'We embrace Bitcoin because it saved the world economy from inflation, yet in Web3, we are practicing what we oppose: inflation by scheduled unlocking.'
The theme of this article will horizontally expand on the phenomenon of [low circulation high FDV] and the improvement of the [fair launch] paradigm regarding token issuance.
Before this👇🏻
I have previously outlined the evolution of token distribution methods over the years, from free airdrops to the recently popular Tap to Earn. Friends interested in this can also revisit: History of Token Issuance Development
1. The essential issue of [low circulation high FDV] 🔻
Even though I have previously published related Chinese reports, looking back now, I have not truly explored the essence of the problem. The correct way to ask should be:
➢ Why is there a gap between circulating market value and FDV? And why is there a problem?
Looking back at traditional financial markets, this seems to be a unique feature of Web3. Although there are differences between total share capital market value and circulating market value in traditional financial markets, they are not very large and this phenomenon is not widespread. However, in the VC tokens we are familiar with this year, this phenomenon is prevalent.
Launching with less than 20% circulating supply is essentially basic operation.
And if there is a case of new stock issuance later, it is usually done through financing or stock splits, both of which will immediately reflect in market prices.
The fundamental difference between the two markets arises from cultural differences, which is a problem that has existed since the design of Bitcoin: a fixed supply in advance causes the market's supply and demand to coincide with the issuance curve. If we apply this phenomenon to traditional financial markets, FDV = all possible future issuances of stocks.
Therefore, whether the FDV metric has actual significance, in my view, it does not. Hence, I only consider circulating market value as the current reference metric.
However, before the project's official TGE, this metric is very important for the fundraising stage. How to fairly cut the cake while ensuring reasonable financing in the process of interest distribution is crucial for a project. Therefore, returning to the first question:
Essentially, the difference between circulating market value and FDV arises from the transition between primary and secondary markets.
This is not the root cause of the market's criticism; after all, the primary market provides a very high trial-and-error space for industry development. The real problem that causes this phenomenon is precisely the unlocking issue.
The model itself is not the problem; how it is adopted is. After all, Bitcoin also started with low circulation, but while most projects imitate Bitcoin's limited total supply and low initial circulation, they fail to adopt its core principle: demand-driven issuance rather than time-based issuance.
The relationship between Bitcoin's issuance and price is often misunderstood as purely based on time (thanks to the well-known 'four-year halving cycle'), but in fact, it is also driven by demand. Even all mining coins are based on this logic: if upstream miners cannot profit in the market in the long term, they will leave this node cluster.
This demand-driven issuance aligns with the basic economic principle that only when supply and demand form can prices emerge. For an L1 protocol, only when this supply and demand is established can security be maintained. In stark contrast, most crypto projects (especially those supported by venture capital) only follow time-based issuance, lacking this supply-demand aspect, which is the true essence of the 'low circulation, high FDV' problem.
In addition, there is a more subtle issue: misaligned interests.
Most projects have different issuance arrangements for teams, venture capital, communities, and treasury, etc. Although this seems to prioritize certain 'vulnerable groups' (e.g., communities) by unlocking their tokens first, this leads to conflicts of interest, reflecting extremely poor design. Here are the typical manifestations of this situation:
(1) Before unlocking, the community/market expects token sell-offs to occur, so they often act on this expectation to avoid further losses, which is also a main starting point for the 'sell high and earn' army.
(2) After the project team reaches the unlocking period, they artificially inflate the token price by creating news and market-making to attract retail investors, then sell the tokens to them.
This misalignment leads to a conflict between the team and venture capital firms and the community, weakening trust and causing many VC-supported tokens to perform poorly after TGE.
Therefore, demand-driven token issuance has become a potentially more reliable solution.
2. Demand-driven unlocking 🔻
For projects with a fixed total supply in advance and low circulating issuance, a financially reasonable solution is to base it on demand-driven issuance rather than time.
This is especially applicable to VC-supported projects with ownership mechanisms.
