The Evolution of Decentralized Capital Formation
The regulatory overhaul in America 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, crypto hadn’t settled on a productive use case for Bitcoin and altcoins until Ethereum smart contracts enabled early-stage teams to raise capital from supporters dispersed around the world. We saw Ethereum bootstrap a global decentralized computer which spawned DeFi, NFTs, and various crypto primitives funded by less than $20 million raised from a global community.
The Rise and Fall of ICO 1.0
Many other projects soon followed suit and we observed a new dynamic in which raising early-stage capital from a decentralized community almost always resulted in more value-add for the project and entrepreneurs than even the best, most well-intentioned venture capitalists could offer. With a decentralized investor group, entrepreneurs get free evangelists, beta testers, and code contributors — i.e., free work that contributed to the project at hand. Also, the shorter liquidity time frame allowed for better risk-return profiles for early-stage investors.
Unfortunately, ICOs were slowly choked off and signaled as "not in compliance" with regulations that were never exactly spelled out. By 2020, they had slowed to a trickle and 88% of ICO tokens were trading at below issuance price.
Ingredients of ICO 2.0
1. Updated Regulatory Stance
I predict that value accrual will be a fundamental part of the "why" of investing in tokens this time around. Entrepreneurs and investors in the space have matured and are ready to collectively admit that there is an expectation of profit with most tokens. In fact, one could argue that the obfuscation of how token holders would be compensated as a hand-wavey attempt to sidestep the Howey test was the primary problem the first time around.
KYC/AML will be focused on on-ramps and off-ramps such as exchanges and L2 bridges, and reasonably concentrate at the point of realization of gains back into fiat, which is the appropriate light touch that should satisfy reasonable regulators.
2. Market Turnover
We are seeing the rapid decline of certain mid-market companies that could remake their business models by becoming community-led and decentralized. For example, mid-size media companies, including newspapers and magazines, are an obvious business model that could be greatly improved by the use of a token economy to drive citizen journalists towards greater professionalism.
3. Crypto’s Progression
In 2017, we had ICO-click-races on very rough UI/UX interfaces, pre-launch SAFT rounds going to a handful of VCs, and years of waiting until a live network launch. No one should be surprised then that the majority of ICO projects died. The Darwinian nature of any emerging technology is such that most will perish, but the few that survive will go on to create great value (spoiler alert: >90% of AI projects are going away as well).
Crypto now has decent onboarding and good user-facing apps, and most importantly, the community has shown an uncanny ability to publicly call out nonsense and root out bad actors far better than government oversight ever has. The light of open decentralized ledgers is a particularly strong disinfectant.
Implications and Predictions
So what does all this mean for the crypto community?
This new wave of decentralized capital formation will dwarf the approximately $20 billion of capital allocated in ICO 1.0 in 2017 and 2018. Over the coming years, we will see hundreds of billions in total capital formation across DeFi, NFTs, RWAs, and a plethora of other crypto primitives.
M&A activity will represent a significant component of on-chain capital formation activity. Whether it is traditional businesses getting serious about crypto and buying up lost ground, like the Stripe-Bridge deal, or EVM L2s joining forces as they recognize that only a handful will survive to be significant, we will see billions of dollars worth of M&A activity in the coming year.
In addition, mid-market Web2 and legacy companies will seek to reinvent their business model now that they can use token-incentivization under less hostile circumstances. We are seeing companies in energy, media, art, and cellular communications get serious about token-incentivization to turn their value chain into an open marketplace, as well as rapidly acquire customers and use cheap(er) labor.
I am also optimistic that regenerative financing, blending a capitalistic mandate and philanthropic mandate, will find its place. And I am very excited about how crypto can change paradigms in bridging reasonable returns on capital with social goals in more compelling ways than we’ve seen to date.
I predict that we will see a range of novel ways to choose ICO participants, whether as a reward to LPs, relying on reputation based on on-chain activity or via the usage of certain proofs. The byproduct of this is that we will see better balance between retail and institutional/VC investors.
Finally, as always with crypto, we will continue to see relentless innovation and new ideas that give rise to more early-stage funding opportunities. Many exciting new teams clearly see that AI’s natural transaction medium will be via crypto and are preparing accordingly. AI agents will bootstrap themselves with token-backed fundraising mechanisms that blend debt and equity principles.
Conclusion
Overall, I am optimistic that the crypto community has internalized the lessons learned along the stoic path of evolution to this point. As a litany of opportunities for capital allocation emerge next year, I encourage everyone in crypto to be vocal and open in highlighting due diligence red flags and bend the arc of this industry towards open access, fair launches, and projects that are forthright in accruing value to token holders.
Fair launches are a superior path forward, and we should all work towards more equitable and transparent fundraising practices. There are still many issues to resolve, and there will be some spectacular failures as we move forward, but decentralized capital formation is crypto’s original killer app, and it deserves to continue to evolve.
FAQs
Q: What is the updated regulatory stance for ICOs in 2025?
A: The updated regulatory stance will focus on value accrual, with a focus on on-ramps and off-ramps, and reasonable concentration at the point of realization of gains back into fiat.
Q: How will market turnover impact the growth of decentralized capital formation?
A: Rapid decline of certain mid-market companies will create opportunities for community-led and decentralized business models, and token economies will drive citizen journalists towards greater professionalism.
Q: What role will crypto play in the progression of decentralized capital formation?
A: Crypto will continue to evolve, with decent onboarding and good user-facing apps, and the community will continue to call out nonsense and root out bad actors, making open decentralized ledgers a strong disinfectant.
Q: How will M&A activity impact on-chain capital formation?
A: M&A activity will be a significant component of on-chain capital formation activity, with traditional businesses getting serious about crypto and buying up lost ground, and EVM L2s joining forces to recognize that only a handful will survive to be significant.
Q: What opportunities will regenerative financing bring?
A: Regenerative financing will blend a capitalistic mandate and philanthropic mandate, bringing new opportunities to bridge reasonable returns on capital with social goals.
Q: How will token-backed fundraising mechanisms impact AI’s natural transaction medium?
A: AI agents will bootstrap themselves with token-backed fundraising mechanisms that blend debt and equity principles, making crypto a natural transaction medium for AI.
