Written by: Brian Flynn

Compiled by: AididiaoJP, Foresight News

For the past five years, I have been trying to solve the problem of "incentive misalignment" in the cryptocurrency space.

The design of most tokens encourages holders to compete against each other.

This is completely contrary to the goals they were supposed to achieve. Tokens are supposed to unite teams, investors, and users around a common goal. If everyone holds the same asset, then everyone naturally hopes for the project's success; this idea itself is correct. The problem lies in the token models we have built, which allow people to make money by "selling" instead of by "holding." It is this one design choice that has messed everything up.

This article is not meant to promote a specific project I am working on. Rather, it addresses the core issue that the entire industry needs to solve, and it is the direction we should advocate to regulators.

For eight years, we have been watching the same script: project launch, market hype, insider unlocks, price dumps and exit scams, retail investors getting trapped. This pattern is too familiar, so much so that we hardly see it as a problem—it seems that tokens were meant to operate this way. But I believe we have not been honest in facing the root of the problem. Moreover, I have not seen anyone pushing for a truly better token model—a model we can point to and say, "This is what we should do."

Now, we have entered an unprecedented regulatory window. But the problem is we haven't even figured out what a "good token" should look like before stepping into this window.

The Race to Exit

When you make money by selling tokens, every other holder becomes your competitor.

The team issued a token, and early investors came in. The team also holds a lot, but needs to unlock gradually. Users buy on the market, and on the surface, everyone's interests seem aligned. In reality, everyone is watching each other, pondering when to sell. Investors watch for the first large unlock, the team looks for cashing out opportunities. Users want to exit before the insiders do. This is not aligned interest; it’s a race to exit.

Lock-up and unlock mechanisms do not solve this problem. They merely determine who gets to exit first—the answer is always insiders exit ahead of retail investors. The "ultimate game" is no longer "how to grow this project," but has turned into "when should I sell."

Even the "Smart" Methods Don't Work

What about buybacks? What about burning tokens? What about staking rewards? These are all attempts to solve the problem, but they share the same flaw: they are too convoluted; buybacks and burns can push prices up—but you still have to sell the tokens to make money. Staking rewards are even worse, using new tokens as rewards for holders, which ends up diluting the token price and creating new selling pressure. This is not a yield; it’s a treadmill disguised as yield.

If your token model requires holders to sell tokens to make money, then you have not aligned the incentive mechanism at all—you’ve just built a game of musical chairs.

Industry Progress

Indeed, there are some signs that the industry is exploring the right direction. Projects like Aave, Morpho, and Uniswap are pushing to unify equity holders and token holders, bringing insiders and the community to the same table, eliminating opposition; this direction is truly important.

However, this still does not solve the problem of "racing to exit." Everyone is still playing the same game: making money by selling tokens. Some fee switches and governance sharing of revenues have made progress, but they still scratch the surface. To completely solve the exit race problem, we need to go all the way.

A Viable Model

Imagine this scenario: 100% of the protocol's revenue is entirely determined by the token holders on how to use it. It’s not decided by the team or any behind-the-scenes decision makers. Everyone votes on: how much is directly distributed to holders, how much is used for continued development, and how much is set aside for reserves. This is exactly how listed companies operate—shareholders vote on whether to distribute dividends or reinvest, and the cryptocurrency version is just more direct and transparent.

There are no lock-ups because everyone no longer has to play the "who exits first" game. You don’t make money by selling tokens; you make money by holding them. As long as the protocol generates revenue every day, you can get your share as decided by the votes. If you sell, you stop receiving dividends. If you hold, you continue receiving dividends. The calculations are straightforward, and the strategy is clear: find ways to help the protocol make more money.

For example, suppose a protocol earns $1 million in a year. Holders vote to allocate 70% for distribution and 30% for continued development. There are a total of 1 million tokens. Thus, each token can receive $0.70 per year, while continued funding for development allows the protocol to keep growing. You don’t have to worry about when to buy or sell, nor do you need to devise ways to outmaneuver other holders. You just hold, and you can keep earning.

