Theoretical Impact of Token Unlocking on Prices

Token Unlocking Generally Leads to Price Drops

Theoretically, after tokens are unlocked, the circulating supply increases. In the absence of other bullish or bearish events, the overall market capitalization of the token remains unchanged. The increase in circulating supply dilutes token value, typically leading to a decline in token price.

DYDX Token Unlocking Path

In January 2023, dYdX announced a delay in its originally scheduled token unlock of 150 million DYDX tokens (valued at over $200 million) from February 3, 2023, to December 1, 2023. Following the announcement, the price of DYDX surged nearly 25% on the same day and gained an additional 20% the next day, marking a significant rally.

DYDX Price Trend After Unlocking

However, on December 2nd, 2023, the actual unlock date, DYDX began a steady price decline. This decline occurred despite the broader market experiencing bullish sentiment due to the upcoming launch of Bitcoin ETFs, which had driven Bitcoin into a bull market.

The unlocked DYDX tokens accounted for 81.63% of the total circulating supply, with 83.19 million DYDX tokens allocated to investors, making up 55.5% of the unlocked supply. The substantial proportion of unlocked tokens led to increased selling pressure.

After surpassing its November peak in March due to broader market trends, dYdX entered a bearish channel. This was despite the launch of dYdX’s application-specific blockchain product, dYdXChain, during the same period, which failed to reverse the token’s decline.

ARB Token Unlocking Path

On March 16, 2024, Arbitrum is scheduled to unlock approximately 1.11 billion ARB tokens, valued at an estimated $1.24 billion. This unlocked amount represents 87% of ARB’s circulating supply of 1.275 billion tokens, a significantly high proportion.【2】

ARB Price Trends

ARB exhibited signs of weakening bullish momentum over the prior week leading up to the unlocking event. Following the unlock, the token entered a clear downward trend, underperforming relative to Bitcoin (BTC), which continued to show strength.

Unlike other public blockchain tokens, ARB and other Layer 2 tokens like OP cannot be used as on-chain gas fees. This lack of utility places ARB at a disadvantage compared to tokens like SOL or BNB, which serve as transaction fees on their respective chains. This utility gap further amplifies the weight of token unlocking on ARB’s price.

The Larger the Proportion of Unlocked Tokens to Circulating Supply, the Greater the Negative Price Impact

When the proportion of unlocked tokens to the current circulating supply is high, the resulting price dilution becomes more severe, assuming the market capitalization remains unchanged.

This principle was evident in ARB’s case, where the large-scale unlock created significant selling pressure. As utility and demand could not compensate for the influx of supply, ARB’s price faced substantial downward pressure, highlighting the outsized impact of token unlocking on price dynamics in such scenarios.

SUIToken Unlocking Path

The unlocking path for SUI tokens highlights a significant event on April 3, 2024, when Sui unlocked approximately 1.1 billion SUI tokens, nearly matching the circulating supply (1.2 billion tokens). This unlocking volume was substantially higher than previous unlock events.

SUI Price Trends

SUI’s price initially demonstrated resilience due to its strong fundamentals and utility, with the earlier lower-volume linear unlocking events having minimal impact on its upward trend. However, following the April unlock, SUI retraced most of its gains and entered a four-month-long decline.

This demonstrates that larger unlock events tend to correlate with greater price volatility for a specific token.

Airdrops: A Special Case of Unlocking

As a unique form of unlocking, Airdrops are often the first unlock event following a Token Generation Event (TGE). The unlock volume is often close to or even equal to the token’s circulating supply. Consequently, price declines post-airdrop are generally more severe and long-lasting.

While airdrop-induced price drops can also stem from other factors, such as the composition of token holders (e.g., many participants looking to sell immediately), the sheer increase in circulating supply amplifies the negative impact.

EIGEN Token Price Trends

EigenLayer, a recognized leader in the Ethereum restaking ecosystem, conducted an airdrop earlier this year. Though the airdrop was completed before trading began, tokens only became tradable in October 2024.

