Token economy is one of the biggest projects in the Web3 project, so I have always been confused by some comments that token economic distribution is not important.
A complete token economy requires three basic components: distribution, release, and rights.
Every step involves the hearts of investors in the primary and secondary markets. This article will also revolve around these three major areas.
1. Let’s talk about distribution first
(1) The Art of Balance
The initial distribution of tokens is mainly about balancing three parties: institutions, project owners, and the community. How to take care of these three parties while making investors in the secondary market happy is the most important thing to consider before the project goes online.
Generally speaking, in a high-quality token distribution, the surface shares occupied by the three camps are similar, and the next best is that the project party has more than 40%, which allows the project to take a certain initiative in the process of protocol governance.
The next level is those in which institutions account for more than 30%. Regardless of whether they have actually sold, this actually sends a signal to the market: there is a lot of selling pressure from institutions on this project!
(In addition to balancing the above three parties, another part needs to be used to support the continued development of the protocol. The proportion of this part varies greatly depending on the different protocol businesses.)
The previous fair mint narrative assumes that there is no information asymmetry in an ideal state, and the distribution of tokens all belongs to the community. This bottom-up distribution is very ideal, but it involves an unavoidable and difficult to overcome problem: human laziness.
Everyone holds tokens, so who will do the work? In theory, more people should work harder, but the actual situation is often not like this: there are many large investors who are lying flat, and only a small number of small investors are pushing for CX. This is the current development status of many fair mint projects.
Because big investors often don't just have one project, and it would be too much effort for them to build each one themselves; while small investors often only have one project, so this design of community-wide allocation with unbalanced funds and unbalanced efforts is beautiful in ideal but very bleak in reality.
(2) Community vs. Institution
Many people have talked about the topic of community tokens and VC tokens before. There is no need to argue about this topic at all. In an industry with a strong community culture, the community is an indispensable part of promoting the protocol, but VC provides a lot of tolerance for this industry.
This is something that the community cannot match. The state of collective wisdom and effort will often gradually disperse as the secondary market price of the underlying asset goes down (asking about this is experience).
The community and VC play important roles in different stages of the protocol/project. Comparing the important roles in two different stages is itself a ridiculous topic.
As for the secondary VC's comments, it is a process of token decentralization, or a process of alternation between old and new players. VCs bear the early risks, and the community game long-term cyclical growth (of course, some institutions also accompany for a long time)
The peak is full of false supporters, and the dusk witnesses the sincere believers
Many people are forced to build because they are trapped, but there are more people who choose to face the reality, cut their losses and never look back.
Therefore, in an industry where the secondary market and the community have a very high degree of overlap, we find that this situation is very fragmented: those who buy may not necessarily participate in the construction, and those who participate in the construction may not have enough chips.
Therefore, we will find that from the past to now, there have been too many protocols that are in name only. This phenomenon itself is actually telling us that it is difficult to make it work if it is completely community-driven.
At this point, the project party may not have many chips left. Once the price is seen, even the project party itself may be in trouble. This not only involves the issue of distribution, but also release.
2. Let’s talk about release
If allocation is an economic signal that the initial market pays more attention to, then release is a key event that the project will pay attention to during its development and even in the secondary market.
There are two main types of token release: cliff-type design and linear design
The cliff-style design is to release a fixed share at a certain time point. This is usually seen in institutions. For example, various projects of Binance's new coin mining basically have institutional lock-up for one year before they begin to release.
Some will be unlocked at a cliff rate, while others will be unlocked linearly after being locked for one year. The difference is actually the proportion of the first release. For example, the cliff rate is a one-time release of 5% of the total amount, while the linear rate may divide this 5% into 36 parts and release them monthly.
The cliff-like design is what the market needs to pay most attention to. Although it does not necessarily mean that it will be sold after it is released, it is at least a sword hanging over the heads of secondary investors.
At this time, the project party may also launch a pledge design to give you a certain degree of confidence, telling you that after these tokens are released, there is still a high possibility that they will not be sold to lock up the positions.
In addition, a sufficiently long-term release design actually sends a signal to the market: our team and even the supporters behind us have enough confidence in our own project.
(Although in reality they can realize initial cash in early on through various insider trading)
Therefore, we should not think that there will be an agreement without insider trading. It is basically impossible. From institutions to project parties themselves, everyone will do it. Otherwise, many small institutions will not be able to pay salaries. Some studios are incubated specifically for insider trading.
Don’t think that there is no agreement without insider trading. The only difference is the degree and whether the means are concealed.
3. Finally, the token rights
The opposite of rights is a less important part of the token economy than the first two links, because we can see that many pure governance tokens in the market have done well, so that many people have the wrong idea that the token economy is not important.
The rights and interests of tokens can actually be summarized into two issues:
(1) What additional benefits can I get if I hold/lock it?
(2) Does it occupy a dominant position in the protocol? (Product token/GAS/governance)
Especially the first question, which involves the overall economic cycle. If there is no design for holding equity, then for some node supply sides, their way of cashing out is to sell in the secondary market.
This supply sell-off will be offset by bullish sentiment in the up cycle, but in the down cycle, the dead spiral effect will begin to amplify (not many people in the market are willing to take over at this time)
A typical example is the past $LINK 1.0 economy, which was a process where upstream nodes continuously sold their supply to the secondary market. The launch of 2.0 was intended to motivate these nodes and tell them: There are other benefits to holding LINK, so don’t rush to sell it.
Even the leading DEX UNI announced this year that it will further iterate token rights and interests to make dividends
The second question is actually about the topic of relevance. A deeper question is: Does this project need to issue tokens? For example, some data analysis websites, although their services can be provided with stablecoin tokens, insist on issuing a coin, and may even issue additional stablecoins.
There are such teams who want to reap more money in the market. Therefore, the second question is not only to consider whether the token has a high correlation with the main business of the protocol, but also to consider whether it is necessary to issue tokens for this business.
At the end of this article, I would also like to say that there is no perfect token economy design, and even in the early stages of a project’s launch, this aspect cannot be designed too perfectly.
Because once it goes online, all aspects will be perfect, and in the future we will need to constantly think about how to further give the market better expectations.
Is it better/hotter narrative or improving the current flaws? Obviously the latter is an easier card to play.
Therefore, for the protocol that currently only serves as a governance token, the further improvement of the token economy is a trump card that has not yet been used.