The competitive direction is finally correct: it’s about your protocol competing with other protocols to capture users and revenue, rather than holders plotting against each other in a race to exit.

When everyone can earn by holding, the motivation shifts from "running away" to "holding on and advocating for the project." Such projects will ultimately resemble traditional businesses more than speculative ventures. They will value dividends over hype, focus on revenues rather than boasting. This may be exactly what cryptocurrencies need the most right now.

Why Has No One Done This Earlier?

There are two reasons, and both are slowly changing.

The first reason is that playing the "insider game" made money faster. As long as you could achieve a 10x return by hyping and dumping on retail investors, who would want to go through the effort of building a genuinely profitable business? But that era is coming to an end. Retail investors have wised up; on-chain data makes insiders' movements transparent, and only the teams that are serious about their work will want to stay.

The second reason involves the issue of securities law. A token that distributes income to holders looks very much like a security under the "Howey Test." Because of this, serious teams in the industry have been hesitant for many years. Even if founders know that revenue sharing is a better model, as long as there’s a risk of being classified as an "unregistered security," they can hardly dare to initiate the idea.

That's why you see so many protocols going around in circles, resorting to indirect methods like burning and buybacks. It’s not because they are better, but because doing so can bypass direct dividends and give themselves a rationale: "Look, we are not distributing money directly." One could say that the current state of token design is half driven by legal fears and the other half by technical considerations.

There’s also a practical difficulty: the previous infrastructure did not support it. To achieve large-scale, trustworthy, programmatic income distribution on-chain requires inexpensive transactions, reliable smart contracts, and robust infrastructure. Five years ago, doing this on the Ethereum mainnet alone would have incurred transaction fees exceeding most protocols' revenue. Now with layer two networks and modern infrastructure, it has become feasible.

Why Now Is Possible

In the past year, changes in the regulatory environment have been greater than in the previous eight years combined. The U.S. SEC has established a cryptocurrency working group in January 2025, led by Commissioner Hester Peirce, with the clear task: "To delineate clear regulatory boundaries and provide feasible registration pathways." Peirce herself has also proposed a token "safe harbor" plan that allows projects a development buffer period before a final classification. The SEC and the Commodity Futures Trading Commission (CFTC) have also jointly issued a statement, saying they will coordinate the regulation of digital assets. These are not empty words; real rules are being formulated and advanced.

But this window of opportunity won't last forever. This year is an election year, and this relatively open political climate may not hold until the next election cycle. If we just wait around, the window may close before we present anything worthwhile to support. Even more dangerously, if the industry has not proposed reliable alternatives, the next round of token collapses will come, and those events will solidify the regulatory template—leaving us no voice.

That’s why it’s so important to talk about this now. It's not about being reactive or a last-minute fix, but about taking proactive measures. If we don’t tell regulators what a "good token" should look like, they will use bad cases as templates. Projects that exploit and pump and dump will become the regulatory "baseline," while truly compliant revenue sharing models will be misjudged.

Projects like Aave, Morpho, and Uniswap are showing—by merging equity and token holders—that the industry genuinely wants to move towards something with real economic value. Regulation should support this direction, not the other way around. But the prerequisite is that we must clarify the logic and speak publicly about it, before the window closes.

Questions Every Founder Should Ask

If you are currently designing a token, ask yourself one question: do your holders make money by selling tokens or by holding them?

If the answer is "by selling tokens," then you have just created a game of musical chairs. Some people will get chairs, but most won’t. And those who miss out will always remember.

If the answer is "by holding," then you have built something that everyone can profit from by growing the cake. This is the "aligned interest" that tokens should have.

Of course, this is not a simple question. Revenue sharing models indeed involve complex issues such as token classification, distribution mechanisms, and governance methods, among others. But at least it is a better starting point than what we have now.

The regulatory window is open, but it won’t be open forever. The midterm elections will shift the landscape. The next major token collapse could close the door before revenue sharing models have a fair chance to be considered. If we want better rules, we have to tell regulators what "better" looks like—now, don’t wait for the next cycle.