through history. The points in airdrop meta is actually just like the current stop on this ever changing meta of how the crypto industry distributes tokens. Like I said earlier, like this is like a core component of how crypto works. We make new things and then new things have new tokens and then we distribute the tokens. And like some, some things actually like last, most things don't. 2013, we had the proof of work fork and fair launch meta.

• 22:45David Hoffman?

  That was actually spawned, funnily enough, by Litecoin, which was the only token to really meaningfully last beyond that meta. And I wouldn't even consider Litecoin alive ecosystem to this day. 2017, the ICO meta. We do have some survivors out of that. Synthetix is a survivor out of that. Ave is a survivor out of that. I think Linked did an ICO, some survivors. DeFi summer, liquidity mining in 2020, plenty of survivors there. 2021, NFT Mints. And now in 2024, the points and airdrop meta. This just is what happens in crypto. We come up with like distribution mechanisms, but eventually every meta ends.

• 23:23David Hoffman?

  Once it's been identified and like, you know, good heart's law, when a measure becomes a target, it ceases to become a good measure. Once, once the meta is known, then the meta moves on. And this is because of two reasons. Once the meta is identified by both, one, grifters who know how to exploit it, who learn how to exploit it, and two lawyers who understand how it violates securities laws, then the meta becomes exhausted. Like, the lawyers put on the brakes on the ICO meta. Once everyone realized that what an ICO is, is unregistered sale of securities. But then also grifters also identified the ICO meta, and they just use it for fraud. And so these two parties are trying to identify the meta. And then once the meta is identified, we move on because the game is up.

• 24:04Ryan Sean Adams?

  I think when you say lawyers, I would maybe substitute by like, kind of like regulators, basically, who just kind of like, you know, are a few cycles behind. Like, the lawyers are trying to navigate, like, how to distribute a token in this, like, super opaque regulatory landscape.

• 24:20David Hoffman?

  Right.

• 24:20Ryan Sean Adams?

  And it's like, it just kind of like stops working. Once, like, regulators start suing. Remember the ICO meta? It was like, totally broken by US versus the SEC. And to like, you know, the regulators kind of stepping in and putting a stop to it.

• 24:36David Hoffman?

  Right. Yeah. Well, the lawyers are paying attention to the regulators, and then they are advising their projects, like, hey, you can or cannot do that. And as the, as the regulators get wise, then the lawyers are like, okay, you can no longer do this.

• 24:49Ryan Sean Adams?

  Well, I think the, the big insight here, though, which is interesting, and I think something that you've, you've talked about for a while, which I think is sort of hidden that, that people see, which is like, every single bull cycle is also accompanied by a token distribution meta, a new game that's effectively being played, that's has some similarities to the previous game, but also has some important differences, right? Every single crypto cycle has been about distribution, fair distribution to retail of tokens. That is like, part of the underlying reason why we even get bull cycles in the first place. And so now we're at kind of the, the most recent one, which is like, the points and airdrop type of, of meta. And I think you're calling the top on that.

• 25:34David Hoffman?

  Yes, this is, I'm calling the top on the points and airdrop meta. And like I said, we're still going to experience it for a while. Like when the top of the 2017 ICO meta was about like November-ish, maybe a little earlier of that meta. But you still saw ICOs going well into 2018. It was just like the last fumes of the ICO meta. It lasted like a year. And so I'm kind of like calling the top on like the market is now looking for alternatives to the points and airdrop distribution method. And now it's up to some creative founder, some creative team to come up with a new token distribution strategy that makes their community happy, makes their community rich.

• 26:17David Hoffman?

  And is also like unique and innovative and does the job that is required, which is kind of obfuscating the fact that there's a token distribution method happening right now.

• 26:25Ryan Sean Adams?

  I think we'll get back to maybe the reason why a certain distribution only lasts for like a while. And also talk about like, you know, regulators and that being a driving force to this. But really to just camp out on even as far back as proof of work, like Bitcoin proof of work. Okay, people don't see that as a token distribution play.

