Pantera Partner: How should Web3 project founders optimize token distribution?

Original title: Optimizing Your Token Distribution 2023

Original author: Lauren Stephanian, Partner at Pantera Capital

Original translation: Luffy, Foresight News

Two years ago, we published the report Optimizing Token Distribution, an analysis of token distribution models designed to help founders better think about network token distribution. Trends in the crypto space are changing rapidly, and given the renewed enthusiasm in the market, more and more founders are drafting their own token distribution models and issuing tokens. This report combines the latest data with our updated analytical framework to provide founders with valuable reference.

As a reminder, protocol founders usually raise funds to issue tokens to private investors and their communities. These tokens generally represent governance rights, allowing holders (insiders, private investors, and communities) to participate in the decision-making process of the product, service, or protocol. Protocols usually have a fixed supply of tokens, and teams must carefully allocate tokens to optimize the recipient group and distribute tokens to users and partners.

In our 2022 exploration, we explored key trends in token distribution using data extracted from private referral platforms, public media posts and blogs, and Github READMEs dating back to 2014. Now, two years later, we have improved our dataset and further explored recent trends in token distribution.

Please note: This report was published in March 2024 and uses public information as well as aggregated and anonymized private data points. The authors of this report have not independently verified the accuracy of these token distributions.

Key Trends in Token Distribution

Token distribution can be broken down into 7 main components:

· Core Team

· Private Investors

· Community Treasury

· Ecosystem Incentives

· Airdrops

· Public Sale

· Partners and Suppliers

We aggregated token distributions for over 150 projects and protocols to provide a more comprehensive analysis of clear trends in the space.

Team

This is the token allocation set aside for founders, past and future employees, and advisors. These tokens typically have the longest lockup periods, often aligning with investor lockups.

The team allocation above includes core contributors, future contributors, and advisors. For a more detailed look at the core team, check out the chart below, which shows a gradual increase in the core team allocation share.

Core Team Allocation

It's not surprising, but still worth noting, that team allocations seem to correlate somewhat with where we are in the market cycle. When the total market cap of cryptocurrencies grows, so does the amount allocated to the team, and when the market cap shrinks, so does the amount allocated to the team.

Team Allocation vs. Crypto Market Cap, Source: Market Cap

Private Investors

This is the share allocated to capital providers who purchase rights to future tokens or equity that are subsequently converted to tokens. These tokens have a lock-up period and are typically aligned with the core team.

Private Investor Token Allocation

Interestingly, while we would expect investor allocations to be inversely proportional to team allocations, this ratio has actually also been trending upwards over the past year. It is currently roughly at 2018 levels.

Team vs. Private Investor Allocation

Initially, I thought this might be related to the large-scale financing at the end of 2023, but judging from the industry financing data, this does not make much sense because the increase in valuation is higher than the increase in financing amount.

Median Funding Amount

Median Valuation

This may have something to do with founders raising funds they didn’t desperately need while waiting for the recent bear market to end.

Public Investors

This is the allocation of tokens sold to the public. Formerly known as “ICOs,” public sale tokens are sold at the time of the token launch and are fully circulated.

Unsurprisingly, the share of public sales has gradually trended towards 0 due to regulatory risk.

Public Sale Token Allocation

Airdrops

The disappearance of the public sale token model raises the question: how to get tokens into the hands of the community? One potential method is airdrops.

Airdrop Allocation

Treasury

These tokens are held in reserve for future distribution through governance. Treasury tokens are often viewed as a project’s “reserve pool” — allocated to different stakeholders through voting proposals.

Treasury allocations fluctuate over time, peaking in 2022. After a downward trend, we may see a decrease in treasury allocations due to increases in other categories.

Ecosystem Incentives

These tokens are earmarked for growth plans at launch, allowing users to profit from a pre-designated pool of tokens. Incentives have emerged as an alternative to public sales, including growth plans and liquidity mining.  

The allocation to ecosystem incentives is declining, but given the rapid growth of airdrops, many founders likely view incentives as a larger category, so you can assume this decline is closely related to the large increase in airdrops.

Ecosystem Incentive Allocation

Partners and Suppliers

These tokens include pools for paying for legal, rent, third-party marketing, etc. The decline could simply be because these expenses were not classified and mixed with the treasury.

Token Distribution by Project Type

Each type of project will have a unique allocation pattern.

Here is how each type of project performs. Note that these are post-pandemic averages.

Not surprisingly, DAOs tend to allocate more tokens to their treasuries/foundations, while L1s prioritize airdrops and (at least until 2023) public sales. L2s tend to prioritize ecosystem growth incentives, which may also be used for airdrops later. DApps spend the most on community incentives, but not necessarily through airdrops, but through other means such as liquidity mining.

Now, we will explore each sub-category in more depth.

DAO

We have seen some changes in DAO allocations over time. For many years, community funding has remained high, while team allocations have gradually decreased and fund allocations have increased. Unfortunately, we do not have enough data after 2023 to calculate an average.

DAO token allocation breakdown

A “Typical” DAO Token Distribution in 2022

DApp

Diving deeper into the DApp token distribution, we can see that team allocations have been slowly decreasing over time (after a big drop after 2014), while investor allocations and airdrop allocations have been increasing.

DApp Token Distribution Breakdown

Infrastructure: L1 and L2

The chart below combines L1 and L2 token distributions together, as they are very similar. We can see that public sale allocations have decreased over time. Community allocations have fluctuated slightly over the years, while investor and team allocations have both increased in 2023. A large portion of the 2023 token distribution went to airdrops.

