The current market cycle has seen a trend of tokens being launched with high fully diluted valuations (FDV) and low initial circulating supplies. These "low float, high FDV" tokens have raised concerns within the crypto community about sustainable returns for public market investors. With a significant volume of tokens scheduled to unlock by 2030, potential sell-side pressure could emerge unless balanced by increased demand.
Traditionally, contributors to protocol networks receive a percentage of the token's fully diluted supply, subject to a vesting schedule. While contributors deserve fair compensation, it is crucial to balance their rewards with the interests of other stakeholders, particularly public market token investors. If vested tokens represent an excessive portion of the token's market capitalization and available liquidity, vesting events could adversely impact the token's price, harming all token holders. Conversely, insufficient compensation may reduce contributors' incentives to participate, ultimately undermining the project's success.
Classic token vesting parameters include the percentage of tokens allocated, cliff periods, vesting duration, and payout frequency. However, these parameters operate solely along the time dimension, limiting the scope of potential solutions. Incorporating new parameters can unlock previously untapped value and lead to more sustainable token economies.
This article proposes integrating liquidity-based or milestone-based dimensions to enhance existing token vesting models.
Understanding Token Vesting
Token vesting is a mechanism designed to align long-term incentives among project contributors, investors, and the broader community. It ensures that tokens are distributed gradually over time rather than all at once, reducing the risk of market manipulation and sudden sell-offs.
Standard vesting structures often include:
- A cliff period during which no tokens are distributed
- A linear or graded vesting schedule after the cliff
- Regular payout intervals, such as monthly or quarterly
While these structures provide basic protection, they may not fully account for market conditions or project development progress. This is where additional dimensions like liquidity and milestones can add significant value.
Liquidity-Adjusted Vesting Schedules
One innovative approach involves implementing vesting schedules that adjust based on market liquidity. This concept introduces a new parameter: liquidity, which expands upon traditional vesting structures. While liquidity measurement isn't an exact science, several methods can help quantify it.
One measure of liquidity is the available bid depth for a token, whether on-chain or on centralized exchanges (CEXs). The cumulative sum of all bid depths creates a nominal figure we can term "bLiquidity" (bid liquidity).
Contributors could have an additional parameter in their vesting terms called "percentage of bLiquidity" or "pbLiquidity," theoretically set between 0 and 1.
When vesting is triggered, the contract could output:
min(typical vesting output, pbLiquidity × bLiquidity × token unit FDV)
Practical Example
Consider a token with a total supply of 100 units, with 12% (12 tokens) allocated to vested contributors at a price of $1 per token. Assume linear vesting over 12 months from the token generation event, no cliff period, and for simplicity, a constant token price. Typically, without adjustments, vesting would allow redemption of 1 token per month.
Now, suppose we assign a 20% pbLiquidity parameter, and the token maintains at least $10 of bLiquidity throughout the 12 months. In the first month, the contract would assess the $10 bLiquidity, multiply it by 20% pbLiquidity, resulting in $2. Given the min function, 1 token would vest normally since 1 token × $1 is less than $2.
If we change the scenario to $2 of bLiquidity, then 20% of $2 equals $0.40. Instead of 1 token worth $1, only 0.4 tokens would be distributed.
Advantages of Liquidity-Based Vesting
Previously, distributions primarily concerned timing, perhaps indirectly considering whether sufficient liquidity existed at a given price to absorb distributions. This new structure explicitly defines that contributors should focus on building their token's liquidity while aligning this objective with tangible incentives.
Unvested token holders (liquid market buyers before unlock dates) can gain confidence knowing that single vesting events won't cause prices to collapse into liquidity-scarce states. While public token holders previously had to trust the goodwill and intentions of token claimants, they now have concrete reasons to feel secure.
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Challenges and Considerations
This approach could lead to volatile compensation for contributors if the token never achieves sufficient liquidity, potentially significantly extending the vesting period.
It complicates the simple payment frequency that contributors are accustomed to.
There's potential incentive to fake bid liquidity. However, several solutions exist to address this concern. For instance, one might consider bLiquidity within a certain percentage of the mid-price, or require liquidity provider (LP) positions to have time-lock elements.
Another consideration: contributors might claim tokens from vesting but not immediately sell them, accumulating large balances. Subsequently, they might sell all tokens at once, potentially significantly impacting liquidity and causing token price decline. However, this scenario resembles someone gradually acquiring a large position of liquid tokens. The risk of large, concentrated liquid token holders selling and causing price decline always exists.
Obtaining bLiquidity data from decentralized exchanges in a trust-minimized way is much easier than from CEXs, where order book data is published by the exchanges themselves.