• 26:46David Hoffman?

  It was the original token distribution.

• 26:48Ryan Sean Adams?

  Yeah, and the reason why is because we are so many years far removed from that. Where like all, you know, like Bitcoin mining is, and Ethereum mining is like, or you know, previously, all Bitcoin mining was industrial, basically. But there was a time and place where people ran like their computers and they mined Bitcoin from their laptops in their home in order to receive what? The distribution of that Bitcoin.

• 27:11David Hoffman?

  Right.

• 27:12Ryan Sean Adams?

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

• 27:49David Hoffman?

  Towards the beginning of the 2013 proof of work fork and fair launch meta, which Litecoin started. It Litecoin was inspired by Bitcoin. It's like, hey, you can like do this blockchain thing with proof of work and then you can spawn a token. I will do that as well. Charlie Lee like spawns up Litecoin. And I think like in April of 2013, towards the earlier stages of the proof of work fork and fair launch meta, Bitcoin was at 1.5 billion, Litecoin was at 72 million. And the whole market cap was at like 1.55 billion dollars. Like it was basically 98% Bitcoin. But Charlie Lee just made a 72 million dollar market cap. This was in 2013. No one knew what crypto was. This was unheard of. 72 million dollars out of thin air. And so like the success of Litecoin spawned this like euthanated roller coaster of

• 28:34David Hoffman?

  proof of work fork and fair launches like, oh, we can just make blockchains. You don't have to just own Bitcoin. You can also make your own blockchain.

• 28:42Ryan Sean Adams?

  Yeah, all these copycats.

• 28:43David Hoffman?

  Just copycats. It's exploded. And that was the first like this like Cambrian explosion of crypto assets that the crypto industry ever saw. And each one like was trying to distribute their token fairly legitimately. It ended up getting corrupted by grifters because the grifters figured out the meta. And that's how it ended. And this has been repeated at every cycle ever since.

• 29:02Ryan Sean Adams?

  Well, I think that's the pattern, right? It's going to be corrupted by grifters and for like anyone that's trying to game the system essentially. And so every system with respect to like a new token distribution is going to get gamed over time. It's also going to get constrained, I think, by the regulators. And now we're at this.

• 29:19David Hoffman?

  That's the other half of this for us.

• 29:20Ryan Sean Adams?

  That's the other half of this, right? Because like part of the distribution is to sort of find a way to get these these tokens in an ungameable way to retail and in a fair way to retail. And the some of the regulations we have on the books make that very difficult. And in particular here, SEC securities law. This is a post from Chris Dixon. I think I think he published this in Fortune magazine or some sort of like, you know, like more more normie centric of, you know, like financial publication. How bad policy favors memes over matter. And he's basically saying that part of the explanation for the meme coin mania that we've seen is because there's no clear path. To a token getting regulatory status, at least in the US, and of course, the US drives

• 30:02Ryan Sean Adams?

  a lot of these capital markets around the world, towards a token actually having some share of cash flows, some share of like, you know, what traditional finance would consider a fundamental, right? And so what are we left with? These sort of like much more empty shells of memetic narrative trading meme coins. And so like, you can, in every one of these cycles, push some of the reason why the the cycle ends and why we've had to create like, kind of a new cycle, back to regulators and say, well, they're not, there is a market desire and a market need to do this, and you're not providing an output for that. Instead, you're just taking the ban hammer and just saying, no, it's not

• 30:43Ryan Sean Adams?

  possible. And so every single cycle, there's sort of a different way to like, route around this and try to find a way to distribute the token in a way that is like, regulatorily compliant. And it keeps just getting more and more restricted, doesn't it?

• 30:58David Hoffman?

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

• 31:25Ryan Sean Adams?

  Well, now you made it to the case.

• 31:26David Hoffman?

