VC Perspective: How to解“High FDV, Low Circulation”的慢毒？

Written by: Ro Patel, Partner at Hack VC

Compiled by: Azuma, Odaily Planet Daily

Current Design Status of Token Lockup

In the current market cycle, the token issuance method of "high FDV, low circulation" has gradually become a mainstream trend, raising concerns among investors about the sustainable investment potential of the market. It is expected that by 2030, a large number of tokens in the cryptocurrency market will gradually unlock, and unless demand sees significant growth, the market will inevitably bear the potential selling pressure.

Historically, contributors to networks/protocols (including teams and early investors) typically receive a certain proportion of tokens as compensation, which are locked according to a specific time structure. As the primary development force in the early stages of the network/protocol, contributors should indeed receive appropriate compensation, but they should also be mindful of balancing the interests of other stakeholders, especially those of token investors in the public market after the TGE.

The design of these proportions is crucial. If the proportion of locked tokens is too large, affecting the available liquidity of the tokens, it will have an adverse impact on the token's price, thereby harming the interests of all holders; conversely, if contributors do not receive appropriate compensation, they may lose the motivation to continue building, ultimately harming the interests of all holders as well.

Classic parameters for token lockup include: allocation ratio, lockup duration, unlocking duration, and delivery frequency, all of which only function in the time dimension. Given the current situation, relying solely on these classic parameters limits our imaginative space for solutions, thus necessitating the addition of new parameters to explore new possibilities.

In the following sections, I suggest adding dimensions based on "liquidity" and/or "milestones" to improve the most common token lockup models in the current market.

Liquidity-Based Lockup Mechanism

The definition of liquidity is not absolute, and there are many ways to quantify liquidity across different dimensions.

One feasible standard for measuring liquidity is to check the buy order depth of tokens on-chain and on centralized exchanges (CEX). By calculating the cumulative total of all buy order depths, we can arrive at a number, which we can call bLiquidity (buy-side liquidity).

When designing lockup terms, the project team can introduce two new parameters: bLiquidity and p bLiquidity (the percentage of buy-side liquidity, theoretically any value between zero and one), which can be expressed at the contract level as:

min (tokens to be claimed under normal vesting output, p bLiquidity * bLiquidity * token unit FDV)

Next, we will explain how the liquidity-based lockup mechanism operates through an example.

Assume a token has a total supply of 100, of which 12% (12 tokens) will be allocated to contributors with lockup requirements, with each token priced at $1 (for simplification, we assume the token price remains constant).

If a time-based lockup method is used, suppose this portion of tokens will be released linearly over 12 months after the TGE, meaning contributors can unlock 1 token per month, or $1.

If additional liquidity-based lockup terms are added, suppose the p bLiquidity value set in this lockup is 20%, and bLiquidity is $10 (meaning there is at least $10 of buy-side liquidity for the token over 12 months). In the first month of the lockup, the contract will automatically check the $10 bLiquidity, then multiply it by the 20% p bLiquidity value, resulting in $2.

According to the min function provided above (taking the minimum value from both classic and additional mechanisms), the contract will automatically release 1 token, as the release value under the classic mechanism ($1) is less than that under the additional mechanism ($2). However, if we change the bLiquidity parameter to $2, the contract will automatically release 0.4 tokens, as the release value under the classic mechanism ($1) is greater than that under the additional mechanism (20% * $2 = $0.4).

This illustrates a potential way to dynamically adjust the lockup structure based on liquidity.

Advantages

• The mainstream lockup models in the current market primarily focus on the time dimension and may indirectly consider whether there is sufficient liquidity at a specific price to absorb the unlocks. A liquidity-based lockup model requires the project team to actively focus on building liquidity around their tokens and combine it with specific incentive measures.
• For investors in the public market, they will also receive a stronger confidence signal—tokens will only be unlocked when liquidity is sufficient; otherwise, only a portion that aligns with the liquidity status will be unlocked, thus avoiding a price crash due to liquidity being unable to bear new selling pressure.

Potential Challenges

• If the token consistently fails to gain sufficient liquidity support, this may significantly prolong the period for contributors to receive their rewards (unlocks).
• Additional rules may complicate the calculation of token unlock frequency and cycles.
• It may incentivize false buy-side liquidity. However, this can be avoided through various methods, such as considering only a certain proportion of bLiquidity near the current price or only considering LP positions with certain lockup restrictions.
• Contributors may continuously obtain tokens from the unlock contract without immediate selling, gradually accumulating a large amount, which they can then sell all at once, potentially having a significant impact on liquidity and causing the token price to drop. However, this situation is similar to whales actively accumulating a large amount of liquid tokens, and the risk of whales dumping and causing price drops always exists in the market.
• It is generally more difficult to obtain bLiquidity values on CEX compared to DEX.

Before continuing the discussion on milestone-based lockup models, project teams should consider how to ensure sufficient liquidity to guarantee "normal" unlocking progress. One potential idea is to incentivize LP positions that are locked, while another idea is to attract more liquidity providers—such as allowing liquidity providers to borrow tokens from the project inventory to encourage more participation, thereby creating a more stable market around their tokens, as discussed in our article "10 Things to Consider Before TGE".

Milestone-Based Lockup Mechanism

Another potential dimension to improve the token lockup model is "milestones," such as user count, trading volume, protocol revenue, total value locked (TVL), and other quantifiable data parameters that can be used to assess the attractiveness of the protocol.

Similar to the liquidity-based lockup design mentioned earlier, the protocol can introduce additional parameters for various milestones to design a binary token lockup clause.

For example, to achieve 100% "normal" unlocking, the protocol must reach a TVL of $100 million, over 100 daily active users, and over $10 million in daily trading volume, among others. If these values are not met, the final amount of unlocked tokens will be less than the initially set target.

Advantages

• The milestone-based lockup mechanism ensures that when tokens begin to unlock in large quantities, the protocol will have a certain level of attractiveness and liquidity.
• There is less reliance on the time dimension.

Disadvantages / Challenges

• Data can be manipulated, especially statistics like active users and trading volume are more likely to be tampered with. In contrast, the TVL metric may be less susceptible to manipulation, but its importance is relatively low for projects that rely heavily on capital efficiency. Revenue is harder to manipulate, but certain activities (like wash trading) can convert into more fees, thus indirectly making it manipulable.
• When assessing the potential for data manipulation, it is crucial to consider the motivations of various groups. Teams and investors (the groups involved in the unlocking plan) have incentives to manipulate statistics, while public market investors are less likely to manipulate statistics as they have little reason to accelerate unlocks.
• Off-chain legal agreements may significantly mitigate the malicious intent of motivated groups. For example, projects can establish severe penalties for rule violations in advance—such as depriving team members or investors of their original token shares if they are found to have engaged in wash trading or other data falsification.

Conclusion

The current market trend of "high FDV, low circulation" has raised concerns among public market investors about the sustainable investment potential of the market.

Traditional lockup models based solely on the time dimension cannot match the complex market environment. By integrating dimensions such as liquidity and milestones into token lockup terms, project teams can better align incentives, ensure sufficient depth, and maintain the attractiveness of the protocol.

Although these new designs also bring new challenges, a more robust lockup mechanism will undoubtedly yield more benefits. Through meticulous design, these improved lockup models can effectively enhance market confidence and create a more sustainable ecosystem for all stakeholders.