Before implementing milestone-based dimensions, how can projects ensure sufficient liquidity to support reasonable vesting schedules? One idea involves rewarding locked LP positions through incentives. Another approach involves attracting liquidity providers. As discussed in "10 Things to Consider When Preparing for Token Generation Events," attracting liquidity providers can help create stable markets by borrowing tokens from project treasuries and pairing them with stablecoins on exchanges.
Milestone-Based Allocation
Another dimension that could improve token vesting schedules involves milestone achievements. Milestones such as user numbers, trading volume, protocol revenue, total value locked (TVL), and similar metrics capture a protocol's overall attractiveness through quantifiable data.
Protocols could set binary thresholds or gradients for these parameters that would incorporate into vesting schedules. For example, a protocol might require maintaining over $100 million TVL, more than 100 daily active users, or over $10 million in average daily trading volume for the past 90 days. If these targets aren't met, distributions could either pause entirely (binary approach) or reduce proportionally relative to initial threshold targets (gradient approach). Between binary and gradient approaches, gradient seems more reasonable.
Benefits of Milestone-Based Vesting
This milestone approach ensures the protocol maintains certain attractiveness and liquidity when vesting occurs, fostering healthier protocol development over time.
Milestones place less emphasis solely on time, focusing instead on substantive achievements.
Challenges and Limitations
Certain statistics like active users and trading volume can be manipulated. TVL metrics are less gameable but arguably less important, especially for capital-efficient protocols. Revenue is also harder to manipulate, though certain activities like wash trading could translate to more fees and thus more revenue, making it still gameable long-term.
When assessing manipulation potential, it's important to note the incentives at play. Teams and investors (anyone participating in vesting schedules) are incentivized to game statistics. Public market buyers are less likely to manipulate statistics since they lack incentives to accelerate vesting. Additionally, strongly worded token warrant provisions in off-chain legal agreements can significantly reduce malicious behavior by incentivized parties. For example, if team members or investors are found wash trading or inflating user activity, they might forfeit their tokens, creating severe penalties for rule violations.
Implementing Enhanced Vesting Structures
When considering these advanced vesting mechanisms, projects should carefully evaluate several implementation factors:
Technical Considerations: Smart contract complexity increases with liquidity-based and milestone-based vesting. Audits and security measures become even more critical.
Legal Frameworks: Legal documentation must clearly outline the conditions and parameters for these non-traditional vesting structures to avoid disputes.
Communication Strategy: All stakeholders need clear explanations about how these innovative vesting mechanisms work and what they mean for token distribution.
Parameter Selection: Choosing appropriate thresholds for liquidity percentages or milestone metrics requires careful analysis of market conditions and project specifics.
Gradual Implementation: Projects might consider phasing in these advanced features rather than implementing them all at once.
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Frequently Asked Questions
What is token vesting?
Token vesting is a mechanism that gradually releases tokens to recipients over time according to a predetermined schedule. This approach aligns incentives between project contributors and long-term stakeholders by preventing immediate dumping of tokens upon distribution.
How does liquidity-based vesting work?
Liquidity-based vesting adjusts token distribution amounts based on market liquidity conditions. When liquidity is high, more tokens can be distributed without significantly impacting price. When liquidity is low, distributions are reduced to prevent market disruption.
What are the benefits of milestone-based vesting?
Milestone-based vesting ties token distributions to specific project achievements rather than just time passage. This ensures that tokens are released as the project demonstrates real progress and adoption, creating better alignment between contributions and rewards.
Can these advanced vesting mechanisms be combined?
Yes, projects can implement both liquidity-based and milestone-based parameters in their vesting schedules. This creates a multi-dimensional approach that addresses both market conditions and project development progress.
How do these vesting structures affect token price stability?
By aligning distributions with market liquidity and project milestones, these advanced vesting mechanisms can significantly improve token price stability. They prevent large distributions during unfavorable market conditions and ensure that selling pressure is balanced with genuine project progress.
Are there any legal concerns with innovative vesting structures?
While innovative vesting structures offer many benefits, they may introduce additional legal complexity. Projects should work with legal experts experienced in cryptocurrency regulations to ensure their vesting arrangements comply with applicable laws and are properly documented.
Conclusion
The current market trend of high valuations and low initial circulating supplies has raised legitimate concerns about sustainable returns for public market investors. Traditional time-based vesting schedules may not fully address the complexities of token liquidity and market conditions. By integrating liquidity-based and milestone-based dimensions into vesting plans, projects can better align incentives, ensure adequate market depth, and foster genuine protocol attractiveness.
Although these approaches introduce new challenges, the benefits of more robust vesting mechanisms are significant. With careful safeguards and precautions, these enhanced vesting models can boost market confidence and create a more sustainable ecosystem for all stakeholders. The evolution of token distribution mechanisms represents an important step toward maturing cryptocurrency markets and aligning the interests of all participants in the ecosystem.