  No fundamentals for retail, only memes for retail.

• 31:28Ryan Sean Adams?

  Right.

• 31:29David Hoffman?

  And so this kind of identifies the current problem with the points meta. People have now understood that points kind of suck. Why do they suck? They offer point collectors zero assurances on what they are actually receiving, because the relationship between points earned and tokens received must be opaque. The disconnect between the points and the tokens is the cover that startups are receiving. That's the cover, the regulatory cover that they have from the SEC. Like, points aren't securities, they're just points. Oh, and then we just also happen to release a token for completely unrelated reasons to People, but the points are separate.

• 32:08Ryan Sean Adams?

  So it's funny you say points suck because I'm old enough to remember, David, three months ago, when points didn't suck, or like even like six months before that, when they were basically the way you could kind of like pre-release and make a drop of your token much more fair. Right?

• 32:24David Hoffman?

  Right.

• 32:25Ryan Sean Adams?

  And I think that's the, that's the point of this entire conversation.

• 32:28David Hoffman?

  Right?

• 32:28Ryan Sean Adams?

  Right. When a new distribution method for tokens is kind of like, like started, at first it doesn't suck. At first it's actually really good, but you can start to see like the fault lines in that distribution and how it'll fall apart in the, in the early stages of that. And it's like, it leads to some gamification of it. It leads to eventual exhaustion, exploitation, and it leads to the meta eventually like, like sucking. But like, points don't inherently suck from my perspective. They're just like a tool that's being used. And it wasn't too long ago where many people in the crowd, I think we did an entire episode about like the value, like how points are cool, what some of the trade-offs are, all of these things. So like, they don't just suck, it's just now they're starting to.

• 33:11David Hoffman?

  It's the nature of the people that use them that can suck and we should be wary of that. Like, again, the, the investor protections around points are zero. Retail has no clarity on like what a point actually gives them or what their rewards are. So like, for the points, if you're receiving points of like any particular protocol, like, what is that a claim on? Is that future, is that 5% of the future tokens? Is it 15% of the future tokens? Some points are worth more than others because some actions are deemed more valuable by the, the project than others. Like, not all points are created equal. And so the investor protections around points are basically zero. And we, we talked about some of the, the pros of points, like points are kind of the regulatory

• 33:55David Hoffman?

  sandbox that projects have been asking for so that they can tinker with the issuance of their token without actually it being permanent. And so like, these are. These are there is like a it's a pencil of a token rather than a pen of a token. And so some projects have been able to leverage this property just to like iterate before they ink out the actual real distribution of their token. And I think that's like an enjoyable fact, having some sort of pseudo regulatory sandbox that we just discovered rather than received. But nonetheless, like points as a an assurance of rights over the value being contributed to a protocol by retail and versus the value getting back to retail. There's like, it's just all completely opaque.

• 34:36David Hoffman?

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• 35:20David Hoffman?

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• 36:04David Hoffman?

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• 36:48David Hoffman?

  Cello is seeing a meteoric rise with over 300 million transactions and 1.5 million monthly active addresses. And now, Cello is looking to come home to Ethereum as a Layer 2. Optimism, Polygon, Matter Labs, and Arbitrum have all thrown their hats in the ring for the Cello Layer 2 to build upon their stacks. Why the competition? The Cello Layer 2 will bring huge advantages like a decentralized sequencer, off-chain data availability secured by Ethereum validators, and one-block finality. What does that all mean for you? With Cello Layer 2, gas fees will stay low and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using social connect. But Cello is a community-governed protocol. This means that Cello needs you to weigh in and make your voice heard. Join the conversation in the Cello forums.

• 37:30David Hoffman?

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• 38:14David Hoffman?

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• 38:29Ryan Sean Adams?

