DeFi
Why promising airdrops of billions run out of steam as hype gives way to ‘short-term scalpers’ – DL News
- More and more DeFi users who receive token airdrops are choosing to sell.
- Some blame the unsustainable valuations of many newly launched tokens.
- But the high valuations could be intentional.
April was a big month for crypto airdrops.
Ethena, Wormhole, ParcelTensor, Omni Network, and several other projects combined have distributed billions of tokens to eligible users.
And with many more DeFi protocols set to launch tokens over the coming weeks, next month could be even bigger.
But there is a problem.
New token launches, which traders previously flocked to in droves, no longer attract the same attention as before.
As airdrop recipients look to cash out and no new buyers step in, prices of newly launched tokens are plummeting.
“Only short-term scalpers who see low circulating supply as an opportunity for quick gains are buying them,” said Marc Weinstein, partner at crypto investment firm Mechanism Capital. DL News.
The lack of interest is obvious. Kamino, a lending marketplace on Solana, launched its KMNO governance token on April 30. Less than an hour after its launch, KNMO fell more than 63% as those who received tokens in an airdrop rushed to cash out.
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And it’s not alone. Recovery protocol At Renzo’s Governance token REZ, launched around the same time as KMNO, fell 28%.
The worry now is that future airdrops, which many DeFi users are betting big on, will follow a similar trend, disappointing those hoping for substantial gains.
Unsustainable valuations
The reason many newly launched tokens fall is because their valuations are too high when they launch, Weinstein said.
“Investors don’t believe there is upside potential if a project launches with an 11-figure valuation,” he said.
The high valuations are partly due to the hype surrounding newly launched projects. But there are other reasons.
“Manipulative market maker deals and low initial floats” also contribute to unrealistic launch valuations, according to a source who works at a crypto investment firm and spoke with DL News under condition of anonymity.
Some market makers have already been accused of pump the value of the tokens they were recruited to provide liquidity for.
The initial float refers to the amount of the total supply of a token that is put into circulation upon its launch.
Newer tokens were launched with low initial floats. For example, Wormhole, launched with 18% of its W token supply in circulation, and Etthena’s ENA token only 9.5%.
By releasing only a small portion of a token’s supply, it can more easily maintain a high valuation in the short term. But when a project later puts more tokens into circulation, the price often drops as selling pressure increases.
For example, a launch at $10 billion plus a so-called fully diluted valuation “is not sustainable unless interest from retail investors trading these tokens increases significantly,” said Regan Bozman, co-founder from cryptocurrency venture capital firm Lattice Fund. DL News.
Fully diluted valuation – or FVD – is the value of the total supply of a token, including those locked or yet to be distributed, not just those in circulation.
Bozman said projects should distribute a larger amount of tokens upon launch and allow their communities to purchase tokens directly from them in order to launch a more sustainable FDV.
Is this all intentional?
But for some projects, launching at a high FDV is probably intentional, specifies the same anonymous source.
“The most optimistic hypothesis is that they want to use their token as currency and that a high FDV leads to a larger US dollar runway,” they responded when asked why projects like to launch tokens at high FDVs.
But for some projects, there are also more malicious reasons.
“Teams and investors are getting rid of [over the counter] before acquiring and investors make money on unrealized gains via management fees,” the source said.
Weinstein also speculated on another reason why projects might want to launch at a high FDV: “If you start at $20 billion and drop 95% on a downside, you’re still a $2 billion project “, did he declare.
As new tokens continue to crash at launch, projects will need to find new ways to attract buyers. The bottom line is that despite the problems a crypto project may claim to solve, investors only care about one thing above all: whether they can make money.
Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.