Original title: Crypto’s Token Lockup Orthodoxy Is a Scam

Original author: Christopher Goes

Original source: https://www.coindesk.com/

Compiled by: Mars Finance, Daisy

Christopher Goss, co-founder of Anoma and Namada, said today’s prevalent token distribution model is fundamentally flawed.

The current token distribution model that dominates the cryptocurrency field is the so-called "low-float, high FDV" issuance. In this model, projects are issued with a low percentage of the total supply, with the majority of the supply locked and gradually unlocked, usually after a year. This low float is often combined with high fully diluted valuations and may even be explicitly designed to encourage this. According to research from CoinGecko, nearly a quarter of the industry’s top tokens are illiquid today. Notable recent issuances that have adopted this model include Starknet, Aptos, Arbitrum, Optimism, Celestia, and Worldcoin (as of now, a staggering 95.7% of the supply remains locked).

This model is fundamentally flawed. Limiting token liquidity distorts market signals and misleads actual and potential network participants who rely on that signal to make decisions. The “low liquidity, high fully diluted valuation” model leads to a world where the upside potential of most newly issued tokens is captured by private investors, with little access to public markets. Ultimately, this model for issuing tokens inflates short-term metrics at the expense of long-term sustainability and public trust.

The “Vesting” Fallacy in Cryptocurrency

What we call “vesting” in crypto bears little resemblance to the actual function of vesting mechanisms in the traditional financial world. In traditional companies, vesting (e.g., restricted stock units, RSUs) is used to align incentives and ensure that stakeholders’ obligations are met. In traditional companies in particular, vesting comes with specific performance expectations, and if these expectations are not met, further ownership shares can be withdrawn. Vesting locks in crypto networks have no such mechanism - tokens are simply locked for a fixed period of time, after which they are unlocked.

These lockups, which should not be called "vesting," often distort market signals by giving a false impression that demand is much higher than it actually is. If we understand price signals as clearing points between supply and demand for an asset, then the value of these signals to the market depends on both sides of the supply and demand being able to freely express their preferences (e.g., sell when they want to sell, buy when they want to buy). Lockups degrade the signal by making it impossible for one side of the market to express its preferences. This may provide some short-term benefit in market capitalization rankings or other metrics, but overall market quality deteriorates because price signals convey less information.

Worse, these lock-up mechanisms actually only harm the public. Token holders who join after a project launch are disadvantaged by the gradual unlocking, which provides them with an inaccurate price signal that does not reflect actual market sentiment. Advanced investors who own locked tokens have access to non-public markets and information, so they have an unfair advantage and tend to sell these locked tokens over the counter. In order to understand the true market signal, one must analyze who may want to sell but cannot, and speculate on what is happening in the background. This analysis is too complex and time-consuming for most public market participants.

The inevitability of market pressure

Lockups don’t stop people from selling tokens, they just delay the inevitable. Vesting periods will eventually expire, and those who want to sell will eventually sell, exerting constant downward pressure on the market, often causing an artificial “slow drain” in market capitalization. Personally, I would be hesitant to hold an asset or participate in a network, especially if many holders may want to exit but are unable to. This is also a problem for participants (such as validators) who need accurate price signals to sustainably forecast revenue and operating costs.

If one of the goals of the cryptocurrency space is to produce meaningful products that provide real long-term value, then practices designed to artificially inflate short-term metrics will not help us achieve that goal. To accurately assess the potential of any particular project, you must be able to tell whether people are truly committed to it. You can't do that if you don't know whether people are holding tokens because they truly believe in the project or because they are prohibited from selling.

Criticism of the low liquidity, high fully diluted valuation (FDV) orthodoxy has been accompanied by calls for new “fair launch” token distribution methods. However, many of these proposals simply call for a higher percentage of circulating supply at launch, without questioning the legitimacy of the “vested” lockup itself.

This is not enough. Any form of artificial manipulation of market signals is still artificial manipulation of market signals. We need to break the Overton Window of cryptocurrency attribution through various new experiments.

Free market issuance

A big advantage of this approach, which we call "free market issuance," is that it allows everyone to express their preferences freely. If you want to sell, you can sell; if you want to buy, you can buy. Most importantly, you will be able to do so with confidence because the price signals make sense and because everyone is able to express their preferences transparently and in real time, here and now.

The long-term benefits of building a sustainable community of stakeholders who truly believe in the project far outweigh the short-term risks of providing an early exit opportunity for those who don’t believe in it. We need projects that provide real utility and have real staying power, and the current vesting orthodoxy clearly doesn’t provide enough (or even any) of those projects.

The free market approach is often limited to meme coins, leading to the perception that it is unsuitable for “serious” projects. However, it is reasonable to argue that, in addition to their meme appeal, the huge success of meme coins is partly due to the market’s realization that this model is more beneficial to token holders in the long run and often creates more active, organic communities.

We should try new things, even if they are risky, and I hope that free market launches will open up discussions about new directions to go. Groupthink — following the crowd rather than having a specific idea of ​​why we are doing it — is a harmful phenomenon in the cryptocurrency space today. Following the crowd may be a reasonable approach if you plan to launch a project and exit in a year or two, but it is not a good strategy if you want to bring real value to the world. It's time to try something new.