  I think you're saying this on the back of the Eigen airdrop, which was like mainly points driven and it got such a negative, bad vibe type of reaction. There are a few more upcoming airdrops to sort of watch. One is in motion, I think, right now, which is Layer Zero. And they're doing something different. I wasn't fully up to speed on this, but there's some sort of anti-Cibyl kind of mechanism at play. What's happening with Layer Zero and why is that one to watch?

• 38:53David Hoffman?

  Both Layer Zero and Eigenlayer, and I think really anyone issuing a points-based airdrop, everyone is just stuck between a rock and a hard place. I believe all of these protocols are asking in their best intentions, and none of them really deserve to be like mobbed. But the mob is a result of the fact that like of the rock and the hard place that a lot of these projects have found themselves in, pushed there by the SEC. One of the current issues going around that I think is an interesting thing to watch is Layer Zero's Cibyl reporting initiative. And so Layer Zero is saying, hey, if you are Cibyl-ing our airdrop, if you are spitting up puppet accounts and you are just kind of pushing fake activity using many, many different wallets, if you are doing that activity,

• 39:36David Hoffman?

  just self-report yourself as a Cibyl and we will give you 15% of what you would have otherwise earned. If you don't report yourself, we're going to give a bounty for somebody else to report you and they're going to earn like 10% or 5% or some minority of share.

• 39:51Ryan Sean Adams?

  Oh, wow. If you don't report yourself and we find out through some other way, whether someone else reports you or we find out, then you get...

• 39:57David Hoffman?

  You get zero.

• 39:58Ryan Sean Adams?

  You get zero.

• 39:58David Hoffman?

  And there's a bounty for people who report you. And so it's basically a big Cibyl like pruning mechanism. Kane Warwick wrote a thread saying that this is actually not a good strategy by Layer Zero and actually is not the right thing to do. Because Layer Zero has benefited from the metrics of all these different Cibylers, quote unquote, Cibylers, because like, look at all the activity going through Layer Zero. Look at all the assets going through Layer Zero. Look at all the volume and all the users and all the transactions. Clearly, the metrics behind Layer Zero support them as an ecosystem and have supported their ability to raise at a very high valuation. And so Kane is claiming that Layer Zero has benefited from the Cibylers, but now they are... Pruning Sybilers from their token distribution.

• 40:42David Hoffman?

  And so there's like an is/ought gap between these things. Whereas like Layer Zero is benefiting from Sybil attacks, but then they're pruning away the Sybilers in the token distribution. And one of the problems here, again, created by the SEC, created by this cornering of crypto companies into this meta, is that somebody who is a small time retail investor has no way of gaining exposure to Layer Zero. Say like some individual is just like really bullish Layer Zero and they want upside to Layer Zero. How do they do that as a community member? The only way to do that, if you are especially bullish Layer Zero-

• 41:20Ryan Sean Adams?

  Pre-token launch.

• 41:21David Hoffman?

  Is to- Pre-token launch, yeah, is to Sybil attack Layer Zero. And not even attack, just Sybil Layer Zero. Like, I'm so bullish Layer Zero, I'm gonna put-

• 41:29Ryan Sean Adams?

  Spin up 10 wallets-

• 41:30David Hoffman?

  Spin up 10 wallets-

• 41:31Ryan Sean Adams?

  As an individual.

• 41:32David Hoffman?

  Push like 10 ETH through in like 17,000 different transactions because you are so bullish Layer Zero that you want that token. So you're gonna Sybil Layer Zero, which unfortunately makes you identical to somebody who is maliciously attacking Layer Zero with the intent to immediately dump that token.

• 41:48Ryan Sean Adams?

  You're just saying there's no way like in, so they just climb the fence, basically, is what you're saying. That's a charitable explanation for why individuals might engage in this type of behavior. Not to discount, though, there are actual like industrial Sybil farms that are just like actually like doing this in the most unethical way- like possible, and they are like exploiting- And that's why protocols like Layer Zero are trying to stop them because it's a massive cost. No one wants that outcome. Retail doesn't want the outcome of like all of these tokens going to industrial airdrop farmers. And certainly the projects themselves don't. And that could be like a lot of money, a lot of the value of the project on the line going to these industrial farmers. So you can understand why they're trying to prevent it as well.

