VC Perspective: How to Solve the Slow Poison of "High FDV, Low Circulation"?
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VC Perspective: How to Solve the Slow Poison of "High FDV, Low Circulation"?
Exploring possibilities beyond the time dimension by introducing new parameters: liquidity and milestones.
Navigating Web3 tides with focused insightsAuthor: Ro Patel, Partner at Hack VC
Translation: Azuma, Odaily Planet Daily
Current State of Token Vesting Design
In the current market cycle, the token issuance model characterized by "high FDV, low circulating supply" has gradually become a mainstream trend, raising investor concerns about the sustainability of market investments. A large number of tokens in the cryptocurrency market are expected to unlock by 2030. Unless demand grows significantly, the market will inevitably face substantial selling pressure from these unlocks.
By historical convention, contributors to networks/protocols—including teams and early investors—are typically granted a certain portion of tokens as compensation, which is subject to vesting schedules with specific time-based structures. As key early developers of the network/protocol, contributors deserve appropriate rewards. However, their interests must be balanced against those of other stakeholders, especially public market investors who purchase tokens post-TGE (Token Generation Event).
The allocation ratio is critical. If too large a proportion of tokens is locked up, thereby limiting available liquidity, it could negatively impact token price and harm all holders. Conversely, if contributors are not adequately compensated, they may lose motivation to continue building, which would also ultimately harm all holders.
Classic parameters in token vesting include allocation percentage, lock-up duration, vesting period, and release frequency—all operating solely along the time dimension. Given current realities, relying only on these classic parameters limits our imagination for better solutions. Therefore, new dimensions should be introduced to explore novel possibilities.
Below, I propose adding dimensions based on “liquidity” and/or “milestones” to improve the most common token vesting models in today’s market.
Liquidity-Based Vesting Mechanism
Liquidity isn't an absolute concept; there are many ways to quantify it across different dimensions.
One feasible metric is to examine buy-side depth of the token on-chain and on centralized exchanges (CEXs). By summing up cumulative buy orders, we obtain a numerical value—here referred to as bLiquidity (buy-side liquidity).
When designing vesting terms, projects can introduce two new parameters: bLiquidity and pbLiquidity (the percentage of buy-side liquidity, theoretically any value between zero and one). At the contract level, this can be expressed as:
min(tokens to be claimed under normal vesting output, pbLiquidity * bLiquidity * token unit FDV)
Next, let's walk through an example to illustrate how a liquidity-based vesting mechanism works.
Suppose a token has a total supply of 100 tokens, with 12% (12 tokens) allocated to contributors subject to vesting, each priced at $1 (assuming constant price for simplicity).
Under a traditional time-based vesting schedule, assume these tokens linearly unlock over 12 months post-TGE—meaning contributors receive 1 token ($1) per month.
Now, suppose an additional liquidity-based vesting clause is added, setting pbLiquidity at 20%, and bLiquidity at $10 (i.e., the token maintains at least $10 of buy-side liquidity over 12 months). In the first month, the contract checks the $10 bLiquidity value, multiplies it by 20% pbLiquidity, yielding $2.
Using the min function described earlier (taking the lesser of the two conditions), the contract releases 1 token because the time-based release value ($1) is less than the liquidity-based threshold ($2). However, if we change bLiquidity to $2, then the liquidity-based calculation becomes 20% × $2 = $0.40. Since $1 > $0.40, only 0.4 tokens will be released that month.
This illustrates one potential way to dynamically adjust vesting based on liquidity.
Advantages
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Mainstream vesting models today focus almost exclusively on time, perhaps indirectly considering whether sufficient liquidity exists at certain prices to absorb unlocks. A liquidity-based model requires projects to actively build and maintain token liquidity, aligning incentives more closely with long-term health.
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Public market investors gain stronger confidence—tokens only unlock fully when adequate liquidity supports them; otherwise, releases are capped according to actual liquidity, helping prevent price crashes due to insufficient absorption capacity.
Potential Challenges
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If the token consistently fails to achieve sufficient liquidity, contributor payout (unlock) timelines could be significantly extended.
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Additional rules may complicate calculations around unlock frequency and timing.
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May incentivize artificial buy-side liquidity. This risk can be mitigated via various methods—e.g., counting only bLiquidity within a certain price range, or requiring LP positions to have minimum lock-up periods.
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Contributors might continuously claim unlocked tokens without selling immediately, accumulating large balances before dumping them all at once—potentially impacting liquidity and causing price drops. However, this scenario resembles whales accumulating liquid tokens; the risk of whale sell-offs affecting price always exists in markets.
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Obtaining accurate bLiquidity data is easier on DEXs than on CEXs, where transparency is limited.
Before moving on to milestone-based vesting, projects should consider strategies to ensure sufficient liquidity to support “normal” unlocking progress. One approach is to incentivize locked LP positions. Another is to attract more liquidity providers—for instance, as discussed in our article “10 Things to Consider When Preparing for Your Token Generation Event (TGE)”, allowing liquidity providers to borrow tokens from the project treasury can encourage participation and help create a more stable market around the token.
Milestone-Based Vesting Mechanism
Another promising dimension to enhance vesting design is “milestones”—quantifiable metrics such as user count, trading volume, protocol revenue, or total value locked (TVL)—that reflect a protocol’s attractiveness and adoption.
Similar to the liquidity-based design, protocols can introduce milestone-related parameters to create binary-style vesting conditions.
For example, to achieve full “normal” unlocking, the protocol must reach milestones such as $100M TVL, 100+ daily active users, and over $10M average daily trading volume. If these targets aren’t met, the final amount unlocked will fall short of initial expectations.
Benefits
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Ensures that when large-scale unlocks begin, the protocol already demonstrates real traction and liquidity.
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Reduces reliance on fixed time-based vesting.
Drawbacks / Challenges
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Data can be manipulated—especially statistics like active users and trading volume. TVL is relatively harder to manipulate but may be less meaningful for capital-efficient protocols. Revenue is harder to fake, though activities like wash trading can generate fees and thus inflate revenue indirectly.
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When assessing manipulation risks, it's crucial to examine incentives across groups. Teams and investors (those directly affected by vesting schedules) have strong motives to manipulate data, while public market investors have little incentive to accelerate unlocks and thus are unlikely actors.
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Off-chain legal agreements can significantly deter malicious behavior from motivated parties. For example, projects could establish strict penalties upfront—such as revoking token allocations if team members or investors are found engaging in wash trading or other forms of data falsification.
Conclusion
The current market trend of “high FDV, low circulating supply” has raised concerns among public market investors regarding sustainable investment potential.
Traditional time-based vesting models fail to adapt to complex market dynamics. By integrating dimensions such as liquidity and milestones into vesting terms, projects can better align incentives, ensure sufficient depth, and validate protocol appeal.
While these new designs present fresh challenges, the benefits of more robust vesting mechanisms clearly outweigh the drawbacks. With careful design, enhanced vesting models can strengthen market confidence and foster a more sustainable ecosystem for all stakeholders.
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