Hack VC Partner: The project applies better liquidity management and task incentives to solve the problem of large-scale unlocking of tokens

Current Status of Token Distribution

One trend in the current market cycle is token issuance with high valuations and low initial circulating supply (i.e. “low circulating/high fully diluted valuation (FDV) tokens”), which This sparked concerns in the crypto community about sustainable gains for public market investors. A large number of tokens are expected to be unlocked by 2030, which could bring potential selling pressure unless demand increases.

Historically, contributors to a protocol network typically receive a percentage of the fully diluted supply of tokens, which are distributed according to a certain term structure. Contributors should be compensated appropriately while balancing the interests of other stakeholders, especially public market token investors. This is critical because if allocated tokens represent a disproportionately high proportion of the token’s market capitalization and available liquidity, a distribution event could adversely affect the token price to the detriment of all token holders. On the other hand, if contributors are not adequately compensated, they will no longer have the incentive to continue working on the project, which will ultimately harm the interests of all holders.

Classic token distribution parameters include: percentage of distributed tokens, cliff period, distribution duration and payment frequency. All these parameters operate only in the time dimension. However, using only the typical parameters described above 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 the most common token distribution models we have today.

Liquidity

Consider adjusting the liquidity token distribution plan. This idea extends 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 a token’s buy-side depth both on-chain and on centralized exchanges (CEX). The cumulative sum of all buy-side depths has a nominal value, which we can call “ bLiquidity ” (buy-side liquidity).

Contributors can add an additional parameter to their allocation terms, namely "bLiquidity percentage" or "pbLiquidity", which can theoretically be between 0 and 1.

When a distribution request is initiated, the contract can output: min (tokens to be received under normal distribution output, p bLiquidity bLiquidity token unit FDV).

Here’s an example to illustrate this: Let’s say a token has a total supply of 100 tokens, 12% (12 tokens) are allocated to contributors in the allocation, and the token price is $1 each. Assume a linear distribution over 12 months from the token generation event, with no cliff periods, and for simplicity, the token price remains constant. Typically, the allocation will allow for the redemption of 1 token per month, without regard to other factors. Now, let's say the allocation is allocated 20% of p bLiquidity and the token has at least $10 of bLiquidity in 12 months. In the first month of the allocation, the contract will look at a bLiquidity value of $10, multiplied by a p bLiquidity value of 20%, giving us $2. According to the above function, 1 token will be distributed in the normal way, because 1 token * 1 USD is less than 2 USD. However, if the above value is changed to $2 of bLiquidity, then 20% of $2 is $0.40, so instead of 1 token allocation worth $1, there is an allocation of 4/10 tokens. This is the allocation of liquidity adjustments.

Advantages

• Previously, allocation requests only cared about time, and perhaps only indirectly whether there was enough liquidity to absorb the allocation at a given price. This structure clearly states that contributors should focus on building liquidity for their tokens and combines this goal with specific incentives.
• Token holders who are not in the allocation (i.e. liquid market buyers before the unlock date) can rest assured that a single allocation request will not cause the price to plummet amid thin liquidity. Previously, public token holders could only trust the integrity and intentions of those who claimed their tokens. With this improvement, they now have a clear reason to feel reassured.

Disadvantages/Challenges

• If the token never achieves sufficient liquidity, this may cause payouts to contributors to fluctuate and may ultimately extend the distribution period significantly.
• This complicates the simple payment frequency that contributors are used to.
• This may incentivize fake buyer liquidity. However, there are many ways to deal with this problem. For example, one could consider bLiquidity within a certain mid-price percentage range, or an LP position with some time-locked 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.
• Obtaining bLiquidity values ​​in a trust-minimized manner is easier in a decentralized exchange than in CEX, whose order book data is published by CEX itself.

Before discussing milestone-based dimensions, how does a project ensure there is sufficient liquidity to support a reasonable distribution plan? One idea is to reward tokens for locked LP positions as incentives. Another is attracting liquidity providers. As we wrote in 10 Things to Consider When Preparing for a Token Generation Event (TGE) , attracting liquidity providers can be done by borrowing tokens from the project’s pool and pairing them with stablecoins on exchanges Pairing to help create a stable market.

Milestone-Based Distribution

Another dimension that can improve the token distribution plan is milestone-based. Milestones, such as data points 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, the protocol can set binary thresholds or gradients for the above parameters, which will be factored into the allocation plan. For example, a protocol must have over $100 million in TVL, over 100 daily active users, and/or over $10 million in 90-day average daily trading volume to receive 100% of the associated allocation in normal times. If these requirements are not met, the allocation amount is either stopped completely (binary approach) or is reduced proportionally relative to the initial threshold target (gradient approach). Between binary and gradient, gradient seems to make more sense.

Advantages

• This milestone-based approach ensures that the protocol has a certain level of traction and liquidity when allocations occur, resulting in a healthier protocol over time.
• A milestone-based approach puts less emphasis on time.

Disadvantages/Challenges

• Certain statistics such as active users and transaction volume may be manipulated. The TVL metric is less susceptible to manipulation, but may be less important for more capital efficient protocols. Revenues are also more difficult to manipulate, but certain activities like wash trading can translate into more fees and revenue, so can still be manipulated from a pass-through perspective.
• 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.

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.

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