 L1 and L2 Token Allocation Details

Looking closely at the differences between typical L1 and L2 token allocations, you’ll find that L2 tends to reserve less funds for ecosystem growth pools and allocate more funds for public sales and airdrops. L2 teams also tend to receive a smaller allocation ratio.

Typical L1 token distribution: Due to lack of 2023 data, only 2022 data is provided

Typical L2 token distribution: 2022 and 2023 data

Interview

All of the above charts show historical averages over time. This time, we’ll share some anecdotal data from founders in the early days of token distribution to understand what they regret and are happy with about token distribution.

Here’s what they had to say:

Livepeer

Livepeer was founded in 2017, long before DAO governance tools existed and when crypto was still in its infancy.

“I’m generally happy with how the tokens were distributed, initially through an algorithmic, decentralized, and open mechanism we created called Merklemine, and then continuously distributed through inflation, distributing tokens to node operators and other active participants on the network. This keeps tokens in the hands of those who are directly helping the network, while also allowing access to everyone and allowing thousands of users to discover Livepeer through the process of receiving tokens through MerkleMine.

As for what I would change, if DAO-based governance tools had been more mature and available when the network launched 6 years ago, it would have been great to use them for community-governed treasury. This would have helped with future ecosystem growth by being able to send tokens directly to video developers and others who didn’t directly receive network rewards. But at the time, the tools were so immature and complex to build that it wasn’t a priority. We didn’t want to have centralized control over token distribution, so we didn’t keep a treasury managed by a large company.”

——Livepeer founder Doug Petkanics

Prominent DApp Founded in 2018

“I think the token distribution itself ended up working out pretty well for us, and I rarely think: if only…

But if I could go back in time, I would place more emphasis on raising funds from people who are: 1) actively engaged in quantitative trading, 2) outspoken, and 3) actively involved in governance.

One of the best things we did as founders was not to take a disproportionate share - this allowed us to compensate important participants in the network with room to spare.”

—Founder of a Prominent DeFi Protocol Founded in 2018

What is the “best” way?

After the 2022 report was released, it was pointed out that average is not always the best. Therefore, it will be interesting to reverse engineer some of the most notable and recent token issuances across categories.

Reverse Analysis of Token Issuance of Top Projects

Layer 2

OP Market Cap (as of March 2024)

Looking at Optimism, they have a large fund dedicated to RPGF, which is a new strategy to incentivize builders to participate in their platform. Funds usually provide a certain amount of funds to investors and core contributors, and airdrops are also an important part of it.

Optimism token allocation, source: https://community.optimism.io/docs/governance/allocations/

Layer 1

Celestia is a Layer 1 protocol. They allocate most of the tokens to investors and a large portion to ecosystem developers. Incentive allocation also accounts for a relatively large part.

Celestia token distribution, source: https://docs.celestia.org/learn/staking-governance-supply

DApp

GMX market value (data as of March 2024)

GMX is a DeFi DApp, and its token distribution is more complex, with a large portion of it used to meet the requirements of the long-term operation of the DApp, especially related to keeping the product running properly, i.e. liquidity reserves, etc.

GMX token distribution, source: https://tokenomicsdao.substack.com/p/tokenomics-101-gmx

Summary

With the recent bull run, the token distribution method has changed dramatically over the past year.

Team

· In 2023, the average allocation for each team is 24%.

· Team allocation is related to market timing, and teams will have greater influence in this bull run.

· The distribution of the team and investors is not necessarily inversely proportional. In fact, in this round of bull market, both are on an upward trend.

Private investors

In 2023, the average distribution ratio of private investors is 20%.

Community Treasury

In 2023, the average distribution ratio of the community treasury is 28%.

Public Sale

In 2023, the proportion of public sales is almost zero.

Ecosystem Incentives

In 2023, the average distribution ratio of ecosystem incentives is 8%.

Airdrops

· In 2023, the average distribution ratio of airdrops is 20%.

· Airdrops have become an important part of community building, and airdrop strategies are important.

A successful token launch requires allocating a majority of tokens to community holders as well as future incentives for the core team.

In bull markets, teams have the upper hand as VCs rush to participate. Founders cut their ownership in the last bear market, but current ownership percentages are back to where they were in the last bull market in 2021. One of the difficult problems that crypto founders need to solve is balancing incentives and semi-retirement of core team members when the first tokens vest.

Also, the exponential growth in popularity of airdrops has triggered a flurry of engagement from crypto users — both good and bad, with crypto users becoming more sophisticated over time: users not only set up wallets on protocols, but also bridge protocols, participate in transactions, submit code requests on the protocol’s GitHub, and so on — often to the dismay of builders.

The crypto space is changing rapidly, and we’re always seeing innovations in marketing, ecosystem development, financing, and team compensation. Interestingly, we seem to have accepted the reality of earning tokens by participating in protocols, but the question is how to extend the participation time and get users familiar with using your platform.

An evolution of the airdrop framework is a points system, where points can be used to incentivize activity while retaining the ability for the founding team to fully control. Perhaps this is bad for the community, as this allows founders to incentivize user participation without fully committing to allocating tokens.

RPGF is also an emerging topic, a way to incentivize the establishment of utilities, that is, providing tools to the ecosystem to make it easier to access or build. Utilities are extremely important Layer 1 and Layer 2, but they are not usually backed by venture capital. RPGF is used to incentivize the construction of these utilities and enhance the entire ecosystem, which is classified as ecosystem growth. So far, it has distributed more than $300 million to more than 1,000 entities.

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