Written by: brian flynn
Compiled by: AididiaoJP, Foresight News
Original title: Can linking equity to tokens save cryptocurrencies?
For the past five years, I have been trying to address the "incentive inconsistency" problem in the cryptocurrency space.
Most tokens are designed to create competition among their holders.
This is the complete opposite of what they were supposed to achieve. Tokens were meant to unite the team, investors, and users around a common goal. The idea that everyone wants the project to succeed is correct if everyone holds the same asset. The problem is that the token model we built allows people to make money by "selling," not by "holding." This one design choice messed everything up.
This article is not intended to promote any particular project I'm currently working on. Rather, it addresses what I believe are core issues the entire industry needs to resolve, and areas we should advocate for with regulatory bodies.
For eight years, we've been watching the same script: project launch, market hype, insider unlocking, dumping and running away, retail investors trapped. This pattern is so familiar that we almost don't see it as a problem—as if this is how tokens are naturally supposed to work. But I think we haven't been honest about the root of the problem. And I haven't seen anyone pushing for a truly better token model—a model we can point to and say, "This is what we should be doing."
We are now facing an unprecedented regulatory window. But the problem is that we haven't even figured out what a "good token" should look like before we're about to enter this window.
Early start game
When you make money by selling cryptocurrency, every other holder is your competitor.
The team launched a coin, attracting early investors. The team themselves also acquired a large stake, but it will be unlocked gradually. Users buy in the market, and on the surface, everyone's interests seem aligned. In reality, everyone is watching each other closely, figuring out when to sell. Investors are eyeing the first large unlock, the team is eyeing the opportunity to cash out, and users are watching to get out before the insiders. This isn't alignment of interests; it's a race to the top.
Lock-up and unlocking mechanisms don't solve this problem. They only determine who can get out first—and the answer is always insiders outrun retail investors. The "ultimate game" for everyone is no longer "how to grow this project," but rather "when should I sell?"
Even the "clever" methods didn't work.
What about buybacks? Burns? Staking rewards? These are all attempts to solve the problem, but they all have the same flaw: they're too convoluted. Buybacks and burns can push up the price—but you still have to sell your coins to make money. Staking rewards are even worse, using new coins as rewards to distribute to holders, which dilutes the price and creates new selling pressure. This isn't a return at all; it's just a treadmill disguised as a return.
If your token model requires holders to sell their tokens to earn money, then you haven't aligned any incentives at all—you've just built a game of musical chairs.
Industry progress
Indeed, there are signs that the industry is finding the right direction. Projects like Aave, Morpho, and Uniswap are pushing to unite equity holders and token holders, bringing insiders and the community to the same table and eliminating antagonism—this direction is truly important.
But this still doesn't solve the "early bird" problem. Everyone is still playing the same game: making money by selling tokens. Partial fee switching and revenue sharing through governance are steps forward, but they're still just scratching the surface. To truly solve the early bird problem, we need to go all the way.
Effective Model
Imagine this scenario: 100% of the protocol's revenue is used entirely by token holders. It's not decided by the team or behind the scenes. Everyone votes to decide: how much goes directly to holders, how much is used for further development, and how much is put into reserves. This is how publicly traded companies operate—shareholders vote on whether to distribute dividends or reinvest; the cryptocurrency version is simply more direct and transparent.
There's no lock-up period because everyone no longer has to play the "first to run" game. You don't make money by selling coins; you make money by holding them. As long as the protocol generates revenue daily, you'll receive a share of what everyone voted to contribute. If you sell, dividends stop. If you hold, dividends continue. The math is simple, and the strategy is clear: find ways to help the protocol make more money.
For example, suppose a protocol earns $1 million a year. Holders vote to distribute 70% and reinvest 30% in development. There are a total of 1 million tokens. Each token would earn $0.70 a year, and because of the development funding, the protocol can continue to grow. You don't need to worry about when to buy or sell, or how to outmaneuver other holders. You just hold on and you'll keep earning.
The direction of competition is finally right: it's your protocol competing with other protocols for users and revenue, instead of the holders scheming against each other and trying to get ahead.
