Hack VC: 10 Considerations to Emphasize During Project TGE

Establishing Connections with Liquidity Providers

When tokens are first launched, there is usually a limited token supply available in the market. This is because tokens belonging to investors and employees are often locked up for years, resulting in a lack of liquidity depth on exchanges, leading to signific ant price volatility of the tokens. Small buy and sell orders on exchanges can greatly impact the token price. Is token price volatility a problem? Not necessarily, but it becomes crucial if your token has some form of utility. Your network may not function as expected if users cannot acquire tokens in reasonable quantities or prices to use the network, potentially hindering network growth. To address this issue, you can hire one or more liquidity providers to help create liquidity for the token. Liquidity providers can borrow tokens from your treasury and pair them with their stablecoins on exchanges to create a market. They typically have algorithmic bots that act as "middlemen" between exchange buyers/sellers, thus creating a liquidity market. A typical transaction with liquidity providers involves them borrowing your tokens for 18 months, after which they can choose to purchase these tokens at the prevailing price. Therefore, these activities come at a cost. Examples of liquidity providers include Amber Group, Dexterity Capital, and Wintermute. Recently, the concept of on-chain liquidity providers has emerged, where Web3 protocols effectively act as liquidity providers. Stablecoins are provided by dynamic LPs, who may even be members of your own DAO (creating a strong incentive alliance and a good way to reward participating DAO members).

DeFi Protocols (or L1/L2 Protocols) Need to Plan TVL from the Start

We see many tech founders launching DeFi protocols and hoping the motto "if we build it, they will come" applies. However, reality is often different - you need a robust go-to-market strategy to attract capital. The measure of DeFi protocol attractiveness is TVL. If you start from 0 TVL, it can create a chicken-and-egg dilemma for LPs, as no one wants to take the risk and be the first LP in the pool. LPs nowadays are often more conservative (considering some recent rug pulls in Web3). They typically worry about two things: - Is the displayed yield accurate relative to the actual yield? - Am I at risk of principal loss (due to hacks or other reasons)? One way to address this is to have strong social proof from other investors who trust the protocol from the start. You can effectively "pre-negotiate" TVL with private groups before the launch. This could be VCs, family offices, or high-net-worth individuals. A reasonable target for mass adoption before others start feeling comfortable joining is reaching a 7-8 figure TVL. Ultimately, the best long-term solution to make LPs comfortable is to have your protocol run as expected for a significant period without being hacked. This could be an effective way to encourage early adoption and start building a track record. Users and TVL often follow the 80/20 rule (where the top 20% of users can account for over 80% of TVL), so when growing TVL, attracting large deposits should be a focus. Apart from the initial stages, you should also plan the release schedule for liquidity mining. Initially, it's okay to subsidize through token incentives, but in the long run, transitioning to sustainable fee-driven revenue is advisable. An interesting tactic to increase early TVL is to create an "overflow" bucket for investors. Only consider them once they commit to TVL once the current dilution limit is reached.

Follow Best Security Practices

Evaluate Product-Market Fit Before Mainnet Launch

Web3 projects have gained a bad reputation for launching tokens before addressing real customer pain points. If you adopt this approach, the token price may plummet as your KPIs are at best questionable. But how do you evaluate product-market fit before the product launch? Some teams attempt to confirm this through testnets, but the challenge with testnets is that customer behavior may differ from the mainnet. This is especially true in financial domains (e.g., DeFi protocols on testnets) because users are using "test coins" and may not take their actions seriously, possibly just engaging in airdrop mining without being serious users. To address this, I suggest launching a "private mainnet" (distinct from the testnet) where your service is used with real users who have real capital to confirm product-market fit. These users are invite-only (e.g., your investors, friends, and team), so you don't risk botching your marketing efforts with a small group of private users.

Ensure the Launch Schedule is Accurate

When is the right time to launch your token? Most of the time, I would recommend startups delay launching their tokens until significant actual value is created with the protocol. This is similar to Web2 startups before IPOs not rushing into IPOs before establishing a solid business. There's a risk in launching tokens during specific market windows. If retail investors buy your tokens in a deep bear market, there's a higher likelihood of price appreciation if there's a bull market in the future, which can create strong loyalty and advocacy for your project. If you switch this to launching tokens only during a bull market, and a sharp decline occurs in a future bear market, the enthusiasm of these users naturally diminishes. One way to mitigate this risk is by setting more attractive entry prices for investors through IEOs. To understand this concept, consider that most Web3 projects plan to airdrop a significant portion of their token supply to users. When you do this, users typically don't provide any information in exchange for tokens; the airdrop is free for them. This provides broad distribution of chips, but doesn't necessarily make users care about your protocol as they haven't invested/taken any risks. That is, they haven't participated. You may want to avoid selling tokens to retail investors (for legal/regulatory reasons). One potential solution is an IEO. It works by allocating a portion of the token supply to exchanges, which then sell it to users at a lower price (creating an easy win opportunity for retail investors to see appreciation). This is also a good way to build trust with exchanges. Sui is a good example. Sui, an L1 based on the Move programming language, created by former Meta employees, conducted an IEO, which was very successful.

Be Mindful of Cliff Unlock Times When Designing Token Vesting

Tokens for most Web3 project employees and investors are usually released over several years and often have a cliff set at the beginning. In practice, if a large number of employees or investors are selling tokens around similar dates, sudden large sell-offs in the market can lead to negative price trends. To avoid this situation, we recently started recommending continuous vesting (tokens steadily accumulating on a smooth curve). This way, tokens flow into the market slowly, avoiding sudden drops.

Allocate Budget for Exchange Listings

Many exchanges charge fees to list your token, so if you want to list your token on some popular exchanges, you need to plan ahead and budget for it. It's known that some of the most renowned exchanges charge up to $1 million for token listings, so the listing process can quickly become expensive. An exception is if you're a top-tier project supported by well-known funds; in such cases, exchanges sometimes list your token for free as it attracts users to join their exchange.