The Token Economy Unlocked on Time: The Elephant in the Crypto Industry’s Room

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We revere Bitcoin because it has saved the world economy from the depths of hyperinflation caused by fiat currency. Little did we know that in Web3, we are still shooting ourselves in the foot: by unlocking tokens on a time-based schedule, we are causing excessive token issuance.

"Low Liquidity, High FDV": A Surface-Level Problem

Since the report published by the Block Research in May 2024 brought the "low liquidity, high FDV" issue to the forefront of industry discussions, the debate on this problem has remained at a superficial level. The core of the real problem has not been addressed, nor has anyone questioned the fundamental cause of its existence.

The questions we should really be asking are:

1. Why does the gap between market capitalization and FDV exist?

2. Why does "low liquidity, high FDV" lead to problems?

Market Cap vs. FDV: A Unique Challenge in the Crypto Industry

Why does the "low liquidity, high FDV" problem not exist in traditional finance (TradFi)? Because this problem is unique to the crypto industry.

In traditional finance, market capitalization is calculated based on all outstanding circulating shares, including shares locked up for 6 to 12 months after an IPO. Dilutive factors (such as options and restricted stock units) are negligible, so the gap between FDV (fully diluted valuation) and market capitalization is small. When new shares are issued, it is usually done through financing or stock splits, and these issuances are immediately reflected in the stock price.

In the crypto industry, however, most projects have inherited the token economics legacy of Satoshi Nakamoto: limited total supply and relatively low initial circulating supply. This has led to a fundamental difference between "crypto FDV" and "traditional finance FDV": the latter only considers the weak dilution of circulating shares when derivatives are converted into shares, while the former includes all tokens that may be issued in the future into the system.

If the concept of "crypto FDV" were applied to traditional finance, it would encompass all the shares that may be issued in the future - although this is theoretically calculable (as companies have so-called "authorized share ceilings"), the limit can be easily raised by shareholder resolutions, so this number is essentially infinite.

Now, when making comparisons in this fair manner, many people (at least I do) will start to question the reasonableness of the crypto industry's FDV definition: basing a company/project's valuation on the current spot price and its potentially issuable shares/tokens in the future - is this really reasonable? The answer is clearly no. If tokens could be issued infinitely like the U.S. Treasury printing money, a company/project's valuation would become infinite.

So why do we adopt such an absurd FDV metric in the crypto industry? The answer lies in the fact that it may be needed as a benchmark for financing before the TGE (token generation event) - but it's a different story after the TGE. Before the TGE, VCs will invest in a certain proportion of tokens, and this is usually calculated based on a certain total supply. Once the tokens are listed, FDV becomes irrelevant, and market capitalization is the only meaningful metric. This is why no one talks about the FDV of Bitcoin or Ethereum - only their market capitalization matters. (Note: Ethereum has no cap on total supply, just like how companies in traditional finance can issue shares infinitely, so its FDV cannot be calculated regardless.)

So, if in the "low liquidity, high FDV" dilemma, FDV is actually irrelevant (or more like a "scapegoat"), who is the real culprit?

Time-Based Unlocking: The Real Culprit

While most projects have imitated Bitcoin's limited total supply and low initial circulating supply, they have failed to grasp the essence of its token economics: releasing tokens driven by demand, not on a time-based schedule.

The block issuance of Bitcoin is often misunderstood as being purely time-based (thanks to the well-known "four-year halving cycle"), but it is actually demand-driven. The key mechanisms are:

1. The release rate of BTC (block rewards) is tied to the number of blocks mined;

2. If the rewards (essentially the BTC price) are not enough to incentivize miners, new BTC will not be mined;

3. The price of BTC is ultimately driven by market demand, as its supply mechanism is hard-coded.

This demand-driven release aligns with basic economic principles: new currency or tokens are only issued when the system needs them. In stark contrast, most crypto projects (especially those that have raised funds) follow time-based release/unlocking - this is the real reason behind the "low liquidity, high FDV" problem.

The most obvious flaw of time-based token release is the mismatch between supply and demand. Supply is strictly written into smart contracts, while demand fluctuates unpredictably. Projects usually publish seemingly reasonable roadmaps to justify the rationality of their release plans, but these plans rarely go as expected. The result is that token issuance is to meet demand increments that do not exist at all - or even declining demand (the peak of demand is often before the TGE in the form of airdrops). The consequence is that token prices constantly decline as unlocking occurs.

But there is an even deeper problem hidden: conflicts of interest. Most projects have different unlocking schedules for the team, VCs, community, and treasury. While this seems to prioritize certain "vulnerable groups" (such as the community) by unlocking their tokens first, it leads to conflicts of interest - reflecting an extremely poor mechanism design. Typical scenarios are:

1. Before unlocking, the community/retail investors expect the issued tokens to create selling pressure, so they exit early;

2. The project team expects the unlocking, so they artificially boost the token price through market making and positive news to attract retail investors to buy in;

3. After unlocking, the project team has to compete with VCs to exit, and both often coordinate through market makers to offload their holdings.

This conflict of interest places the project team and VCs in opposition to the community, eroding trust and leading to the poor post-TGE performance of many VC-backed tokens.

Demand-Driven Token Release: The Only Viable Solution

For projects that will have issuances or unlocks, the only solution that aligns with economic principles is release based on demand - this is especially applicable to VC-backed tokens with unlock mechanisms (but not for 100% circulating meme tokens).

The two core advantages of demand-driven release directly address the fundamental flaws of time-based release:

1. Supply-Demand Balance: New tokens are only released when there is additional demand (e.g., token consumption), avoiding planned inflation;

2. Aligned Interests: Unlocking is only triggered when the community/market generates additional demand for the tokens (e.g., protocol interactions), ensuring the team, VCs, and community are on the same boat. 'BlockBeats' must be translated into 'BlockBeats'. 'Block' must be translated into 'Block'. 'BNB' must be translated into 'BNB'. 'TRON' must be translated into 'TRON'. 'BTC' must be translated into 'BTC'. 'FIL' must be translated into 'FIL'. 'HT' must be translated into 'HT'. 'AR' must be translated into 'AR'. 'CKB' must be translated into 'CKB'. 'DFI' must be translated into 'DFI'. 'RON' must be translated into 'RON'. 'ONG' must be translated into 'ONG'.

However, this also introduces a new risk: the uncertainty of the project party and VC unlocking cycle. If the community stops participating in interaction/usage, the demand for tokens will disappear, and no new tokens will be released/unlocked. But shouldn't this risk be borne by the project party and VC? If there were no such risk, the Web3 industry would forever be a zero-sum game between the conspirators and the community - or perhaps even worse, a financial scam. In the next article, I will delve into how to design a fair on-demand token release model. Welcome to join the official community of BlockBeats: Telegram subscription group: https://t.me/theblockbeats Telegram discussion group: https://t.me/BlockBeats_App Twitter official account: https://twitter.com/BlockBeatsAsia

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Disclaimer: The content above is only the author's opinion which does not represent any position of Followin, and is not intended as, and shall not be understood or construed as, investment advice from Followin.
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