Today, while reviewing projects, I came across an article by an L1D partner titled (Phantom Tokenomics, Inside the Obscure Daedalus Labyrinth), which translates to: 'Daedalus' Labyrinth: The Hidden Token Economic Model for Retail Investors'. To put it more simply: many tokens are not only opaque but also have two economic models.
I have always been quite averse to the industry's emphasis on token economics. Firstly, tokens don't really constitute economics, and secondly, discussing this is fundamentally misguided.
It's like the IPO prospectus in traditional markets, which emphasizes the inherent value of the project and its future growth potential. The more confidence a project has in itself, the simpler and clearer it wants to write it, fearing others won't understand its merits; while low-quality projects tend to complicate their financial designs, fearing others will realize they are garbage.
The article at the beginning is even more ironic. Many projects not only engage in token economics but also have two sets of models: one written in the white paper to deceive the gullible, and the other being the real distribution scheme kept secret.
Especially with projects that initiated investment and financing during the last bull market, they have been particularly ruthless in this regard. To be honest, I knew about these matters quite early on; after all, there are no fresh insights under the sun. However, I didn’t delve into it that deeply, as I haven't pushed high FDV low circulation secondary tokens in the past two years, nor have I bought any.
Now that we are starting to pay attention to alternative projects, it is necessary to understand these more deeply and present them to readers. I also thank L1D for daring to speak out boldly and breaking through this window paper, because many insider trades remain unknown to outsiders until there is a blow-up.
For instance, after the sequential collapse of FTX and LUNA, some unique investment terms were exposed. I remember at that time, Terra provided Alameda with tokens worth over a billion at a cost far below the A-round price, purportedly for market-making management.
But these contractual agreements are never publicized. It wasn't until the Terra blow-up that the judicial authorities intervened and unearthed those agreements.
This is extremely common in traditional financial markets; many companies that cannot publicly disclose their names are playing the trick of covering several pots with seven lids until they can no longer cover and are forced to reveal themselves.
Like the Terra, Celsius, 3AC, IDG from the crypto world, and the Silicon Valley Bank in the US, they were still pushing good news to maintain appearances before the blow-up. With leverage involved, the moment everyone rushes for withdrawals, it’s over. Once they announce they can’t go on, bankruptcy is the only option.
The token economic model is actually a black box. Many transactions are completed privately by a few individuals and can be concealed, making it impossible to identify from the blockchain. The public token economic model is merely a cover for the real distribution.
0xLouisT has mentioned several representative insider trades; through these trades, the actual costs for institutions are far lower than the publicized financing costs.
· Advisor Distribution: Investors can receive additional tokens through advisory services, and these shares are usually categorized under team or advisor categories. This is often a means for investors to lower their costs, and they provide little to no additional advice. I have seen firsthand where an institution's advisor shares were five times that of its investor shares; compared to official financing and valuation data, the institution's actual cost could be reduced by 80%.
· Market Making Allocation: A portion of the token supply will be reserved for market making on centralized exchanges (CEX). This has some positive significance as it can enhance the liquidity of the token; however, when market makers are also investors in the project, conflicts of interest arise — allowing them to use their market-making shares to hedge their locked investments.
· Listing on CEX: To get listed on top CEXs like Binance, project parties often need to pay marketing and listing fees. If investors can assist and ensure the tokens are listed on these exchanges, they may sometimes receive additional business fees (up to 3% of the total supply). Arthur Hayes previously published a detailed article revealing that these fees could be as high as 16% of the total token supply.
· TVL Leasing: Whales or institutions that provide liquidity are often promised exclusive access to higher yields. Ordinary users might be satisfied with a 20% annual yield, while some whales can quietly earn 30% through private transactions with the foundation, with the same contribution. This practice may have some positive significance for maintaining early liquidity, but project parties should disclose these transactions in the token economic model.
· OTC 'Financing': OTC 'financing' is quite common and isn't necessarily a bad thing. However, since the terms are usually not disclosed, these trades often lead to significant opacity. The most notorious among them is the so-called 'KOL round', which is seen as a short-term catalyst for token prices. Some leading Layer 1s (I don't want to name names) have recently adopted this strategy — KOLs can subscribe to tokens at significant discounts (about 50%) and with shorter lock-up periods (six months linear unlocking), and for their interests, they will strive to market xxx as the next xxx (insert any Layer 1 here) killer. If you have questions, you can check out my previous KOL rhetoric translation guide.
· Selling Staking Rewards: Since 2017, many PoS networks have allowed investors to stake locked tokens and receive staking rewards at any time, which has become a way for early investors to profit ahead of time. Celestia and EigenLayer have recently been pointed out for this situation.
0xLouisT also made a diagram; the original text is in English, so I'll translate it. The token distribution that we ordinary investors and community members see may look like this:
But in reality, the true token distribution might look like this:
Why has it come to this? On the surface, it seems to be a case of oversupply, with too much venture capital flowing in during 2021-2022, and then as the market shifts, many tokens are left squeezed in the current cold environment, with the secondary market lacking funds and unwilling to pay for these high FDV projects.
If you can't pay the bill, you can only trade privately. Venture capital and funds want returns, and projects are far from profitable, so they can only resort to underhanded methods.
But in reality, the deeper reason is the pursuit of profit by capital and the problem of centralization. This is commonplace in traditional financial markets, and once rules are established, they can yield huge profits for those who can trample on them.
Isn't this ironic? Since the beginning of Bitcoin, decentralization has been about combating the issues brought by centralized power in a trustless manner.
As a result, all projects are talking about decentralization, but they have been centralized in their operations since inception, preaching high moral standards while engaging in illicit activities behind the scenes. If they can't even achieve fairness, what decentralization can they talk about?
The current situation cannot change the status quo; many people see these problems, but all they can do is call for change, which is useless. The essence of capitalism dictates that capital will seek every possible way to profit, and what the industry needs is likely some form of enforced constraints.
For us investors, since we can't change the environment in the short term, we can only avoid stepping into these pitfalls. For example, choosing projects with high token circulation, opting for more transparent projects, and doing our best to avoid participating in projects that have opaque metrics.
All things considered, the only choices are Bitcoin and Ethereum, which is why I have consistently emphasized that everyone should heavily invest in them.
Additionally, for this reason, I believe blockchain needs AI. Human nature will always be biased, and power will always be monetized.
The future of decentralization is to ensure that the rules established cannot be violated by anyone. This is the most crucial foundation of crypto and also one of the most important reference indicators for our investments.
