Airdrop season ends, and crypto is getting capital markets

For the past several years, airdrops and point systems have been the lifeblood of crypto user acquisition. Crypto projects simply had no alternative. After the initial coin offering boom caused severe regulatory pushback, projects faced a difficult question: how do you get tokens into the hands of users without selling anything that might be construed as an unregistered security? Airdrops emerged as the answer.

That era is ending. The shift in U.S. regulation has opened the door for compliant, transparent ICOs to return. We shouldn’t expect the same craze as in 2017 (the industry has matured enormously since then); on the contrary, the crypto sector will likely correct some of its distortions and develop more disciplined capital markets.

The return of ICOs

Coinbase’s announcement of a regulated ICO platform for U.S. investors was the clearest signal yet that the U.S. regulators are ready to re-engage with public token sales — that is, under structured, compliant conditions. Far from a nostalgic revival of the 2017 free-for-all, it’s a sign that ICOs, done properly, are no longer taboo.

The market responded immediately. MegaETH’s ICO was a blockbuster success, demonstrating that retail appetite for well-structured token offerings is still enormous. Plasma also drew huge demand back in June. Monad’s ICO took longer than expected to fill as Coinbase’s first ICO, but it still received a lot of attention from the industry. The ability to conduct public token sales again changes everything for crypto fundraising.

Why airdrops existed in the first place

After 2017, the ICO landscape became radioactive. Almost overnight, selling tokens to the public became legally risky, major exchanges refused to list tokens launched through public sales, and U.S. investors were effectively excluded from early-stage participation.

Yet developers still wanted to grow their networks, and users still wanted tokens. So crypto firms improvised a workaround in the form of airdrops. If tokens were given away rather than sold, perhaps they wouldn’t be treated as securities. It certainly seemed safer than the ICO model.

A new wrinkle was added to the scheme later on: points systems. Projects didn’t even need to really airdrop a token — instead, they could reward users with abstract “points” that hinted at future financial gains. These systems allowed projects to build hype and usage without crossing legal lines. It worked for a time, but it created distortions in the market.

The incentive problem

Since firms couldn’t raise from the public, they leaned heavily on venture capital. VCs obviously wanted liquidity events, so crypto projects were pressured into elaborate cycles of launching unfinished products, using points to attract “users,” and airdropping a token months later to satisfy investors.

The incentives were utterly broken: airdrop recipients (often times called “farmers”) had zero loyalty to the project they’d received tokens from; VCs didn’t care about product-market fit so much as token unlocks; protocol teams optimized for fake KPIs to justify valuations, and obtain exchange listings for day 1 selling liquidity; and real users were drowned out by extractive behavior.

Put differently, the project’s long-term success was irrelevant to VCs and airdrop recipients. It was all free money. Once you’d unlocked your liquidity — or received your airdrop — the best move was to sell your tokens and to move on to the next project. You couldn’t build anything of lasting value.

What this new ICO era unlocks

Regulated ICOs will give crypto a chance to fix those distortions and realign the sector’s economic foundation. This new wave will look nothing like 2017. Back then, ICOs only needed a whitepaper to get investors pouring in. Today, crypto market participants are far more educated, and regulators are setting clear boundaries. 

With the return of ICOs, crypto firms will no longer be forced to over-optimize for VC interests; they can raise directly from the people who believe in the product. Token holders will also become real stakeholders. Because they’ll have invested in the project, they will truly have skin in the game.

Markets will finally gain genuine price discovery. What the market is willing to pay for this or that new token becomes a real signal. Nor will crypto projects waste resources on convoluted airdrop campaigns anymore. That attention can be redirected towards product design and revenue.

Even so, as we’ve seen with Monad, ICOs don’t necessarily spell the end of token unlock schedules (which were a common feature in airdrops). Some projects will still experience significant selling pressure on their tokens over long time horizons.

In short, compliant public fundraising mechanics will abate some (but not all) of the major distortions that crypto capital markets have been suffering from. The ecosystem’s health is bound to improve.

Airdrops will have different functions

Airdrops and point systems were innovative in their own way, and they won’t fade away entirely. We should expect them to be used as part of loyalty programs — to reward investors who, for example, have participated in the protocol’s governance, or have already been holding the project’s token for a significant amount of time. 

The end of the airdrop season is a sign of maturation for crypto. The sector is finally building the infrastructure of real capital markets: regulated fundraising, transparent pricing, investor protections, and aligned incentives. Investors won’t get free money anymore, but they’ll be able to invest in crypto projects without having to worry as much about broken incentives.