Original source: https://t.co/AulNdP3eLd
We admire Bitcoin because it saves the world economy from the quagmire of excessive fiat currency issuance. Unbeknownst to us in Web3, we are still shooting ourselves in the foot: through time-based unlocking, we excessively issue tokens.
“Low circulation, high FDV”: A superficial issue
Since a report released by Binance Research in May 2024 brought “low circulation, high FDV” to the forefront of industry discussions, the conversation around this issue has remained superficial. The core of the real problem has not been addressed, nor has anyone questioned the fundamental reasons for its existence.
The question we should really be asking is:
1. Why is there a gap between market cap and FDV?
2. Why do “low circulation, high FDV” cause problems?
Market Cap vs FDV: A Unique Dilemma in the Crypto Industry
Why is there no issue of “low circulation, high FDV” in traditional finance (TradFi)? Because this problem is unique to the crypto industry.
In traditional finance, market cap (Market Cap) is calculated based on all issued circulating shares, including shares locked for 6 to 12 months after an IPO. Dilutive factors (such as options and restricted stock units) are minimal, so the gap between FDV (fully diluted valuation) and market cap is small. When new shares are issued, it is usually done through financing or stock splits, and these actions are immediately reflected in the stock price.
In the crypto industry, most projects have inherited Satoshi Nakamoto's token economics legacy: a limited total supply and a low initial circulation. This leads to a fundamental difference between “Crypto FDV” and “traditional financial FDV”: the latter only considers the slight dilution of circulating shares when derivatives convert to equity, while the former includes all tokens that may be issued into the system in the future.
TradFi FDV vs Crypto FDV (by their respective definitions)
If the concept of “Crypto FDV” is applied to traditional finance, it would cover all future possible shares that can be issued—although this can theoretically be calculated (because companies have a so-called “authorized share limit”), the number is essentially infinite due to the ease of raising that limit through shareholder resolutions.
TradFi FDV vs Crypto FDV (by Crypto definition)
Now, when comparing in this fair manner, it’s easy for everyone to start questioning (at least I would) the definition of FDV in the crypto industry: is it really reasonable to value a company/project based on the current spot price and all the shares/tokens it may issue in the future? The answer is clearly no. If tokens can be issued without limits like the U.S. Treasury printing money, then the valuation of a company/project would become infinite.
So, why do we adopt such an absurd FDV metric in the crypto industry? The answer lies in the fact that it may be needed as a benchmark for financing before TGE (token listing)—but it’s a different story after TGE. Before TGE, VCs would invest a certain proportion of tokens, usually calculated based on a certain total supply. Once the tokens are listed, FDV becomes irrelevant; market cap is the only meaningful metric. This is why no one talks about Bitcoin or Ethereum's FDV—only their market cap matters. (Note: Ethereum’s total supply has no cap, just like how companies can issue unlimited shares in traditional finance, so its FDV cannot be calculated anyway.)
So, if in the dilemma of “low circulation, high FDV”, FDV is actually irrelevant (or more like a “scapegoat”), then who is the real culprit?
Timely Unlocking: The Real Culprit
While most projects imitate Bitcoin's limited total supply and low initial circulation, they fail to grasp the essence of its token economics: demand-driven release rather than time-based release.
Bitcoin's block issuance is often misunderstood as purely time-based (thanks to the well-known “four-year halving cycle”), but in reality, it is demand-driven. The key mechanisms are as follows:
1. The release amount of BTC (block rewards) is linked to the number of blocks mined;
2. If the rewards (essentially the BTC price) are insufficient to incentivize miners, then new BTC will not be mined;
3. The price of BTC is ultimately driven by market demand because its supply mechanism is predetermined.
BTC Halving: Seemingly time-based release, but actually demand-driven
This demand-driven release aligns with basic economic principles: new currency or tokens are only issued when the system needs them. In stark contrast, most crypto projects (especially those that have raised funds) follow time-based releases/unlockings—this is the real reason behind the “low circulation, high FDV” problem.
The most obvious flaw of timely release tokens is the mismatch between supply and demand. Supply is strictly written into smart contracts, while demand fluctuates unpredictably. Projects often release seemingly reasonable roadmaps to prove the legitimacy of their release plans, but these plans rarely go as expected. As a result, the issuance of tokens is meant to satisfy a demand increment that fundamentally does not exist—even a reduced demand (often the peak demand is during airdrops before TGE). The consequence is that token prices continue to decline with each unlocking.
Timely Release: Predictable Supply vs Unpredictable Demand
But there is another deeper issue: conflicts of interest. Most projects have different unlocking schedules for teams, VCs, communities, and treasuries. While this seems to prioritize certain “vulnerable groups” (like the community) by unlocking their tokens first, it leads to conflicts of interest—reflecting extremely poor mechanism design. A typical situation is as follows:
1. Before unlocking, the community/retail investors expect the newly issued tokens to create selling pressure and exit early;
2. Project parties anticipate unlocking and artificially inflate the token price through positive news and market makers to attract retail investors;
3. After unlocking, the project parties have to compete with VCs to exit, and both sides often coordinate to sell through market makers.
This conflict of interest places project parties and VCs in opposition to the community, eroding trust and leading to poor performance of many VC coins after TGE.
The vicious cycle caused by timely unlocking
Demand-driven token release: The only viable solution
For projects that will issue or unlock tokens, the only solution that aligns with economic principles is to release on demand—this is particularly applicable to VC coins with unlocking mechanisms (but not including 100% fully circulating tokens primarily based on meme coins).
The two core advantages of demand-based release directly address the fundamental flaws of time-based release:
1. Supply and demand balance: New tokens are only released when there is additional demand (such as token consumption), thus avoiding planned inflation;
2. Aligned interests: Unlocking only occurs when the community/market generates additional demand for the tokens (such as protocol interactions), ensuring that the team, VCs, and the community are on the same boat.
However, this also introduces a new risk: the uncertainty of the unlocking cycles for projects and VCs. If the community stops participating in interactions/usage, the demand for the tokens will disappear, and no new tokens will be released/unlocked. But shouldn’t this risk be borne by the projects and VCs? Without this risk, the Web3 industry will forever be a zero-sum game between orchestrators and the community—or worse, a financial scam.
In the next article, I will delve into how to design a fair demand-based token release model.
