Hack VC Partner: Projects Apply Better Liquidity Management and Task-Based Incentives to Address Large-Scale Token Unlocks
TechFlow Selected TechFlow Selected
Hack VC Partner: Projects Apply Better Liquidity Management and Task-Based Incentives to Address Large-Scale Token Unlocks
By integrating liquidity and milestone-based incentive dimensions into the distribution plan, projects can better align incentives, ensure sufficient market depth, and enhance genuine appeal.
Navigating Web3 tides with focused insightsAuthor: Ro Patel
Compiled by: TechFlow
The Current State of Token Distribution
A trend in the current market cycle is token launches with high valuations and low initial circulating supply—commonly referred to as "low-circulating/high-FDV tokens"—which has raised concerns within the crypto community about sustainable price appreciation for public market investors. A large volume of tokens is expected to unlock by 2030, potentially creating selling pressure unless demand increases accordingly.
Historically, contributors to protocol networks have typically received a percentage of fully diluted supply (FDS), distributed over a defined vesting schedule. Contributors must be fairly compensated while balancing the interests of other stakeholders, especially public market token holders. This balance is crucial because if distribution events release tokens representing a significant portion of the token's market cap or available liquidity, they can negatively impact the token price, harming all token holders. Conversely, if contributors are under-compensated, they may lose motivation to continue developing the project, which ultimately also harms all stakeholders.
Classic token distribution parameters include: percentage of tokens allocated, cliff period, vesting duration, and payout frequency. All these parameters operate solely along the time dimension. However, relying only on these traditional parameters limits the solution space to a narrow scope. Introducing new dimensions can unlock previously untapped value.
In this article, I propose adding either a liquidity-based or milestone-based dimension to optimize and improve the most common token distribution models used today.
Liquidity-Based Vesting
Consider adjusting token distribution schedules based on liquidity—an idea that expands standard vesting structures by introducing a new parameter: liquidity. Defining liquidity isn't an exact science, and there are multiple ways to quantify it.
One measure of liquidity is the availability of buy-side depth for the token on-chain and on centralized exchanges (CEXs). The cumulative sum of all buy-side depth has a nominal value, which we can call "bLiquidity" (buy-side liquidity).
Contributors could add an additional parameter to their distribution terms: the "pbLiquidity" ("percentage of bLiquidity"), a value theoretically ranging from 0 to 1.
When a distribution claim is initiated, the contract would output: min(normal amount of tokens to be claimed under standard vesting, pbLiquidity * bLiquidity * token unit FDV).
Here’s an example to illustrate: Suppose a token has a total supply of 100 tokens, with 12% (12 tokens) allocated to contributors under vesting, and a token price of $1. Assume linear vesting over 12 months starting from the token generation event, no cliff, and for simplicity, the token price remains constant. Normally, the vesting schedule would allow redemption of 1 token per month, regardless of other factors. Now suppose 20% pbLiquidity is set, and the token maintains at least $10 of bLiquidity over the 12 months. In the first month, the contract checks the $10 bLiquidity value, multiplies it by 20% pbLiquidity, resulting in $2. According to the function above, 1 token will be released normally since 1 token * $1 is less than $2. However, if bLiquidity were only $2, then 20% of $2 is $0.40, so instead of releasing one $1 token, only 0.4 tokens would be distributed. This is what liquidity-adjusted vesting looks like.
Advantages
-
Previously, distribution claims only considered time, perhaps indirectly accounting for whether sufficient liquidity existed to absorb the release at a given price. This structure explicitly aligns contributor incentives with building token liquidity and ties this goal directly to concrete incentives.
-
Non-vesting token holders (i.e., public market buyers before unlock dates) can be reassured that a single distribution claim won’t cause a price crash in thin liquidity. Previously, public token holders had to rely solely on the integrity and intentions of those claiming tokens. With this improvement, they now have a clear structural reason to feel secure.
Disadvantages/Challenges
-
If the token never achieves sufficient liquidity, this could lead to volatile payouts for contributors and potentially extend the vesting period significantly.
-
It complicates the simple payout frequency that contributors are accustomed to.
-
This may incentivize fake buy-side liquidity. However, multiple mitigations exist—for instance, considering only bLiquidity within a certain mid-price percentage range, or incorporating LP positions with time-lock elements.
-
Individuals could claim tokens from vesting without immediately selling, accumulating large balances, then dumping everything at once—potentially impacting liquidity and causing price drops. However, this scenario resembles someone gradually acquiring a large position in liquid tokens. The risk of concentrated holders selling and impacting price always exists.
-
Obtaining bLiquidity values in a trust-minimized way is easier on decentralized exchanges than on CEXs, where order book data is published by the exchange itself.
Before discussing milestone-based vesting, how can projects ensure sufficient liquidity to support reasonable distribution schedules? One idea is to incentivize locked LP positions. Another is actively attracting liquidity providers. As discussed in our article "10 Things to Consider When Preparing for Your Token Generation Event (TGE)", attracting liquidity providers can involve borrowing tokens from the project’s treasury and pairing them with stablecoins on exchanges to help establish a stable market.
Milestone-Based Distribution
Another dimension that can enhance token distribution plans is milestone-based vesting. Milestones—such as user count, trading volume, protocol revenue, or total value locked (TVL)—capture a protocol’s overall appeal through quantifiable metrics.
Naturally, protocols can set binary thresholds or graded targets for these parameters that factor into distribution eligibility. For example, a protocol might require over $100 million TVL, more than 100 daily active users, and/or a 90-day average daily trading volume exceeding $10 million to receive 100% of the time-based allocation. If these conditions aren’t met, distributions could either halt entirely (binary model) or scale down proportionally relative to target achievement (graded model). Between binary and graded approaches, the graded model appears more meaningful.
Advantages
-
This milestone-based approach ensures that the protocol has achieved a certain level of traction and liquidity before distributions occur, fostering healthier long-term development.
-
The milestone-based method places less emphasis on time alone.
Disadvantages/Challenges
-
Certain metrics like active users and trading volume may be manipulated. TVL is harder to manipulate but may be less relevant for capital-efficient protocols. Revenue is also difficult to falsify, though activities like wash trading can artificially inflate fees and revenue—making manipulation possible in some cases.
-
When assessing manipulation risks, incentive alignment is key. Teams and investors (anyone on vesting schedules) have incentives to manipulate metrics. Public market buyers are unlikely to do so, as they gain little from accelerating distributions. Moreover, strong token escrow clauses in off-chain legal agreements can significantly deter malicious behavior by incentivized parties. For instance, team members or investors caught engaging in wash trading or inflating user activity could forfeit their tokens—a strong disincentive against rule-breaking.
Conclusion
The current market trend of high-valuation, low-initial-circulating-supply tokens raises concerns about sustainable returns for public market investors. Traditional time-based distribution models may not fully address token liquidity dynamics or broader market complexities. By integrating liquidity-based and milestone-based incentive dimensions into distribution frameworks, projects can better align incentives, ensure adequate market depth, and promote genuine protocol adoption. While these approaches introduce new challenges, the benefits of stronger distribution mechanisms are substantial. With careful safeguards, these optimized models can enhance market confidence and create a more sustainable ecosystem for all stakeholders.
Join the official TechFlow community
Telegram subscription group:
Official Twitter account:
English Twitter account:
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
@hack_vc
