VC Insights: 10 Things to Consider When Preparing for Token Generation Event (TGE)
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VC Insights: 10 Things to Consider When Preparing for Token Generation Event (TGE)
Follow best security practices to ensure your time-to-market schedule is on track.
Navigating Web3 tides with focused insightsAuthor: Hack VC
Translation: TechFlow
This article covers a range of considerations for successfully launching a web3 protocol token. These insights are distilled from hands-on experience at Hack VC, supporting our portfolio companies through token launches over the past few years.
The information here is for general informational purposes only and should not be relied upon as accounting, legal, tax, business, investment, or other professional advice.
1. Build Relationships with Liquidity Providers
When a token project first launches, there is typically little token supply available on the market. This is because your investors and employees usually have tokens that vest or are locked over several years. As a result, exchanges lack deep liquidity, making token prices unreliable. Small buy and sell orders on exchanges can drastically affect your token’s price.
Is token price volatility a problem? Not necessarily—but it becomes critical if your token has any form of utility. If users cannot acquire sufficient tokens at reasonable prices to use your network, your network may fail to operate as intended, potentially limiting growth.
To address this, you can partner with one or more liquidity providers (LPs) to help create market liquidity for your token. LPs effectively borrow tokens from your treasury and create markets by pairing them with their own stablecoins on exchanges. They often employ algorithmic trading bots that act as intermediaries between buyers and sellers, establishing a liquid market.
A typical arrangement with an LP involves lending them your tokens for 18 months, after which they gain the right to purchase those tokens at the prevailing market price. These deals therefore carry clear costs.
Examples of liquidity providers include Amber Group, Dexterity Capital, and Wintermute. Recently, a concept known as on-chain liquidity provision has emerged, where a web3 protocol itself acts as a liquidity provider. In this model, dynamic LPs supply stablecoins—and they could even be members of your own DAO (creating strong alignment and a great way to reward active contributors). Elixir.xyz is a pioneer in this space.
Coinwatch is another option worth considering—they serve as a “buy-side agent” for liquidity providers, helping protocols negotiate these deals. Coinwatch helps startups secure cheaper, more efficient, and better-aligned agreements. They also monitor your LPs’ activity to ensure you’re getting what you paid for.
2. If You're a DeFi Protocol (or L1/L2), Have a Day-0 and Ongoing TVL Strategy
We’ve seen many technically skilled founders launch DeFi protocols hoping the adage “if we build it, they will come” applies. More often than not, it doesn’t—you need a strong go-to-market strategy to attract capital. The key metric for gauging a DeFi protocol’s appeal is Total Value Locked (TVL). Starting with zero TVL on day one creates a chicken-and-egg problem for liquidity providers: no one wants to be the first to jump in and take on risk.
Today’s LPs tend to be risk-averse (especially given recent disasters in web3). They typically worry about two things:
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Are the advertised yields accurate compared to realized returns?
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Am I exposed to principal loss (from hacks or other issues)?
You only get one launch—so investing in a smooth rollout is rational. Having TVL on day one can kickstart positive feedback loops of social validation and growth.
One way to solve this is to effectively “pre-negotiate” TVL before launch via trusted investors—such as venture capital firms, family offices, or high-net-worth individuals. A reasonable target for early social proof might be a 7- to 8-figure TVL, giving others confidence to follow.
Ultimately, the best long-term solution to make LPs comfortable is letting your protocol run securely for a sustained period without incidents. But pre-committing TVL is a helpful way to encourage early adoption and start building track record.
There’s an 80/20 rule between users and TVL (i.e., the top 20% of users may account for over 80% of TVL), so focus on attracting large deposits when growing TVL.
Beyond the initial phase, plan your liquidity mining emissions schedule. It’s acceptable to initially subsidize yields via token incentives, but long-term you’ll want to transition toward sustainable fee-based rewards.
An interesting technique to incentivize early TVL is creating a “spillover” bucket for investors. Once you hit dilution limits for a funding round, consider only accepting investors who commit to providing TVL.
