VC Perspective: How to solve the chronic poison of 'high FDV, low circulation'?

Current status of token lock-up design

In the current market cycle, the "high FDV, low circulation" token issuance method has gradually become a mainstream trend, which has triggered investors' concerns about market sustainability. Concerns about investment potential. It is expected that a large number of tokens will be gradually unlocked in the cryptocurrency market by 2030, and unless the demand is significantly increased, the market will surely withstand these potential selling pressures.

As far as historical practice is concerned, network/protocol contributors (including teams and early investors) usually receive a certain proportion of tokens in return, and these tokens will be locked according to a specific time limit structure. As the main development force in the early stages of the network/protocol, contributors should indeed receive appropriate compensation, but at the same time, attention should be paid to balancing the interests of other stakeholders, especially the interests of token investors in the open market after TGE.

The proportional design here is crucial. If the proportion of locked tokens is too large, which affects the available liquidity of the tokens, this will have an adverse impact on the price of the tokens, thereby harming the interests of all holders; conversely, if contributors cannot Without proper compensation, they may lose the incentive to continue building, which will ultimately harm the interests of all holders.

The classic parameters of token lock-up include: allocation ratio, lock-up time, unlocking duration and delivery frequency. All these parameters only play a role in the time dimension. Considering the current situation, only using the above classic parameters limits our imagination of solutions, so we need to add some new parameters to explore some new possibilities.

In the following, I propose to add dimensions based on “liquidity” and/or “milestones” to improve the most common token staking models currently on the market.

Lock-up mechanism based on "liquidity"

The definition of liquidity is not absolute. There are many ways to quantify liquidity in different dimensions.

One possible measure of liquidity is to check the depth of buy orders for a token on-chain and on centralized exchanges (CEX). By calculating the cumulative sum of all buy order depths, we can get a number, which we can call bLiquidity here.

When designing the lock-up clause, the project party can introduce two new parameters such as bLiquidity and p bLiquidity (that is, the percentage of buyer’s liquidity, which can theoretically be any value between zero and one). At the contract level, the The output is:

min ( to kens to be claimed under normal vesting output , p bLiquidity bLiquidity to ken unit FDV )

Next, we will use an example to explain in detail how the liquidity-based hedging mechanism works.

Suppose the total supply of a certain token is 100, of which 12% (12 tokens) will be distributed to contributors with lock-in requirements, and the price of each token is $1 (to simplify the calculation, assume that the token The price remains unchanged).

If a time-based lock-up method is adopted, it is assumed that these tokens will be released linearly within 12 months after TGE, which means that contributors can unlock 1 token per month, which is 1 US dollar.

If additional liquidity-based lock-up terms are added, assume that the p bLiquidity value set in the lock-up terms is 20% and bLiquidity is $10 (that is, the token has at least $10 buy-side liquidity). In the first month of locking, the contract will automatically look at the bLiquidity number of $10, multiply it by the p bLiquidity number of 20%, and the result will be $2.

According to the min function provided above (classic mechanism and additional mechanism, take the minimum value in both cases), the contract will automatically release 1 token at this time, because the release value (1 USD) according to the classic mechanism at this time is Less than the release value according to the additional mechanism ($2). However, if we change the bLiquidity parameter above to $2, then the contract will automatically release 0.4 tokens at this time, because the release value according to the classic mechanism ($1) is greater than the release value according to the additional mechanism (20 % * $2 = $0.4).

This is a potential way to dynamically adjust the lock-up structure based on liquidity.

Advantages

The mainstream lock-up models in the current market basically only focus on the time dimension, and may also indirectly focus on whether there is enough liquidity to digest the unlocking at a specific price. The liquidity-based staking model requires project parties to actively focus on building liquidity around their tokens and combine it with certain specific incentives.

For investors in the open market, they will also receive a stronger confidence transmission - only when there is sufficient liquidity, the predetermined token quota will be unlocked, otherwise only the tokens that meet the liquidity will be unlocked Part of the quota of the current situation is to prevent the token price from plummeting due to the inability of liquidity to bear new selling pressure.

Potential Challenges

If the token never receives sufficient liquidity support, this may cause the cycle for contributors to receive rewards (unlocking) to be greatly lengthened.

Additional rules may complicate the calculation of token unlock frequency and period.

May incentivize false buy-side liquidity. However, this can be circumvented in a number of ways, such as considering only selecting a certain percentage of bLiquidity around the current price, or only considering LP positions with certain hedging restrictions.

Contributors can continue to obtain tokens from the unlocked contract but not sell them immediately, and gradually accumulate a large amount. Later, they can sell all tokens at once, which may have a significant impact on liquidity and lead to token prices. fell. However, this situation is similar to a whale actively accumulating a large number of tokens in a liquid state. The risk of the whale clearing its positions and causing the price to fall is always present in the market.

Compared with obtaining the bLiquidity value in DEX, it is more difficult to obtain this value in CEX.

Before continuing to discuss the milestone-based lock-up model, the project team should consider how to ensure that it attracts sufficient liquidity to ensure "normal" unlocking progress. One potential idea is to reward locked LP positions through incentives, and another idea is to find ways to attract more liquidity providers - such as what we wrote in "10 Things to Consider Before TGE", You can attract more participation by allowing liquidity providers to borrow tokens from the project inventory to create a more stable market around your token.

Lock-up mechanism based on "milestones"

Another additional dimension that may improve the token lock-up model is "milestones", such as the number of users, transaction volume, protocol revenue, total lock-up value (TVL) and other data parameters, These quantifiable values ​​can be used to evaluate the attractiveness of the agreement.

Similar to the previous staking design based on liquidity, the protocol can also design a binary token staking clause by introducing additional parameters for each milestone.

For example, if you want to achieve 100% "normal" unlocking, the protocol must reach a TVL of 100 million US dollars, 100+ daily active users, an average daily transaction volume of over 10 million US dollars, etc. If these values ​​are not met, the final amount of tokens unlocked will be lower than the original target.

Advantages

The above is the detailed content of VC Perspective: How to solve the chronic poison of 'high FDV, low circulation'?. For more information, please follow other related articles on the PHP Chinese website!