Why airdrops promising billions are fizzling out as hype gives way to ‘short-term scalpers’

April was a big month for crypto airdrops.

Ethena, Wormhole, Parcl, Tensor, Omni Network, and several more projects combined gave away billions worth 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’s a problem.

New token launches, which traders previously piled into in droves, aren’t attracting the same attention they used to.

With airdrop recipients looking to cash out and no new buyers stepping in, the prices of newly launched tokens are plummeting.

“Only short-term scalpers who see a low circulating supply as an opportunity for quick gains are buying these,” Marc Weinstein, a partner at crypto investment firm Mechanism Capital, told DL News.

The lack of interest is apparent. Kamino, a lending market on Solana, launched its KMNO governance token on April 30. Within an hour of its launch, KNMO dropped more than 63% as those who received tokens as an airdrop rushed to cash out.

And it’s not alone. Restaking protocol Renzo’s REZ governance token, which launched around the same time as KMNO, fell 28%.

The concern now is that future airdrops, which many DeFi users are betting big on, will follow a similar trend, disappointing those who hope for substantial payouts.

Unsustainable valuations

The reason many newly launched tokens are falling 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 agreements and low initial floats” also contribute to the unrealistic launch valuations, according to one source who works at a crypto investment firm and spoke to DL News on condition of anonymity.

Some market makers have previously been accused of pumping up the value of tokens they have been enlisted to provide liquidity for.

The initial float refers to the amount of a token’s total supply that is released into circulation when it launches.

Most recent tokens launched with low initial floats. For example, Wormhole, launched with 18% of its W token supply in circulation, and Ethena’s ENA token just 9.5%.

By only releasing a small portion of a token’s supply it can more easily maintain a high valuation in the short term. But when a project releases more tokens into circulation later, the price often falls as selling pressure increases.

For example, launching at $10 billion plus so-called fully diluted valuation “is not sustainable unless interest from retail investors trading these tokens increases meaningfully,” Regan Bozman, co-founder of early-stage crypto venture firm Lattice Fund, told DL News.

Fully diluted valuation — or FDV — is the value of the total supply of a token, including those locked or yet to be distributed, and not just those that are circulating.

Bozman said projects should distribute a higher amount of a token’s supply when they launch, and allow their communities to buy tokens directly from them as a way to launch with a more sustainable FDV.

Is it all intentional?

But for some projects, launching at a high FDV is likely intentional, said the same anonymous source.

“The most optimistic assumption is that they want to use their token as a currency and a high FDV leads to a larger US dollar runway,” they said 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 dumping [over the counter] before they vest and investors make money on unrealized gains via management fees,” the source said.

Weinstein also speculated on another reason projects may want to launch at a high FDV: “If you start at $20 billion and drop 95% in a bear, you’re still a $2 billion project,” he said.

With new tokens continuing to collapse on launch, projects will need to find new ways to entice buyers. The bottom line is that despite the problems a crypto project may claim to solve, investors primarily care about one thing only: whether they can make money.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.