Hack VC Partners: Potential Solution to Crypto Ownership Problem

Author: Ro Patel, Hack VC Partner; Compiler: Tao Zhu, Golden Finance

1. The Current State of Token Vesting

A trend in the current market cycle is the issuance of tokens with high valuations and low initial circulating supply (i.e., "low circulation/high FDV tokens"), which has raised concerns in the crypto community about sustainable upside for public market investors. A large number of tokens are expected to be released by 2030, which could bring potential selling pressure unless demand increases to balance it out. *

Historically, contributors to protocol networks* typically receive a certain proportion of the fully diluted supply of tokens that are vested in the term structure. Contributors should be fully compensated for their efforts while balancing compensation with the interests of other stakeholders (i.e., public market token investors). This is critical because if the portion of vested tokens represents an excessive amount of the token market value and available liquidity, the vesting event may have an adverse impact on the price of the token, thereby harming the interests of all token holders. On the other hand, if contributors are not adequately compensated, they will no longer be motivated to participate in the project, which will ultimately harm all holders as well.

Classic parameters for token vesting include: percentage of tokens allocated, cliff period, vesting time, and payment frequency. All of these parameters work only on the time dimension.

However, using only the above typical parameters limits the scope of solutions to a narrow range. Integrating new parameters can unlock previously untapped value.

In this article, I propose to add a liquidity or milestone-based dimension to enhance and improve the existing token vesting schedule models we most commonly observe today.

Liquidity

Consider a token vesting schedule adjusted for liquidity. This idea extends the normal vesting structure by implementing a new parameter: liquidity. The definition of liquidity is not an exact science; there are many ways to detect it.

One of the measures of liquidity is the depth of bidders available on a token, either on-chain or on a centralized exchange (CEX). The cumulative sum of all bidder depths has a notional number that we can think of as “bLiquidity”.

Contributors can get an additional parameter in their vesting terms, which is a “percentage of bLiquidity” or “pbLiquidity”, and this number can be theorized anywhere between 0 and 1.

When vesting is triggered, the contract can output:

min(number of tokens mentioned under normal vesting output, pbLiquidity * bLiquidity * token_unit_FDV)

Here’s an example of how this works: Consider a token with a total supply of 100 units, 12% (12 tokens) allocated to vested contributors, and a price of $1 per token. Assume linear vesting over 12 months from the token generation event, no cliff period, and for simplicity, the token price remains constant. Typically, vesting will allow for redemption of 1 token per month, barring other considerations. Now, let's say 20% of pbLiquidity is allocated, and that token has at least $10 of bLiquidity in 12 months. In the first month of allocation, the contract will look at $10 of bLiquidity, multiply it by 20% pbLiquidity, and get $2. Given the min function above, 1 unit of token would normally vest, because 1 token * $1 is less than $2. However, change the above numbers to $2 of bLiquidity, in this case 20% of $2 is $0.40, so instead of 1 token worth $1, only 4/10 of the tokens will be allocated.

Advantages

Previously, allocations really only cared about timing, and perhaps indirectly whether there was enough liquidity at a given price to absorb the allocation. This structure clearly defines that contributors should focus on building liquidity for their tokens, and aligns that goal with tangible incentives.

Unvested token holders (i.e., buyers of liquidity markets prior to the unlock date) can take comfort in knowing that a single vesting requirement will not cause the price to get stuck in a state of liquidity scarcity. Previously, public token holders simply had to trust the goodwill and intent of the token claimer. With this improvement, they now have a clear reason to feel comfortable.

Disadvantages/Challenges

This could lead to volatility in contributor payments if the token never achieves sufficient liquidity and could end up significantly extending the vesting period.

It complicates the simple payment frequency that contributors are used to.

It could create an incentive to cheat bidders on liquidity. However, there are ways to address this. For example, one could consider bLiquidity to be within a certain percentage of the mid-price, or that the LP position has some sort of time-lock element.

People could claim tokens from vesting but not be able to sell them immediately, thereby accumulating large balances. Subsequently, they might sell all of their tokens at once, which could severely impact liquidity and cause the token price to fall. However, this situation is similar to someone gradually acquiring a large number of liquidity tokens. There is always a risk that large, concentrated liquidity token holders may sell and cause the price to fall.

It is much easier to obtain bLiquidity data for decentralized exchanges in a trust-minimized way than for CEXs, because the order book data of CEXs is published by the CEXs themselves.

Before entering the milestone-based dimension, how can projects ensure that there is enough liquidity to support a reasonable vesting schedule? One idea is to reward locked LP positions through incentives. Another is to attract liquidity providers. As we wrote in "10 Things to Consider When Preparing for a Token Generation Event (TGE), attracting liquidity providers can help create a stable market by borrowing tokens from the project library and pairing them with the exchange's stablecoin.

Three, Milestone-based Allocation

Another dimension that can improve the token vesting schedule is milestones. Milestones, such as number of users, volume, protocol revenue, total value locked (TVL), and similar data points, capture the overall attractiveness of the protocol through quantifiable numbers.

Of course, protocols can set binary thresholds or gradients for the above parameters, which are incorporated into the vesting schedule. For example, a protocol must have TVL of more than $100 million, 100+ daily active users, or $10 million in average daily trading volume over the last 90 days. If these numbers are not met, the amount of the allocation is either stopped completely (binary) or reduced proportionally relative to the initial threshold target (gradient). Between binary and gradient, the gradient seems to make more sense.

Advantages

This milestone approach ensures that the protocol has a certain level of attractiveness and liquidity when vesting occurs, which leads to a healthier protocol over time.

Milestones place less emphasis on time.

Disadvantages/Challenges

Some statistics, such as active users and volume, can be manipulated. The TVL metric is less manipulable, but arguably less important, especially for more capital efficient protocols. Revenue is also harder to game, but some activities (such as wash trading) may translate into more fees and thus more revenue, so it is still gameable in the long run. When judging the likelihood of manipulation, it is important to pay attention to the incentives at play. Teams and investors (i.e., anyone involved in the vesting schedule) are incentivized to game the statistics. Public market buyers are less likely to game the statistics because they have no reason to incentivize accelerated vesting. In addition, strongly worded token warrant clauses in off-chain legal agreements can significantly reduce malicious behavior by incentivized parties. For example, if team members or investors are caught wash trading or pulling user activity, they may give up their tokens, resulting in severe penalties for rule violations.

IV. Conclusion

The current market trend of high valuations and low initial circulating supply has raised concerns about sustainable returns among public market investors. Traditional time-based vesting schedules may not fully address the complexity of token liquidity and market conditions. By integrating liquidity and milestone-based dimensions into vesting plans, projects can better align incentives, ensure sufficient market depth, and cultivate real traction. While these approaches present new challenges, the benefits of stronger vesting mechanisms are significant. With careful precautions, these enhanced vesting models can improve market confidence and create a more sustainable ecosystem for all stakeholders.