(1) Supply-demand balance: Tokens will only be released when there is additional demand (e.g., token consumption), thus preventing planned inflation;
(2) Interest alignment: Tokens will only be unlocked when the community/market generates additional demand for the tokens (e.g., protocol usage), aligning the teams and venture capital firms with the community.
However, this also brings new risks: the ownership of teams and venture capitalists is uncertain. If the community stops participating, demand will fade, and no new tokens will be unlocked. But shouldn't this risk be borne by the teams and venture capitalists? Without it, Web3 will remain a zero-sum game between insiders and the community—or worse, a financial scam.
3. Three models based on demand unlocking 🔻
Based on the aforementioned phenomena and conclusions, this article presents three token launch methods centered around the supply-demand model, focusing on fair launches while making efforts in the income model.
- I assumed a scenario of initially low circulation (10%) with a large share belonging to the community.
(1) No income model: If the token has no income model, each time the circulating tokens in the market are consumed and destroyed, an equal amount of new tokens will be released (distributed proportionally to the team/venture capital/community/treasury, etc.) to maintain the circulating supply until the final release.
This design can be simply summarized as driving the unlocking of new tokens through destruction or consumption; however, this design essentially dilutes the community's share in the circulating supply with each round of release, until the community's share is less than the others.
Even so, this version is still more reasonable than time-based unlocking.
(2) Revenue model: This model requires the project itself to have income outside of the token's value, such as some cross-chain bridges, DEXs, Pump, and other DeFi protocols. This model is based on the [no income model] and uses the protocol's own income to purchase and destroy newly issued shares, thereby ensuring the stability of market circulation.
Under the counteracting influences, we strive to minimize the impact on market prices and circulation, making the overall pool more stable. In this model's design, the community's major share can be preserved to the greatest extent while not harming the interests of other parties.
(3) Revenue model Plus version: This is based on the second version, where the protocol's income is divided into two parts: one part is still used to hedge the impact of unlocking, and the other part is used to inject liquidity into the token itself. Ideally, this will create a positive flywheel effect in the basic design of the token until all unlocking is completed while ensuring a certain price stability for the token.
Compared to the previous model, this requires more precise mathematical calculations: setting the optimal unlocking ratio between destruction and issuance, and determining the ideal income distribution—ensuring that part of it is used for inflation buybacks, while the rest is effectively injected into the pool.
The core issue of the three model designs above is that they tie the unlocking of tokens to the interests of all parties, transforming from a originally misaligned opposition into a demand-driven force. Currently, we can see many projects incorporating income, destruction, and buybacks into the token economy, but there has been no design that links market demand with token unlocking in high FDV designs.
4. Theory-based examples 🔻
In fact, most of the viewpoints in this article come from a tweet by @gabby_world_ Founder https://x.com/Dr_Daoist/status/1847937835653099726
I have translated the issues and models mentioned into a simpler form and made some modifications, hoping to help you understand the underlying economic design and the rationale behind this design.
This design has also been applied to the token design of the project itself.
From my perspective, I believe that unlocking future tokens based on supply and demand is a very bold and difficult attempt because for project teams, the first step is to persuade their investors to accept this.
I work in VC myself, and to be honest, it's hard for us to accept this.
Although many attribute the poor performance of the crypto market to a lack of liquidity, stagnation of innovation, or narrative fatigue, few realize that the real issue lies in unfair wealth redistribution, which further exacerbates the divide between institutions and the community, and is also the reason why the current Meme craze continues.
I am not sure how the GabbyWorld team coordinates this, but executing such an ideal design in this article is not easy.
The fair launch of the inscription market; I have previously stated that a fully community-driven brainstorming approach is not advisable, as it incurs a very high decision-making cost in business expansion. Gabby's approach of using the supply and demand of tokens themselves to drive unlocking is difficult to replicate by other projects. If this can be run successfully, it is entirely worth categorizing separately in the issuance history classification I initially provided.