• 42:32David Hoffman?

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

• 43:16Ryan Sean Adams?

  One other factor that I know I've mentioned in previous episodes, we just haven't named them here, is those industrial airdrop farmers as well, they're not just civil attacking protocols by like spinning up you like tens of thousands of addresses potentially. They are also like civil attacking the social layer and the narrative. If they could spin up a bot, basically to create kind of like a fake identity to be a recipient of their airdrop, you think they can't do that on Twitter? Of course they can. And so this is like another context, another layer of the question here is like, when I see some of these mobs, there's definitely some portion of it. And I can't say the percent because it's just like really difficult to tell. There's some portion of this that is actually like retail who legitimately wanted exposure to the project.

• 44:01Ryan Sean Adams?

  It's just climbing the fence to get it because there's no other way to get into the project. So this is what they have to do. There's also a portion that I know that I'm certain are like industrial farmers attempting to farm the narrative as well and exploit the narrative. And like they're doing that at scale. And I think sometimes they pull others into their extreme positions, right? And like, so how do you even know what's what's real or what's not? I don't think we have a very clear pulse on like a voice of retail here, at least on crypto Twitter, that you like the primary way you receive this. That's another compounding factor is It's not just the protocols themselves being gamed.

• 44:42Ryan Sean Adams?

  It's actually the social layer around this because if they can push a project into distributing more tokens to their industrial farms, essentially, like it's totally worth it. How much does it cost to spin up a whole bunch of bots on Twitter? So again, I'm not saying that's all of the activity here. It's certainly not, but it's some portion of it. And they can also just, you know, move the Overton window by taking an extremist position to be like scam, scam, scam, scam, scam. They pull some retail in that direction who are already predisposed to thinking of like, yeah, why do I have to climb the fence anyway? Right? And like, so that's at play as well.

• 45:16David Hoffman?

  Structurally bad vibes. And so you have like the community members who like we talked to inside of the bankless Discord who are like, I feel disregarded by these protocols.

• 45:27Ryan Sean Adams?

  Sure.

• 45:28David Hoffman?

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

• 46:13David Hoffman?

  And so there's a huge nerfing by the SEC of public market capital. And so anyone who has gotten over the fence of being an accredited investor chooses to LP inside of the VC fund instead of buying tokens on the public market.

• 46:27Ryan Sean Adams?

  There are a few drops to I think watch. One, one is of course, we mentioned layer zero. It's going to be interesting to see how ZK Sync kind of handles this. That's going to be another drop that you like, I got to imagine happens this year. There's also an alternative to all of this, which is what friend, friend.tech is doing, where I think they distributed 100% of their tokens to the community. This is still early, but that's another chart that I'm going to be watching because I guess that's like the, you know, completely fair way to do things, at least according to friend.tech.

• 46:57David Hoffman?

  Yeah, I don't understand how friend tech released 100% of the tokens to users. Like that's. Pretty cool, but then also like, but what about the team?

• 47:06Ryan Sean Adams?

  Is that sustainable for the team?

• 47:08David Hoffman?

  Yeah.

• 47:08Ryan Sean Adams?

  Like, what do they do?

• 47:08David Hoffman?

  Why would the team work on friend. Tech if they own zero tokens?

• 47:11Ryan Sean Adams?

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

• 47:38David Hoffman?

  Talking about evolution.

• 47:40Ryan Sean Adams?

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

• 48:00David Hoffman?

  In chess terms, this is defined as like, if you don't make the best possible move, then you are making a losing move.

• 48:07Ryan Sean Adams?

