The orthodox concept of Token Lock-up Position in Cryptocurrency is eyewash

Author: Christopher Goes Source: coindesk Translation: Shanooba, Golden Finance

The Token distribution model that currently dominates the encryption field is called the 'low circulation, high Fully Diluted Valuation (FDV)' issuance model. In this model, only a small portion of the Token supply is in circulation on the market at the start of the project, while most Tokens are in a locked state and are typically gradually unlocked after one year. This low circulation is often accompanied by a high Fully Diluted Valuation, and may even be designed to drive up this valuation. According to research by CoinGecko, nearly a quarter of the leading Tokens in the industry today use the low circulation model. Recently, some notable projects, including Starknet, Aptos, Arbitrum, Optimism, Celestia, and Worldcoin (as of the time of writing, an astonishing 95.7% of its supply is still locked), have used this model of issuance.

This model is fundamentally wrong. Limiting the circulation of Tokens distorts market signals and misleads current and potential network participants who rely on these signals to make decisions. The 'low circulation, high FDV' issuance model has led to a situation where the profit potential of new projects is mostly captured by private investors, and the public market has little benefit. Ultimately, this Token issuance model, while pursuing short-term indicators, sacrifices long-term sustainability and public trust.

The Fallacy of the 'Ownership Period' in Cryptocurrency

The so-called 'vesting period' in Cryptocurrency has little resemblance to the vesting mechanism in the TradFi world. Traditional vesting mechanisms (such as Restricted Stock Units RSUs) are used to coordinate incentives and ensure stakeholders fulfill their obligations. In traditional companies, vesting periods often come with specific performance expectations and the right to revoke future ownership if these expectations are not met. However, the vesting lock-up position mechanism in the encryption network does not have a similar mechanism - Tokens are simply locked up for a period of time and then unlocked.

These so-called Lock-up Position mechanisms, which hardly deserve to be called 'vesting periods', often distort market signals by creating a false impression that is far above the actual demand. If we understand price signals as the balance point between asset supply and demand, then the market value of these signals depends on the ability of both parties to freely express their preferences (for example, willing sellers can freely sell, and willing buyers can freely buy). Lock-up Position restricts the ability of one party to express their preferences, resulting in a drop in the quality of the signals. This may temporarily boost Market Cap rankings or provide benefits in other indicators, but it deteriorates the overall quality of the market because the information conveyed by price signals is reduced.

Even worse, these Lock-up Position mechanisms actually harm the public interest. Tokenholders who join the project after token issuance face inaccurate price signals due to progressive unlocking, which does not reflect the true market sentiment. Senior Tokenholders with access to non-public markets and information have an unfair advantage and often sell locked tokens in the OTC market. To obtain a true market signal, you must analyze holders who want to sell but cannot, and speculate on the transactions taking place behind the scenes. For most public market participants, this analysis is too complex and time-consuming.

The Inevitability of Market Pressure

Lock-up Position does not prevent people from selling, it just delays the inevitable outcome. The vesting period will eventually expire, and those who want to sell will eventually do so, creating sustained downward pressure on the market, often resulting in a phenomenon of 'slow bleeding' of Market Cap. Personally, I would hesitate to hold an asset or participate in a network, especially when many holders want to exit but cannot do so. This is also a problem for participants (such as validators) who need accurate price signals to predict revenue and operating costs.

If the goal of the encryption field is to create products that can provide real, long-term value, then practices that aim to artificially improve short-term indicators are not helpful in achieving this goal. To accurately assess the potential of any project, it must be possible to evaluate whether participants are truly committed to the project. If you don't know whether people hold Token because they really believe in the project or because they are prohibited from selling, then this evaluation is impossible.

Along with the criticism of the orthodox concept of 'low circulation, high FDV', there are also calls for a 'fair issuance' token distribution method. However, many of these proposals simply request an increase in the proportion of circulating supply at launch without questioning the legitimacy of the 'lock-up period' Lock-up Position itself.

This is far from enough. Any form of manipulation of market signals by humans is still manipulation of market signals. We need to break the traditional concept of ownership of Crypto Assets through a series of new experiments.

Free Market issuance

We refer to the method called "Free Market Issuance", which has a huge advantage that allows everyone to freely express their preferences. If you want to sell, you can sell. If you want to buy, you can buy. Most importantly, you can confidently make these decisions because the price signals are real and meaningful, and everyone can transparently and in real-time express their preferences at this moment.

Establish a holder community that truly believes in the project, whose long-term benefits far outweigh the short-term risks of providing early exit opportunities for those who do not believe in the project. We need projects that provide real practical value to the world and have staying power. Obviously, existing conventional notions of ownership have not brought about enough (or almost no) such projects.

The free-market approach is often limited to meme coins, which has also led to the perception that it is not suitable for "serious" projects. However, it is reasonable to argue that, in addition to the meme coin's spreading appeal, part of its overwhelming success is the market's realization that this model is more beneficial to Tokenholder in the long run and generally creates a more active, natural community.

We should try new things, even if they involve risk. I hope that the discussion of the issuance in the free market can stimulate more thinking about new paths for the future. The collective thinking in the current encryption industry— not because we have a clear idea of why we do this, but because everyone does it, and it seems effective from a short-sighted perspective—is hindering innovation. If you plan to launch a project and leave in a year or two, following the crowd may be a reasonable strategy, but if you want to bring real value to the world, this is not a good strategy. It's time for new experiments now.