A weekly recap of the most insightful news, analysis, and capital flows in the wild west we call crypto.

Hello and welcome back to the Web3 Rewind! Per usual in this industry, lots has happened this past week. Here's what we have in store for you:

• Celebrity pump-and-dump meta

• Cobie’s notes on airdrops

• Tether launches gold-backed stablecoin

• Coinbase announces pre-launch markets

• SEC Head of Crypto Asset Regulation leaves

• L2s vs ETH

The Latest

Celebrity pump and dump rug meta

Airdrop dept.

Cobie notes on airdrops

LayerZero recently concluded their airdrop distribution and users were able to check their allocations. Once again, there were many unhappy parties. This isn’t news to anyone but it increasingly feels like everyone just hates airdrops, and no one can get it right. Given that, maybe we should consider that airdrops aren’t the optimal GTM strategy anymore.

And the evidence is in the data. Take the recent zkSync airdrop as an example, where 41% of the top zkSync token airdrop recipients sold their full allocation. Think about how shockingly large a number that is and how disastrous that user retention rate is. It means 41% of the whales who zkSync hoped would stick around are no longer incentive-aligned at all. $500M of the airdrop was instantly sold, which if you wanted to argue extremely, means that the protocol just gave out $500M for nothing other than a few historical months of artificial usage.

Most protocols are giving away 10-20% of their tokens to extremely low-value users with zero retention. These tokens are being instantly sold and being gifted with a cost basis of zero. In addition, you need a high FDV for the airdrop farmers to be happy and maximize the dollar value of the airdrop, which often sets the stage for a down-only chart.

Maybe it’s time to reconsider airdrops. But what’s the solution? First of all, we can start off by making airdrops non-sybillable. This means that whatever criteria there is for the airdrop has to be linear and that it has to be capital intensive because money can’t be printed out of thin air.

If you still want to do an airdrop, perhaps you can find a mechanism that will only invite long-term token holders. Some protocols have experimented with this. For example, Drift protocol, which recently conducted its airdrop, implemented a mechanism whereby the earlier you sold your airdrop, the less airdrop you received, thereby flushing out the early sellers and not rewarding them as much.

One thing is for sure. Everyone, and remarkably, I truly mean everyone here, including users, protocols, builders, and VCs alike, are completely fed up with the current airdrop meta. Time for crypto to innovate again. — JC

Quick Bits

Tether launching gold backed stablecoin

• Tether is bringing back the gold standard. The company recently announced aUSDt, a digital token backed by physical gold. As of today, the stablecoin currently has a market cap of $576M, which is backed by 7,667kg of gold.
  

• Tether is essentially executing a horizontal expansion playbook, expanding into a more exotic hybrid, and likely eventually on-chain collateral. Given that USDT is the world’s most-valuable stablecoin with an immense amount of liquidity, Tether has a significant amount of network effects to play with here.

Coinbase pre-launch futures

• Coinbase recently unveiled pre-launch markets, which allow users to trade perpetual futures on tokens that have not yet been released. Somewhat like the tradfi derivative, they allow traders to “price” the value of a token before it is launched and are often used as a gauge of what an airdrop will be worth.

• The first token to launch on Coinbase’s pre-launch markets is EIGEN, the token of EigenLayer. Given that the EIGEN token is non-transferable yet, it is an interesting method to allow users to “hedge” the value of their airdrop. Such a product has seen immense product market fit in the past year on-chain, with the notable providers being Aevo and HyperLiquid.

SEC Head of Crypto Asset and Cyber Unit leaves

• David Hirsch, the chief of the crypto asset unit in the enforcement division of the SEC, has left his role. His departure from the SEC comes after a nine year stint at the regulatory agency.

• His next steps? Unknown to anybody. The reasons for his departure? Also unknown. But perhaps he was a little frustrated with Gary for going after the developers of permissionless protocols instead of actual scammers.

And last but not least

L2s vs ETH

Ethereum is the second largest token within crypto. And for years, the only way to get exposure to Ethereum’s ecosystem as an index bet was ETH itself. For a majority of Ethereum’s history, Ethereum was, well, Ethereum. In the recent few years, things don’t look the same. That’s because Ethereum itself ran into scalability constraints, and users were increasingly having to pay absurd gas fees as they crowded each other out. Thus, to scale Ethereum, the Ethereum Foundation focused on rollup-centric scaling, which promised to allow Ethereum to grow through various L2s. Suddenly, Ethereum wasn’t only Ethereum anymore. It now included a bustling ecosystem that included Optimism and Arbitrum as early pioneers, but now has over 50 L2s.

This means that if an investor wants an index bet on Ethereum, the obvious solution isn’t to solely buy ETH, as many of the users and liquidity have now moved to L2s. This statement is especially true considering that most of the value capture of blockchains comes from execution, which means the fees that users pay and MEV that is captured when transactions are executed. None of that is accruing to ETH today. However, there is still a small amount of direct value being accrued to ETH through settlement fees and data publishing fees. There’s also the argument that L2s are “exporting” the demand for ETH, as the majority of L2s utilize ETH as the gas asset. Increasing the demand for an asset, all else being constant, should theoretically make the price of that asset increase over time. Given that execution is where most of the value for blockchains is captured, L2 tokens should theoretically be capturing much of the value created in the Ethereum ecosystem, which should theoretically make them outperform ETH the asset as L2 activity continues to flourish.

That has not been the case. Most L2 tokens have dramatically underperformed ETH in the liquid markets since launch. It is important to note here that VCs have still vastly outperformed ETH by a wide margin from their L2 investments, it is simply underperformance on the public markets. Why is that? L2s are proliferating. They clearly work as a scaling solution to Ethereum mainnet. However, each new L2’s token has effectively been diluting the value of previously listed ones. If you observe the total FDV of L2s as a percentage of ETH, that has effectively stayed flat. Are L2s overvalued? If you believe fundamental investing exists in crypto, yes. Collectively, leading L2s are worth ~$40B and generate $40M of annualized fees, which makes for a shockingly high PE ratio of 1,000x. Compared to notable DeFi protocols such as Pendle, dYdX, Aave, and Lido, which all trade somewhere in the 10-60x PE ratio range, L2s are hardly a steal. However, if you look at the collective FDV of L2s, currently worth 10% of the FDV of ETH, one could pretty safely assume that more than 10% of activity within the Ethereum ecosystem takes place on L2s.

However, for now, no one knows who’s winning the L2 wars. This is perhaps why each new L2 dilutes the value of previous L2 tokens. I suspect this dynamic changes significantly in the future when we see clear winners with significant network effects, and thus L2s which accrue a significant amount of value relative to other L2 competitors. For now, good luck buying a high FDV L2 token. — JC

Have you read the definitive history of Ethereum? No? Well then get your copy of Out of the Ether while you can.