By Ro Patel
Compiled by: TechFlow
Current Status of Token Distribution
One trend in the current market cycle is the issuance of tokens with high valuations and low initial circulating supply (i.e. “low circulation/high fully diluted valuation (FDV) tokens”), which has raised concerns in the crypto community about the sustainable upside for public market investors. The large number of tokens expected to be unlocked by 2030 could bring potential selling pressure unless demand increases.
Historically, contributors to protocol networks have typically received a percentage of the fully diluted supply of tokens, which are distributed according to a certain term structure. Contributors should be appropriately compensated while balancing the interests of other stakeholders, especially public market token investors. This is critical because if the distribution of tokens is too high as a percentage of the token's market value and available liquidity, the distribution event may have an adverse impact on the token price, harming the interests of all token holders. On the other hand, if contributors are not adequately compensated, they will no longer be motivated to continue working on the project, which will ultimately harm the interests of all holders.
Classic token distribution parameters include: percentage of tokens distributed, cliff period, distribution duration, and payment frequency. All of these parameters operate only on the time dimension. However, using only the above typical parameters limits the scope of the solution to a narrow dimension, and introducing new parameters can unlock previously untapped value.
In this article, I propose adding a liquidity or milestone-based dimension to optimize and improve upon the most common token distribution models we have today.
fluidity
Consider tweaking the liquidity token distribution plan. The idea is to extend the normal distribution structure by introducing a new parameter: liquidity. Defining liquidity is not an exact science and there are many ways to quantify it.
One measure of liquidity is the availability of buy-side depth for a token both on-chain and on centralized exchanges (CEXs). The cumulative sum of all buy-side depth has a notional value that we can call “bLiquidity”.
Contributors can add an additional parameter to their distribution terms, namely the “bLiquidity percentage” or “pbLiquidity”, which can theoretically be between 0 and 1.
When an allocation request is initiated, the contract can output: min (the number of tokens to be collected under normal allocation output, p bLiquidity * bLiquidity * token unit FDV).
Here is an example to illustrate this: Assume a token with a total supply of 100, 12% (12 tokens) are allocated to contributors in the allocation, and the token price is $1 each. Assume a linear allocation over 12 months from the token generation event, no cliff period, and for simplicity, the token price remains constant. Typically, an allocation will allow for redemption of 1 token per month, regardless of other factors. Now, assume that 20% of p bLiquidity is allocated in the allocation, and that the token has at least $10 of bLiquidity over the 12 months. In the first month of the allocation, the contract will look at the $10 bLiquidity value, multiply it by the 20% p bLiquidity value, and get $2. Based on the above function, 1 token will be allocated as normal, because 1 token*$1 is less than $2. However, if the above value is changed to $2 of bLiquidity, then 20% of $2 is $0.40, so instead of 1 token worth $1 being allocated, 4/10 of a token is allocated. This is a liquidity-adjusted allocation.
Advantage
Previously, allocation requests only cared about time, and perhaps only indirectly about whether there was enough liquidity to absorb the allocation at a given price. This structure explicitly states that contributors should focus on building liquidity for their tokens, and aligns that goal with specific incentives.
Token holders who are not in the allocation (i.e., liquid market buyers before the unlock date) can be assured that a single allocation request will not cause a price crash in thin liquidity. Previously, public token holders could only trust the integrity and intentions of those claiming tokens. With this improvement, they now have a clear reason to feel reassured.
Disadvantages/Challenges
If the tokens never achieve sufficient liquidity, this could cause fluctuations in payments to contributors and could ultimately extend the distribution period significantly.
This complicates the simple payment frequency that contributors are used to.
This could incentivize fake buy-side liquidity. However, there are ways to combat this. For example, one could consider bLiquidity within some mid-price percentage range, or LP positions with some time-locking element.
People can claim tokens from the distribution but not sell them immediately, allowing them to accumulate 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 acquiring a large amount of liquid tokens. There is always a risk that a large concentration of liquid token holders could sell and cause the price to fall.
It is easier to obtain bLiquidity values in a trust-minimized manner on a decentralized exchange than on a CEX, where order book data is published by the CEX itself.
Before discussing the milestone-based dimension, how can projects ensure that there is enough liquidity to support a reasonable distribution plan? One idea is to reward locked LP positions of tokens as incentives. Another is to attract liquidity providers. As we wrote in 10 Things to Consider When Preparing for a Token Generation Event (TGE), attracting liquidity providers can help create a stable market by borrowing tokens from the project's funding pool and pairing them with stablecoins on exchanges.
Milestone-based allocation
Another dimension along which token distribution plans can be improved is based on milestones. Milestones, data points such as number of users, transaction volume, protocol revenue, total locked value (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 distribution 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 to receive 100% of the relevant distribution in normal time. If these requirements are not met, the distribution amount will either stop completely (binary) or be proportionally reduced relative to the initial threshold target (gradient). Between binary and gradient, the gradient seems to make more sense.
Advantage
This milestone-based approach ensures that the protocol has a level of traction and liquidity when distributions occur, leading to a healthier protocol over time.
Milestone-based approaches place less emphasis on time.
Disadvantages/Challenges
Certain statistics like active users and transaction volume can be manipulated. The TVL metric is less easily manipulated, but may be less important for more capital-efficient protocols. Revenue is also more difficult to manipulate, but certain activities like wash trading can translate into more fees and revenue, so they can still be manipulated in a pass-through manner.
When judging the likelihood of manipulation, it is important to pay attention to incentives. Teams and investors (i.e. anyone in the distribution plan) have incentives to manipulate statistics. Public market buyers are less likely to manipulate statistics because they have little reason to push for accelerated allocations. Additionally, strong token guarantee provisions in off-chain legal agreements can significantly mitigate malicious behavior by incentivized parties. For example, if a team member or investor is caught trading volume or elevating user activity, they could lose their tokens, setting stiff penalties for rule violators.
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 distribution plans may not fully address token liquidity issues and the complexity of market conditions. By integrating liquidity and milestone-based incentive dimensions into distribution plans, projects can better align incentives, ensure sufficient market depth, and increase real traction. Although these approaches introduce new challenges, the benefits of more powerful allocation mechanisms are significant. With careful safeguards in place, these optimized distribution models can increase market confidence and create a more sustainable ecosystem for all stakeholders.