Despite reaching an initial market cap of $800 million, the price has since retreated to $470 million, significantly below the valuations of other leading projects in the field. Nearly all the selling pressure originated from the airdrop, the initial token unlock.

Since the airdrop coincided with TGE, its impact was less about the mechanics of an airdrop itself and more about the disparity between the token’s market capitalization and its perceived valuation.

Tokens Held by Investors and Teams Have a Greater Negative Impact on Prices

In a tokenomics model, tokens are allocated to various groups, including investors, communities, teams, and treasuries. To safeguard investor interests, tokens allocated to investors and teams are often subject to long lock-up periods (typically over a year) after the Token Generation Event (TGE) and tend to represent a significant portion of the supply.

Therefore, the price drop caused by the token unlock is often more severe when it comes from investors and the team compared to the community or retail token holders.

AEVOToken Unlocking Path

AEVO, a token launched by Ribbon Finance, the team behind on-chain structured products, experienced significant price impacts due to an anticipated large unlock event.

Shortly after AEVO’s TGE, it was discovered on the Token Unlocks platform (now called Tokenomist) that AEVO was scheduled for a major token unlock on May 15, 2024, with the unlock volume being 7 times the circulating supply at the time. The majority of these unlocked tokens were allocated to early investors and the team.

AEVO Price Trends

News of the massive unlock spread quickly, causing AEVO to break below its consolidation range of $2.86 and plummet to approximately $1.60 by May 15—a 44% decline in just a few days.

Even though the Aevo team later clarified that AEVO tokens would still be converted from Ribbon Finance’s RBN tokens at a 1:1 ratio as originally planned, the incident highlighted the substantial market impact of investor and team token unlocks, whether the concern was real or speculative.

The Price Impact Often Occurs Before Token Unlocking

Before token unlocks, holders often sell their tokens or establish short positions to mitigate potential losses. This will create selling pressure, causing the price to decline.

Looking back at these token unlock cases, even though they occurred in different crypto cycles, almost all of them exhibited significant selling pressure at the time of the actual unlock. This can be attributed to the selling pressure created by holders who established short positions to hedge against potential losses from the unlock.

Deviations in Real-World Scenarios

Token Concentration Among Market Makers and Project Teams

WLDToken Unlocking Path

In July of this year, Worldcoin ($WLD) entered its unlocking phase. A total of 2.38 billion WLD tokens (approximately $5.545 billion) will be linearly unlocked over the next four years, with an estimated daily unlocking of 1.63 million tokens. Despite the linear schedule, WLD’s circulating supply at the time was less than $190 million. Over the next four years, nearly 12 times the circulating supply will gradually enter circulation, a proportion that remains significant.

WLD Price Trends

In terms of price, WLD, which had long underperformed relative to BTC, experienced a substantial rally starting about a week before the unlocking event. Its price surged nearly 80% over three days, resulting in liquidations for many short traders driven by the unlocking event.

One reason for this could be Worldcoin’s announcement at the time to significantly extend the current unlocking timeline. This adjustment further reduced the amount of tokens unlocked in each period during this phase. The price rebound validates the earlier point that the unlocking rate can significantly affect token prices.

However, WLD’s sudden price surge was perplexing to the market. The token lacks practical utility, and there was no collective rally in the AI sector at the time. Such a sudden increase in WLD’s price seemed inexplicable.

Wintermute’s Transactions with WLD on July 14

On-chain data provides additional insights. According to Arkham, during the price surge from July 14 to July 17, Wintermute, one of WLD’s market makers, frequently transferred WLD tokens into Uniswap. Across ten pages of transaction records, almost all entries showed token inflows. Market makers play a crucial role during token unlocking phases, influencing the repricing of the token.

Conclusion

Historically and logically, token unlocking increases token liquidity. Assuming the market capitalization remains unchanged, the rise in circulating supply leads to a decrease in token price. Put more technically, the price performance of unlocked tokens relative to BTC or tokens within the same sector tends to underperform before and after the unlocking event.

However, in practice, token prices are also influenced by other factors such as market sentiment, fundamentals, and the behavior of market makers. Therefore, trading decisions must consider a variety of information to formulate more appropriate strategies.