When everyone can profit from holding the project, the motivation shifts from "running away" to "holding it and speaking up for the project." Such projects will ultimately resemble traditional businesses more than venture-style gambles. They value dividends over hype; revenue over boasting. This may be precisely what cryptocurrencies need most right now.
Why didn't anyone do this sooner?
There are two reasons, and both of these reasons are slowly changing.
The first reason is that playing the "insider game" used to be a faster way to make money. If you could achieve 10x returns by speculating and dumping on retail investors, who would bother to put in the effort to run a truly profitable business? But that era is coming to an end. Retail investors have become smarter; on-chain data allows them to see insiders' every move. The teams that are still working diligently are the ones who truly want to stay.
The second reason is the issue of securities law. A token that distributes revenue to holders looks very much like a security according to the Howey Test. Because of this, all legitimate teams in the industry have been afraid for years. Even if the founders know that revenue sharing is a better model, they simply don't dare to start the idea if there is any possibility of it being classified as an "unregistered security."
That's why you see so many protocols going around in circles, using indirect methods like burning and buybacks. It's not because they're better, but because this allows them to bypass direct dividends and find a reason to justify themselves: "Look, we're not directly distributing money." You could say that the current state of token design is largely driven by legal fears, with only a small part being technical considerations.
Another practical challenge is the lack of support from previous infrastructure. Achieving large-scale, trusted, programmatic revenue distribution on-chain requires cheap transactions, reliable smart contracts, and robust infrastructure. Five years ago on the Ethereum mainnet, transaction fees alone could exceed the revenue of most protocols. It's only now, with layer 2 networks and modern infrastructure, that's feasible.
Why is it possible now?
The past year has seen more changes in the regulatory environment than the previous eight years combined. In January 2025, the U.S. Securities and Exchange Commission (SEC) established a dedicated cryptocurrency working group, led by Commissioner Hester Peirce, with a clearly stated mission: "to define clear regulatory boundaries and provide viable registration pathways." Peirce himself proposed a token "safe harbor" scheme, allowing projects a development buffer period before final classification. The SEC and the Commodity Futures Trading Commission (CFTC) also jointly issued a statement saying they would coordinate the regulation of digital assets. These are not empty words; concrete rule-making is underway.
But this window of opportunity waits for no one. This year is the midterm election, and the current relatively open political atmosphere may not last until the next election cycle. If we just wait, the window may close before we have anything worth supporting. Even more dangerous is if the industry hasn't come up with a reliable alternative and another wave of token collapses occurs, then those collapses will help regulators set a template—leaving us with no say.
This is why it's so important to discuss this now. It's not about reacting passively or patching things up afterward, but about taking proactive measures. If we don't tell regulators what a "good token" should look like, they'll use bad examples as templates. Those projects that prey on investors and employ pump-and-dump schemes will become the regulatory "benchmark," while genuinely compliant revenue-sharing models will be unfairly penalized.
The actions of projects like Aave, Morpho, and Uniswap—merging equity and token holders—demonstrate that the industry genuinely wants to move in a direction with real economic value. Regulation should support this direction, not the other way around. But the prerequisite is that we must clearly explain our reasoning and articulate it publicly before the window closes.
Questions every founder should ask
If you are designing a token right now, ask yourself this question: Will your holders make money by selling the token or by holding it?
If the answer is "sell coins," then you've simply created a game of musical chairs. Some people will get a chair, but most won't. And those who won't will remember it forever.
If the answer is "hold," then you've created something where everyone can make money by growing the pie. That's the "alignment of interests" that tokens should have.
This is certainly not a simple issue. Revenue-sharing models do involve complex issues such as token characterization, distribution mechanisms, and governance methods. But it is at least a better starting point, much stronger than our current system.
The regulatory window is open, but it won't stay open forever. The midterm elections will change the landscape. The next major token collapse might close the door before revenue-sharing models even have a chance to be treated fairly. If we want better rules, we need to tell regulators what "better" looks like now—not in the next cycle.
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