3. Follow Best Security Practices
Security is paramount for your protocol. If your protocol gets hacked, it becomes a permanent stain on your reputation and may deter user participation. Consider these key steps:
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Consider adopting technologies upfront that reduce smart contract attack risks. For example:
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Programming in Move—a formally verified and type-safe language—is generally safer than Solidity (e.g., via MovementLabs.xyz).
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Introduce delays in finalizing transactions, allowing time to detect and halt smart contract exploits (e.g., via UseFirewall.com).
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Use formal verification of zero-knowledge code (e.g., for bridges) via technologies like AlignedLayer.com.
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Audit multiple smart contracts before launch to instill confidence in your users and team. Note: this doesn’t guarantee immunity from exploits, but it’s a strong signal. Examples include Trail of Bits and Quantstamp.
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Establish a code change process to re-audit each incremental update via lightweight reviews if you modify smart contracts over time. This step is often overlooked but can be critical for catching rushed vulnerabilities.
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Consider using formal verification or fuzz testing. Formal verification provides exhaustive mathematical proof of your code’s correctness, offering comprehensive coverage and increased confidence against attacks. Fuzz testing slightly alters system inputs to uncover potential bugs. An example of a vendor offering both is Veridise.
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Consider investing in a bug bounty program. This incentivizes white-hat hackers to find vulnerabilities in exchange for rewards. The current market leader in web3 is ImmuneFi.
4. Measure Product-Market Fit Before Mainnet Launch
Web3 projects are notorious for listing tokens before confirming their product solves real customer pain points. If you take this approach, your token price is likely to drop sharply as your KPIs remain questionable at best.
But how do you measure product-market fit before launch? Some teams attempt to validate via testnets, but testnets have limitations—user behavior may differ significantly from mainnet. When real money is involved (e.g., in DeFi protocols), users on testnets using “play money” may not behave seriously and could simply be farming airdrops rather than acting as genuine users.
To overcome this, I recommend launching a “private mainnet” (distinct from a testnet), where your service runs live with real funds and real users to confirm product-market fit. Access is invite-only (e.g., your investors, friends, and team), so you don’t spoil your public marketing launch with a small private user base.
5. Get Your Token Launch Timing Right
When is the right time to launch a token? Most of the time, I advise startups to delay launching their token until their protocol generates meaningful real-world value. This mirrors how web2 startups avoid rushing to IPO before building a solid business.
Launching during certain market windows carries risks. If retail users buy your token at the bottom of a bear market and later ride a bull market wave, their tokens are more likely to appreciate—this can generate strong loyalty and evangelism for your project. Compare this to launching during a bull market followed by a sharp downturn in a bear market—users are naturally less enthusiastic.
One way to mitigate this risk is to create a more attractive entry price for investors via an Initial Exchange Offering (IEO). To understand this, note that most web3 projects plan to airdrop a large portion of their token supply to users. In such cases, users receive tokens for free and contribute nothing substantial in return. While this achieves broad distribution, it doesn’t necessarily lead to user “skin in the game”—they didn’t invest or take risk, so they’re less engaged.
How do you foster user engagement? You may want to avoid selling tokens directly to retail users (due to legal/regulatory concerns). One solution is an IEO: allocate a portion of your token supply to an exchange, which then sells it to users at a discounted price (offering upside to retail investors). This is also a good way to build trust with exchanges.
The Sui blockchain is a strong example of this approach. Sui is a Move-based L1 created by former Meta engineers. Their IEO was highly successful.
6. Be Mindful of Cliff Vesting When Designing Token Unlock Schedules
Most web3 projects vest tokens for employees and investors over multiple years. In models carried over from web2, unlocks often include a “cliff”—a minimum lock-up period before any tokens are released (e.g., a one-year cliff means no unlocks for the first 12 months, then a full year’s allocation unlocks all at once at month 12).