  Right, so what we have essentially here is a Red Queen problem. And like Red Queen problems never go away, essentially. They always remain. And so I think that this problem is not going to be fixed by any like silver bullet regulation or a new SEC chair or like Congress finally gets things together. And like, we're able to figure out what tokens are versus securities and have a clean line in the sand. Or we uncover this like fair launch that is actually fair. Because what we've seen is at the beginning of each of these token distributions, it has been pure, right? Like it has been like Bitcoin, the immaculate crypto project to launch.

• 48:49Ryan Sean Adams?

  Ethereum had its sort of like ICO, which was actually pure in that time before ICOs got gamed.

• 48:54David Hoffman?

  Yeah.

• 48:55Ryan Sean Adams?

  You had Compound, which is looked at favorably from a drop perspective. Uniswap was probably the peak of the, you know, the DeFi summer sort of token governance drop. And you have some examples from this cycle as well, but it's always going to be gamed. You have a Red Queen problem, so it's never actually going to be completely solved. It's just going to evolve in another direction. So is that the essential prediction is like, be aware of that?

• 49:20David Hoffman?

  Yes.

• 49:21Ryan Sean Adams?

  That that's what's going on, that that's the game that that's going to be that's being played here. Be aware when it's over and look on the horizon for the next one.

• 49:30David Hoffman?

  Well, that's why we're titling this episode, "This Cycle Is Cooked." I think that this meta is cooked and we are, the market is now looking for alternative teams to distribute their tokens in creative, egalitarian ways that allow communities to do one of the core affordances of crypto, which is to get rich together online with your internet friends. And right now, the high F D V airdrop points meta is not doing that. And so as soon as some scrapping young team, some smart creative founder finds a new way to distribute a token that allows people to get rich with their internet friends, then that, the new meta will go there. And I think right now, as a result of like the mob attacks and the civil farming, that's very civil and toxic

• 50:14David Hoffman?

  versus like the civil farming of like highly committed users, the fact that we can't differentiate between those people. The market is now looking for a new meta. We are looking for like a new phase. We don't, somebody needs to invent it, somebody has to get creative. But right now, I think this meta is cooked and we need to look for a new one.

• 50:33Ryan Sean Adams?

  And hopefully we find a new one in the context of of this cycle because it feels-

• 50:37David Hoffman?

  Price cycle, yeah.

• 50:39Ryan Sean Adams?

  This price cycle, so let's zoom out to the price cycle for a minute, David. So you are not saying that this cycle is over. We might uncover a new distribution meta in the bounds of of this cycle. It seems very clear that retail has not entered at all. This is all kind of crypto natives playing games with one another at this point in time. But like retail hopefully will enter at some point this cycle. So how, like, do you have any predictions for the price cycle then? If this meta is dead, do we get another like token distribution meta in this cycle? And like, will, will, will number go up still?

• 51:20David Hoffman?

  Well, let's talk about the sectors of the crypto industry that all of this cooking of the points meta is not affecting, and that's Bitcoin. Bitcoin ETFs will still grow. We're in a little bit of a one-month-long hiatus right now from the growth of the Bitcoin ETFs, but those will still grow. Meme coins unaffected. So like meme coin sector will live or die for independent reasons other than the points meta. And so that's why the cycle has been defined by these two things right now, like meme coins and the Bitcoin ETF. The ETH ETF is still a thing, whether it gets approved this year, next year, whenever, it's eventually going to be approved.

• 51:58David Hoffman?

  And if we can discover a new fair egalitarian token distribution mechanism inside of this bull market cycle, then like it's a plus one to like the super cycle or like a longer, bigger cycle concept. If it takes a while to discover this new meta and then also the ETH ETF doesn't get approved and the Bitcoin ETF flows don't happen, then like maybe you see a stunted cycle and we kind of got to wait for next turn. There's a number of different permutations of like futures here.

• 52:28Ryan Sean Adams?

  Well, let's just end it there then, David. As always, got to let you know crypto is risky. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us in the bankless journey. Thanks a lot.