Crypto’s Token Lockup Orthodoxy Is a Scam

The design of this model is fundamentally flawed. Limiting the mobility of tokens disrupts the market’s natural flow of information, leading both existing and potential network users astray. This “high liquidity with low supply” phenomenon means that the majority of the gains from new projects go to private investors, leaving minimal opportunities for public markets. Over time, this pattern of token launches boosts short-term metrics but undermines long-term viability and public confidence.

The fallacy of crypto vesting

In the context of cryptocurrencies, “vesting” functions differently compared to its traditional finance counterpart. While vesting in conventional finance is employed to align incentives and fulfill stakeholder obligations by setting specific performance expectations and allowing revocation of ownership if those requirements aren’t met, crypto vesting is more straightforward: tokens are locked up for a predetermined duration, after which they can be accessed. In contrast to traditional RSUs (Restricted Stock Units), there isn’t an equivalent mechanism in cryptocurrency networks to assess performance or revoke ownership rights.

These types of lockups, misleadingly referred to as “vesting,” often skew market data by creating a false impression of increased demand. Price signals, serving as the intersection of supply and demand for an asset, are crucial to the market because they represent the equilibrium where both sides can freely express their intentions (such as selling when they wish or buying when they desire). Lockups restrict one side’s ability to express their preferences, thereby reducing the quality of the price signal. Although temporary advantages might be gained in terms of market capitalization or other metrics, the long-term impact is a decline in overall market health because these signals carry less meaningful information.

In essence, these lockups create an unfair situation where the general public gets shortchanged. New token holders who jump aboard after a project’s launch face a distorted price signal due to gradual unlocks, which don’t align with the real-time market sentiment. On the other hand, those holding locked tokens, often with inside information and access to private markets, gain an unjust advantage. They frequently sell these locked tokens outside of public markets. To grasp the true market trend, one must delve into who might be inclined to sell but can’t, and guess at secret deals happening behind closed doors. However, this level of analysis is usually too intricate and time-consuming for regular investors in the public market.

Market pressure inevitability

Lockups don’t stop people from disposing of their assets; they only postpone the eventual liquidation. Once vesting periods elapse, those eager to sell will do so, consistently devaluing the market and causing a slow but steady drain on market capitalization that can seem artificial. Personally, I would feel cautious about keeping an asset or engaging with a network where many owners may wish to exit, yet are unable to. This is also a challenge for participants like validators, who need reliable price indicators to forecast income and expenses sustainably.

In the world of cryptocurrency, our ultimate aim is to create substantial, lasting products that deliver genuine value. Shortcuts aimed at temporarily boosting statistics won’t lead us towards this goal. To properly assess the worth of a specific initiative, it’s essential to discern whether the participants are genuinely dedicated to the project. This requires knowledge about whether individuals own tokens out of belief in the project or due to restrictions preventing them from selling.

Disputes over the common practice of low-float, FDV have prompted suggestions for fresh methods in token distribution, often referred to as ‘fair launches’. Yet, these ideas primarily advocate for a larger proportion of tokens being circulated at launch rather than challenging the concept of ‘vesting’ lockups themselves.

What’s proposed here isn’t sufficient. Anything that artificially alters market indicators remains artificial manipulation, we must broaden the boundaries of what’s considered acceptable in crypto by experimenting with various novel approaches.

The free-market launch

This method, often referred to as “free trade initiation,” offers a significant benefit: it grants everyone the liberty to openly voice their choices. If you wish to offer goods, you’re free to do so. Similarly, if you desire to purchase, you have that option. Moreover, one of its best aspects is the assurance that the price indicator carries genuine significance, as everyone can freely express their preferences instantaneously and transparently, ensuring that real-time market dynamics are accurately reflected.

In the long run, fostering a community of committed stakeholders who trust in the project’s success is more advantageous than offering an early exit option to those who aren’t on board initially, despite the short-term uncertainties this might bring. To ensure that our projects make a lasting impact and offer genuine value to the world, we need to challenge the traditional approach to vesting, as it hasn’t been producing enough (or any) projects with real staying power so far.

In a simpler way, people often think that the free-market approach, which has been popular with meme coins, isn’t suitable for serious projects because it carries a certain lighthearted image. However, it could be argued that one reason behind meme coins’ massive success (apart from their humorous appeal) is that the market understands that this approach, in the long run, tends to be more advantageous for token holders and fosters more lively, authentic communities.

Let’s embrace novelty, even when it involves taking calculated risks. I’m optimistic that the upcoming free-market launch will stimulate conversations about innovative paths. The dangerous trend of conformity, often referred to as groupthink, is prevalent in cryptocurrency today. It’s a practice where we do things simply because others are doing them, not because we have a clear rationale for it, but because they seemed to work based on narrow perspectives. This approach might be suitable if you intend to start a project and leave it after a year or two, but it’s not effective if your goal is to make a meaningful impact on the world. Now is the time to explore fresh avenues of discovery.

As a passionate crypto investor, I’d like to emphasize that the opinions shared here are mine alone and may not align with CoinDesk, Inc., its owners, or affiliates. These thoughts are shaped by my personal experiences and insights within the ever-evolving world of digital currencies.