By Ro Patel, Partner at Hack VC
Compiled by: Zen, PANews
Token vesting (unlocking) status
In the current market cycle, tokens are being launched with high valuations and low initial circulating supplies (i.e. “low circulation/high FDV tokens”), which has raised concerns in the crypto community about sustainable upside for public market investors. The large number of tokens expected to be unlocked by 2030 could create potential selling pressure unless demand increases to balance it out.
Historically, contributors to protocol networks have typically received a percentage of the fully diluted supply of tokens that vest over a term structure. It is critical that contributors be properly compensated while also balancing the interests of retail investors in the token market. If the percentage of vested tokens is too large as a percentage of the token's market cap, affecting available liquidity, the vesting event could adversely affect the token price, hurting all token holders; on the other hand, if contributors are not properly compensated, they will no longer be motivated to continue working on the project, which would ultimately hurt all holders as well.
Traditional token vesting parameters include: percentage of tokens allocated, cliff period, vesting length, and payment frequency, all of which operate only in the time dimension. However, using only the above typical parameters will limit the scope of the solution to a narrow dimension. By integrating new parameters, previously untapped value can be unlocked.
Based on the liquidity dimension
Consider a liquidity-adjusted token vesting schedule. This idea extends the normal vesting structure by introducing a new parameter: liquidity. Defining liquidity is not an exact science, and there are many ways to quantify it.
One way to measure liquidity is the buy-side depth of a token, including the buy order depth on-chain and on centralized exchanges (CEX). The cumulative sum of all buy-side depths can be considered "bLiquidity".
Contributors can add a new parameter to their vesting terms, “percentage of bLiquidity” or “pbLiquidity”, a number that can theoretically be between 0 and 1.
min(Number of tokens that should be vested based on normal vesting calculation, pbLiquidity * bLiquidity * fully diluted valuation of a single token)
Here's an example of how this works: Assume a token with a total supply of 100 units, of which 12% (12 tokens) are allocated to contributors under vesting, and the token price is $1 each. Assume linear vesting for 12 months from the token generation event, with no cliff period, and that the token price remains constant. Typically, vesting would allow for 1 token to be redeemed per month, not taking other factors into account. Now, assume that pbLiquidity is 20% during the vesting period, and that the token has at least $10 of bLiquidity during the 12 month period. In the first month of vesting, the contract will look at the $10 bLiquidity number, multiply it by the 20% pbLiquidity number, and get $2.
pbLiquidity * bLiquidity * FDV of token = 0.2 * 10 * 1 = 2 USD
According to the minimum function above, 1 token will vest as normal, since 1 token * 1 USD is less than 2 USD. However, changing the above number to $2 of bLiquidity, 20% of $2 in this case is $0.40, so only 4/10 tokens will vest at a token price of $1.
pbLiquidity * bLiquidity * FDV of token unit = 0.2 * 2 * 1 = 0.4 USD
This is the liquidity-adjusted attribution.
advantage
Vesting claims previously focused only on timing, and perhaps indirectly on whether there would be enough liquidity at a specific price to absorb the vesting. This construct explicitly states that contributors should focus on the liquidity of their tokens, and aligns that goal with a specific incentive.
Token holders who are not in the vesting period, i.e., buyers of liquidity markets before the unlock date, can be assured that a single vesting claim will not cause a price crash due to illiquidity. Previously, public token holders only had to trust the goodwill and intentions of those claiming their tokens. With this improvement, they now have a clear reason to feel reassured.
Disadvantages/Challenges
If the tokens never reach sufficient liquidity, this could cause fluctuations in payments to contributors and ultimately significantly extend the vesting period.
It would complicate the simple payment frequency that contributors are used to.
There may be an incentive for fake buy-side liquidity. However, there are many ways to combat this. For example, consider bLiquidity within a certain price range, or LP positions with a certain time lock element.
People can claim tokens from vesting but not sell them immediately, thus accumulating large balances. Later, they may sell all their tokens at once, which may significantly affect liquidity and cause the token price to fall. However, this situation is similar to someone gradually accumulating a large amount of liquid tokens. There is always a risk that a large, concentrated pool of liquid token holders could sell together and cause the price to fall.
On a decentralized exchange, it is much easier to obtain bLiquidity numbers in a trust-minimized manner than on a centralized exchange, where the order book data is published by the exchange itself.
How can projects ensure that there is enough liquidity to support a reasonable vesting schedule? One idea is to reward locked LP positions with incentives. Another is to attract liquidity providers, which will be able to borrow tokens from project treasuries and pair them with stablecoins to create a stable market on exchanges.
Based on the milestone dimension
Another dimension that can improve token vesting schedules is milestones. Milestones such as number of users, transaction volume, protocol revenue, total value locked (TVL), etc., capture the overall attractiveness of the protocol through quantifiable numbers.
Naturally, protocols can set binary thresholds or gradients for the above parameters that factor into the vesting schedule. For example, a protocol must have more than $100 million in TVL, more than 100 daily active users, and/or more than $10 million in 90-day average daily trading volume in order to vest 100% of normal time related vesting. If these numbers fall below the threshold, the amount of vesting either stops completely (based on a binary approach) or is proportionally reduced relative to the initial threshold target (based on a gradient approach). Between binary and gradient, the gradient seems to make more sense.
advantage
This milestone approach ensures that the protocol will have a level of traction and liquidity when vesting occurs, resulting in a healthier protocol over time.
Milestones reduce the emphasis on timing.
Disadvantages/Challenges
Statistics including active users and transaction volume can be manipulated. The TVL metric is less maneuverable, but also less important for more capital efficient protocols. Revenues are also harder to manipulate, but activities such as laundering transactions may also translate into more fees and thus more revenue, so there is still room for manipulation. When assessing the potential for manipulation, it is important to note the motivations involved. The manipulation of incentive statistics comes primarily from the team and investors, who are also the ones on the vesting schedule. Open market buyers are less likely to manipulate statistics because they have no incentive to push for accelerated vesting. Additionally, strong token stock options provisions in off-chain legal agreements can significantly mitigate malicious behavior by incentivized parties. For example, if a team member or investor is found to be laundering transactions, or artificially and maliciously increasing user activity, they may lose their tokens, imposing severe penalties for rule violations.
in conclusion
The current market trend of high-valuation, low initial circulating supply tokens raises concerns about sustainable returns for public market investors. Traditional time-based vesting schedules may not fully address the complexity of token liquidity and market conditions. By integrating liquidity and milestone-based dimensions into vesting schedules, projects can better align incentives, ensure sufficient market depth, and promote real traction.
Although these approaches also create new challenges, the benefits of more robust attribution mechanisms are significant. With appropriate safeguards in place, these enhanced attribution models can increase market confidence and create a more sustainable ecosystem for all stakeholders.
