Regulatory reform in the United States and the thawing of crypto antagonism globally in 2025 will usher in a new generation of decentralized capital formation, which was first popularized in 2017 as “ICOs” (initial coin offerings).
During the 2010s, cryptocurrencies had not found a productive use case for Bitcoin and altcoins until Ethereum smart contracts allowed early-stage teams to raise capital from supporters scattered around the world. We saw Ethereum start a global decentralized computer that spawned DeFi, NFTs, and several early cryptocurrencies funded with less than $20 million raised from a global community.
Many other projects soon followed suit and we saw a new dynamic where raising capital in the early stages of a decentralized community almost always resulted in more added value for the project and the entrepreneurs than even the best and most well-intentioned venture capitalists could. offer. With a decentralized investor pool, entrepreneurs get free evangelists, beta testers, and code contributors—that is, free labor that contributed to the project at hand. Additionally, the shorter liquidity term allowed for better risk-return profiles for early-stage investors.
Unfortunately, ICOs were slowly suffocated and marked as “non-compliant” with regulations that were never accurately detailed. By 2020, they had dropped to a low and 88% of ICO tokens were trading below the issue price.
If we fast forward to 2025, we can see the convergence of some important contributions that allow the resurgence of attractive investment opportunities, but with very different characteristics than those of ICO 1.0.
The ingredients of ICO 2.0
1. Updated regulatory posture
I predict that value accumulation will be a key part of the “why” of investing in tokens this time around. Entrepreneurs and investors in the space have matured and are willing to collectively admit that there is an expectation of profit with most tokens. In fact, one could argue that confusion over how token holders would be compensated as an attempt to circumvent the Howey test was the main problem the first time around.
KYC/AML will focus on on- and off-ramps, such as exchanges and L2 bridges, and will reasonably focus on the point of realizing profits back into fiat currency, which is the appropriate light touch that should satisfy regulators reasonable.
2. Market rotation
We are seeing the rapid decline of certain mid-sized companies that could remake their business models by becoming decentralized and community-driven. For example, medium-sized media companies, including newspapers and magazines, are an obvious business model that could be greatly improved by using a token economy to drive citizen journalists toward greater professionalism.
3. The progression of cryptocurrencies
In 2017, we had ICO click races on very clunky UI/UX interfaces, pre-launch SAFT (Simple Agreement for Future Tokens) rounds for a handful of VCs, and years of waiting until a live network launched. No one should be surprised then that most ICO projects died. The Darwinian nature of any emerging technology is such that most will perish, but the few that survive will continue to create great value (spoiler alert: >90% of AI projects are also disappearing).
Cryptocurrencies now have decent onboarding and good user-facing applications, and most importantly, the community has demonstrated an amazing ability to publicly call out nonsense and root out bad actors much better than government oversight. The light of open decentralized ledgers is an especially strong disinfectant.
Implications and predictions
So what does all this mean for the crypto community?
This new wave of decentralized capital formation will eclipse the roughly $20 billion of capital allocated in ICO 1.0 in 2017 and 2018. In the coming years, we will see hundreds of billions in total capital formation in DeFi, NFT, RWA, and a lots of other crypto primitives.
M&A activity will represent a significant component of on-chain capital formation activity. Whether it is traditional companies getting serious about cryptocurrencies and buying up lost ground, like the Stripe-Bridge deal or L2 EVMs joining forces by recognizing that only a few will survive and be meaningful, we will see billions of dollars in M&A activity in the coming year.
Additionally, mid-market Web2 and legacy companies will look to reinvent their business model now that they can use token incentivization in less hostile circumstances. We are seeing energy, media, arts and cellular companies get serious about token incentivization to turn their value chain into an open market, as well as quickly acquire customers and use (cheaper) labor.
I am also optimistic that regenerative finance, which combines a capitalist mandate and a philanthropic mandate, will find its place. And I’m very excited about how cryptocurrencies can change paradigms by coupling reasonable returns on capital with social objectives in more compelling ways than we’ve seen to date.
I predict that we will see a variety of novel ways of choosing ICO participants, whether as rewards for LPs, based on reputation based on on-chain activity, or through the use of certain proofs. The consequence of this is that we will see a better balance between retail and institutional/VC investors.
Finally, as always with cryptocurrencies, we will continue to see relentless innovation and new ideas leading to more early-stage funding opportunities. Many interesting new teams see clearly that AI’s natural transaction medium will be through cryptocurrencies and are preparing accordingly. AI agents will be powered by token-backed fundraising mechanisms that combine debt and equity principles.
Overall, I am optimistic that the crypto community has internalized the lessons learned along the stoic path of evolution up to this point. As a litany of capital allocation opportunities emerge next year, I encourage everyone in the crypto world to be vocal and outspoken in highlighting due diligence red flags and bending the arc of this industry toward access. open, fair releases and projects that are direct in accumulating value for token holders.
Fair releases are a superior way forward and we should all work towards more equitable and transparent fundraising practices. There are still many problems to be solved and there will be some spectacular failures as we move forward, but decentralized capital formation is the original killer application of cryptocurrencies and deserves to continue to evolve.
