The dominant model of token distribution in the crypto space these days is the so-called “low-float, high FDV” launch. In this model, projects launch with a low fraction of the total supply in circulation, where most of the supply is locked, typically unlocking gradually after a year. This low circulation is often coupled with, and perhaps even explicitly designed to encourage, a high fully-diluted valuation. According to research by CoinGecko, today nearly a quarter of the industry’s top tokens are low float. Notable recent launches which used this model include Starknet, Aptos, Arbitrum, Optimism, Celestia, and Worldcoin (where an astonishing 95.7% of supply remains locked as of this writing).
This model is fundamentally broken. Restricting the movement of tokens distorts the market signal and misleads both actual and potential network participants who rely on that signal to make decisions. “Low-float, high FDV” results in a world where most of the upside potential of new launches is captured by private investors and little is available to the public markets at all. Ultimately, this pattern of launching tokens inflates short-term metrics at the cost of long-term sustainability and the public trust.
What we call “vesting” in crypto has little resemblance to the actual functionality of vesting mechanisms in the traditional finance world, where vesting is used to align incentives and ensure stakeholder obligations are met. In particular, vesting in traditional corporations (e.g. RSUs) comes with specific performance expectations and the ability to revoke further ownership stake if those expectations are not met. Vesting lockups in crypto networks have no such mechanism – rather, tokens are simply locked up for a fixed period of time, and unlocked after.
These kinds of lockups – which don’t deserve the name “vesting” at all – typically distort the market signal by giving the false impression of much higher demand than there actually is. If we understand price signals as the clearing point between supply and demand for an asset, the value of those signals to the market depends on the supply and demand sides having freedom to express their preferences (e.g. sell if they want to sell, and buy if they want to buy). Lockups prevent one side of the market from expressing their preferences, and thus degrade the signal quality. This may provide some temporary benefit in market cap ranking or other metrics, but it makes the overall market quality worse because the price signals carry less information.
Worse, in practice, these lockups just screw the public. Token holders who join a project after launch are disadvantaged by gradual unlocks that present them with an inaccurate price signal which doesn’t reflect actual market sentiment. Sophisticated holders of locked tokens with access to non-public markets and information have an unfair advantage and often sell locked tokens off-market anyways. To get a sense of the true market signal, you have to analyze exactly who might want to sell but is unable to and speculate on what deals are taking place in back rooms. This analysis is too complex and time-intensive for most public market participants to do.
Lockups don’t prevent people from selling, they merely delay the inevitable. Vesting terms eventually expire, and those who want to sell eventually do so, putting continual downward pressure on the market and often leading to an artificial ‘slow bleed’ in market capitalization. Personally, I would be hesitant to hold an asset or participate in a network where many holders of that asset might want to exit, but are unable to. It’s also a problem for participants like validators, who require accurate price signals to sustainably predict income and operational costs.
If one goal of the crypto space is to produce meaningful products that provide real, long-term value, practices designed to artificially inflate short-term metrics will not help get us there. To accurately evaluate the potential of any particular project, you need the ability to evaluate whether people are actually committed to that project. You can’t do that if you don’t know whether people hold tokens because they truly believe in the project or because they’re prohibited from selling.
Criticism of the low-float, FDV orthodoxy has been accompanied by calls for new, ‘fair launch’ approaches to token distribution. However, many of these proposals merely call for a higher percentage of circulating supply at launch and do not call into question the legitimacy of “vesting” lockups per se.
This doesn’t go far enough. Any form of artificial manipulation of market signals is still artificial manipulation of market signals. We need to break crypto’s vesting Overton window with a variety of new experiments.
This approach, which we’ve been calling the “free-market launch,” has the great advantage that it allows everyone to freely express their preferences. If you want to sell, you can sell. If you want to buy, you can buy. Best of all, you’ll be able to do so with the confidence that the price signal is meaningful, because everyone is able to express their preferences here and now, transparently and in real-time.
The long-term benefits of creating a sustainable community of stakeholders who truly believe in the project outweigh the short-term risks of providing an early exit opportunity for those who don’t. We need projects that provide real utility to the world and have real staying power, and it’s become clear that the current vesting orthodoxy is not delivering enough (or really any) of them.
The free-market approach has typically been limited to meme coins, contributing to the perception that it’s unsuitable for “serious” projects. However, it’s reasonable to argue that part of meme coins’ overwhelming success, aside from their memetic appeal, is due to the market recognizing that, over the long run, this model is more beneficial for token holders and often creates more vibrant, organic communities.
We should be trying new things, even if they are risky, and I hope that the free-market launch will open discussion on new ways forward. Groupthink – doing the same things everyone else does not because we have some specific idea of why we’re doing them, but because everyone else did them and they seemed to kind of work according to short-sighted metrics – is pernicious in crypto today. Following the herd may be a reasonable approach if you plan to launch a project and go away in a year or two, but it’s not a good strategy if you want to bring real value to the world. It’s time for new experiments.
Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.
