Today, while reviewing projects, I came across an article by an L1D partner titled 'Phantom Tokenomics, Inside the Obscure Daedalus Labyrinth', which translates to: 'The Daedalus Labyrinth: Hidden Token Economic Models for Retail Investors'. To put it simply: many tokens are not only opaque but also have two economic models.
I have always been quite averse to the industry's emphasis on token economic models. On one hand, tokens do not equate to economics, and on the other hand, discussing this is fundamentally misguided.
It's like the IPO prospectus in traditional markets, which should emphasize the project's inherent value and future growth potential. The more confident a project is, the more straightforward it wants to write it, fearing others won't understand its merits; whereas inferior projects often complicate financial designs, fearing others will realize they are trash.
The article at the beginning is even more ironic. Many projects not only engage in token economics but have two sets of models: one is the fool's model written in the white paper, and the other is the real distribution plan done in secret.
Especially in the last bull market, projects that initiated financing did this most aggressively. Frankly, I knew about these matters early on; after all, there's nothing new under the sun, but I didn't delve into it deeply, as I haven't pushed high FDV low circulation secondary tokens in the past two years, nor have I bought them.
Now that we are starting to pay attention to altcoin tracks, it is necessary to delve deeper into these issues and present them to readers. I also appreciate L1D for daring to speak boldly and break this veil, as many insider trades remain hidden until a crisis occurs.
For instance, after FTX and LUNA collapsed, some unique investment terms were exposed. I recall that Terra offered Alamada tokens worth over a hundred million at a far lower price than the A round to attract FTX's influence, claiming it was for market maker management.
However, these contract agreements are never publicized. It wasn't until Terra collapsed and judicial authorities intervened that those contract agreements were revealed.
This is far too common in traditional financial markets; many companies whose names are inconvenient to disclose are playing a game of covering seven pots with ten lids, until they can no longer cover it and are forced to reveal themselves.
Like Terra, Celsius, 3AC, IDG, and Silicon Valley Bank in the crypto space, they continued to release positive news to maintain appearances, even amidst looming crises. When everyone rushes to withdraw, it all comes crashing down, and when they announce they can't continue, bankruptcy is the only path left.
The token economic model is actually a black box. Many trades are completed privately by a few individuals and can be concealed, making it impossible to identify them on-chain. The apparent token economic model is merely a cover for the real distribution.
0xLouisT mentioned several representative insider trades, through which the actual costs for institutions are much lower than the publicly disclosed financing costs.
· Advisor distribution: Investors can obtain additional tokens through advisory services, and such shares are typically categorized under the team or advisor category. This is usually a means for investors to lower their costs, and they provide little to no additional advice. I've personally seen an advisor's share from a certain institution being five times that of its investor shares, reducing the institution's true costs by 80% compared to official financing and valuation data.
· Market making distribution: A portion of the token supply will be reserved for market making on centralized exchanges (CEX). This has some positive significance as it can enhance the liquidity of the token. However, when market makers are also investors in the project, conflicts of interest arise—enabling them to use their market-making shares to hedge their own locked investments.
· Listing tokens on CEX: To list on leading CEXs like Binance, project parties often need to pay marketing and listing fees. If investors can assist and ensure that the tokens are listed on these exchanges, they sometimes receive additional business fees (which can be as high as 3% of total supply). Arthur Hayes previously published a detailed article revealing that these fees could reach 16% of the total token supply.
· TVL leasing: Whales or institutions that can provide liquidity are often promised exclusive higher yields. Ordinary users may be satisfied with a 20% annual yield, while some whales can quietly earn 30% through private trades with foundations, making the same contributions. This practice may have some positive significance for maintaining early liquidity, but the project parties should disclose these transactions in the token economic model to the community.
· OTC 'financing': OTC 'financing' is quite common and not inherently bad, but due to the terms usually not being disclosed, these trades often result in significant opacity. The most notorious example is the so-called 'KOL rounds', seen as short-term catalysts for token prices. Some leading Layer 1s (which I don't want to name) have recently adopted this strategy—KOLs can subscribe to tokens at a substantial discount (about 50%) and a short lock-up period (six months linear unlock). Out of profit considerations, they will strive to market xxx as the next xxx (insert some Layer 1 here). If you have questions, you can check out my previous KOL speech translation guide.
· Sale of staking rewards: Since 2017, many PoS networks have allowed investors to stake locked tokens and receive staking rewards at any time, which has become a way for early investors to profit in advance. Celestia and EigenLayer have recently been pointed out for this situation.
0xLouisT even made a diagram; the original was in English, and I'll translate it. The token distribution we ordinary investors and community members see might look like this:
But in reality, the true token distribution might look like this:
Why has it turned out this way? On the surface, it's a case of supply exceeding demand. In 2021-2022, too much venture capital flooded in, and then with the transition between bull and bear markets, many tokens are now stuck in a more apathetic market. The secondary market lacks funds and won't pay for these high FDV projects.
If you can't pay, you'll only be able to trade privately. Venture capital and funds want returns; project profits are still a long way off, leading to unethical practices.
In reality, the deeper issue is the pursuit of profit by capital and centralization. This is commonplace in traditional financial markets, and once rules are established, those who can trample them will reap enormous profits.
Isn't this ironic? Since the inception of Bitcoin, decentralization has aimed to combat the issues brought about by centralized power.
The result is that various projects talk about decentralization, but from the start, they operate in a centralized manner, high morality on the surface while engaging in unethical behavior behind the scenes. They can't even achieve fairness, yet they talk about decentralization?
This situation cannot change the status quo. Many see these issues, but all they can do is call for change, which is ineffective. The essence of capitalism dictates that capital will try every possible means to profit; what the industry needs is probably strict constraints.
For us investors, since we cannot change the environment in the short term, we can only avoid stepping into these pitfalls. For example, we should try to choose projects with high token circulation, opt for more transparent projects, and avoid participating in those with opaque metrics.
After all calculations, the options come down to Bitcoin and Ethereum, which is why I have always emphasized that everyone should heavily invest in them.
Additionally, based on this reason, I believe blockchain needs AI. Human nature tends to be selfish, and power is often monetized.
The future of decentralization is to ensure that the established rules cannot be transgressed by anyone. This is the most important foundation of crypto and a key reference indicator for our investments.