This sounds good in theory—it promotes loyalty and prevents immediate dumping. However, in practice, if many employees or investors sell simultaneously after the cliff, a sudden flood of supply can trigger negative price action. To avoid this, we now recommend linear unlocking (tokens gradually accumulate over time). This ensures a steady flow into the market, avoiding abrupt dumps.
7. Budget for Exchange Listings
Many exchanges charge fees to list tokens, so you need to plan and budget accordingly if you aim to launch on popular platforms. Some top-tier exchanges charge around $1 million per listing, making the process very expensive.
An exception is if you’re a top-tier project backed by well-known funds—sometimes exchanges will list you for free, as your presence attracts users to their platform. This is an advantage of partnering with respected VCs in your funding rounds (as it buys you social credibility with exchanges).
8. Raise Funds Before Token Listing
We’ve encountered many token projects attempting to raise capital after launching their token. This can be harder than founders expect.
Most private investors engage in arbitrage between public and private markets. The pool of funds doing private rounds is much smaller than those participating in public token sales, limiting your potential investor base—for example, you’d exclude most early-stage VCs.
Raising post-token launch is also challenging due to negotiation complexity. A common structure is offering a discount to the public token price. But token prices can swing wildly during fundraising. If the public price is moving, how do you set a fixed price and reach agreement with private investors?
These problems vanish if you raise before token launch. At that point, the token price is undefined, and you can tap into a broader group of private funds invested in the asset class.
9. Invest in High-Quality Legal Counsel for TGE
Over the years, we’ve met many teams whose legal counsel provided grossly inadequate support. In web3, founders face higher risks than in web2, making strong crypto-native legal advice essential. I urge founders to ensure their lawyers have hands-on, crypto-specific experience when preparing for a token generation event (TGE).
By the way, the regulatory environment in web3 is still evolving. Often, decisions are subjective rather than objective. Keep in mind that most lawyers aren’t business operators—they typically optimize advice based on hypothetical legal arguments rather than real-world decision-making. In other words, on regulatory matters, don’t blindly follow your lawyer. Use your own judgment and assess your personal risk tolerance, especially given how frequently laws change.
10. Determine the Right Time to Monetize via a “Fee Switch”
Many protocols (especially DeFi) delay flipping on their fee switch to a future date. The goal is to subsidize short-term growth and defer monetization—similar to how Facebook and other social networks in web2 delayed ads/monetization until achieving critical mass. If your goal is user acquisition, deferring monetization makes perfect sense.
The danger of delaying monetization is that it may mask poor product-market fit. Generally, if users are willing to pay for your service, that’s the strongest signal you have “serious” users who will stay loyal. But if your fees would materially impact user economics, delaying monetization might hide core issues in your protocol. That said, if your fee rate is modest, the risk is lower.
“Flipping the switch” refers to transitioning from a pure governance or placeholder token model to one where fees accrue value to token holders. This is often done early (e.g., GMX), though not always (UNI and many others).
Here are some indicators suggesting it’s time to consider activating the fee switch:
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Sufficient number of users
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Strong token liquidity
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Broad holder base
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Healthy fees paid by takers (traders) to makers (liquidity providers)
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Consider airdropping or otherwise distributing tokens to LPs at the same time as flipping the switch, so even if they no longer receive 100% of fees, they still feel compensated via tokens
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Consider the minimum expected yield (APY) target for token holders relative to other opportunities/markets, and design fee parameters that are fair and meaningful in that context
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For staking rewards, 5% is considered standard, 10% is high (e.g., LIDO reaches ~10%)
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For trading venues, 2.5–5.0 bps is standard, 10–25+ bps is high; better venues can command higher fees
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For lending protocols, a reasonable net interest margin (NIM) between borrowers and lenders is typically 1–2%, expected to compress over time
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Conclusion
We hope these ideas serve as useful considerations for your token launch. Keep in mind that best practices are constantly evolving—the thoughts here are just a starting point.
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