Hack VC: 10 Considerations to Emphasize During Project TGE

Original Title: 10 Things to Consider When Preparing for your Token Generation Event (TGE)

Original Author: Ed Roman, Managing Partner at Hack VC

Original Translator: 1912212.eth, Foresight News

Establishing Connections with Liquidity Providers

When a token launches for the first time, there is usually a limited token supply available in the market. This is because tokens belonging to investors and employees are often subject to vesting/lock-up periods for several years, resulting in a lack of liquidity depth on exchanges, leading to excessive price volatility of the token. 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 at a reasonable quantity or price to use the network, potentially hindering network growth. To address this issue, you can engage one or more liquidity providers to help create liquidity for the token. Liquidity providers can borrow tokens from your treasury and create a market by pairing their stablecoins with your token on exchanges, often utilizing algorithmic bots to act as "middlemen" between exchange buyers/sellers, thus creating a liquid market. Typical transactions with liquidity providers involve them borrowing your tokens for 18 months, after which they can choose to purchase these tokens at the prevailing price. Therefore, these activities clearly 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 have seen many tech founders launch DeFi protocols and hope that the motto "if we build it, they will come" will apply. However, the reality is often different - you need a strong go-to-market strategy to attract capital. TVL is the measure of attractiveness for DeFi protocols. If you start from 0 TVL, it may pose a chicken-and-egg dilemma for LPs, as no one is willing to take the risk and be the first to enter 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 before launch. This can be VCs, family offices, or high-net-worth individuals. A reasonable target for mass adoption before others start joining is to reach 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 subject to hacks. This may encourage early adoption and start building a track record. Users and TVL often follow the 80/20 rule (i.e., the top 20% of users can account for over 80% of TVL), so attracting large deposits should be a focus when growing TVL. Apart from the initial stage, you should also plan the release schedule for liquidity mining. Initially, subsidies through token incentives are acceptable, but transitioning to sustainable fee-driven revenue in the long run is recommended. An interesting tactic to increase early TVL is to create an "overflow" bucket for investors. Only when investors also commit to TVL can you consider them once the current round dilution limit is reached.

Adhere to Best Security Practices

The security of the protocol is crucial. If your protocol is hacked, it will be a permanent stain on your record and may deter user participation. Several key steps need to be followed:

Consider early adoption of technologies that help reduce smart contract hacking risks. For example, using the Move language for programming, which is formally verified and type-safe, is often more secure than Solidity (e.g., through Move mentLabs. xyz). Another approach is to introduce a delay upon transaction completion to provide a window for intercepting smart contract hacks (e.g., through UseFirewall. com). Use of code in a zero-knowledge form verification through technologies like AlignedLayer. com (e.g., in the case of bridges).
Conduct multiple smart contract audits before launching the protocol to convey to users and the team that your code is reliable. Note that this does not guarantee that you will not be exploited, but it is a step in the right direction. Examples include Trail of Bits and Quantstamp.
Establish a code change process so that if you make additional changes to smart contracts over time, each code increment can be rechecked through lightweight audits. This is a step that teams often overlook but is crucial for capturing vulnerabilities produced in hasty code submissions.
Consider using formal verification or fuzz testing. Formal verification involves thorough mathematical verification of the code system. It provides comprehensive coverage analysis and can enhance your confidence in resisting attacks. Fuzz testing is a process of slightly altering system inputs to discover extreme cases that could be exploited. Veridise is an example of a vendor that provides formal verification and fuzz testing.
Consider investing in a bug bounty program. This can incentivize white-hat hackers to discover vulnerabilities by rewarding them. Currently, ImmuneFi is a market leader in Web3 bug bounties.

Assess Product-Market Fit on Mainnet Before 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 will plummet sharply because at best, your KPIs are also dubious. But how do you assess product-market fit before launching the product? 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 when it comes to the financial sector (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 and not 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 by invitation only (e.g., your investors, friends, and team), so you don't mess up your marketing efforts due to a small group of private users.

Ensure the Launch Schedule is Accurate

Choosing the Right Time for Token Launch

Most of the time, I would advise early-stage companies to delay the launch of their tokens until significant real value has been created with the protocol. This is similar to how Web2 startups before IPO often do not rush to go public until they have established a solid business. There is a risk in launching tokens during a specific market window. If retail investors buy your tokens during a deep bear market, there is a higher likelihood of price appreciation in a future bull market, which can create strong loyalty and advocacy for your project. If you switch this to launching tokens during a bull market and experience a sharp decline in a future bear market, the enthusiasm of these users will naturally be much lower. One way to mitigate this risk is to set a more attractive entry price for investors through an Initial Exchange Offering (IEO). 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 do not provide any information in exchange for the tokens, making the airdrop free for them. This provides chips for as wide a distribution as possible, but does not necessarily lead to users caring about your protocol because they have not invested/risked anything. In other words, they are not involved. You may want to avoid selling tokens to retail investors (for legal/regulatory reasons). A potential solution is an IEO. The way it works is that a portion of the token supply is allocated to exchanges, and then the exchanges sell it to users at a low 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 is an L1 based on the Move programming language, created by former Meta employees. They conducted an IEO, which was very successful.

Be Mindful of Cliff Unlock When Designing Token Vesting Schedules

Most Web3 projects have tokens for employees and investors that are released over several years, often with a cliff at the beginning. In practice, if you have a large number of employees or investors selling tokens on similar dates, a sudden large sell-off in the market could lead to negative price trends. To avoid this, we have recently started recommending continuous vesting (tokens steadily accumulating on a smooth curve). This way, tokens slowly enter the market, avoiding sudden declines.

Allocate Budget for Exchange Listing

Many exchanges charge fees to list your tokens, so if you want to list your tokens on some of the more popular exchanges, you need to plan ahead and budget for this. It is known that some of the most well-known exchanges charge up to $1 million for token listings, so the listing process can quickly become expensive. An exception is if you are a top-tier project backed by well-known funds, in which case exchanges sometimes list you for free as it attracts users to join their exchange. This is one of the advantages of working with large venture capital firms in fundraising rounds (as it can provide social proof through exchanges buying your tokens).

Fundraising Before Token Generation Event (TGE)

We have encountered many projects that try to raise funds after launching their tokens. This may be even more challenging than expected for early-stage companies. Most private investors engage in arbitrage between public and private markets. The fund market for private fundraising is much larger compared to public fundraising, limiting the potential number of pursuers. For example, you will be excluded from most early funds. Raising funds after token launch is also difficult because the negotiation itself may be challenging. The typical structure is a discount on the public token price. However, the token price may fluctuate significantly during the fundraising process. If the token price is a moving target, how do you determine a price benchmark and reach an agreement with private investors on that price? These issues disappear if you raise funds before launching the token. At that time, the token price is unknown, and you can include more private funds that invest in this asset class.

Seek High-Quality Legal Advisory Services for TGE

Over the years, we have encountered many teams with a severe lack of legal advisory services. Web3 founders inherently take on more risk than Web2, so obtaining strong native crypto legal advice is crucial. I encourage founders to ensure that their advisors have experience in the crypto-specific practice area when preparing for TGE. By the way, the regulatory environment for Web3 is still evolving. Typically, decisions are subjective rather than objective. Keep in mind that most lawyers are not businessmen, and they often optimize advice based on assumed legal arguments rather than real-world decision-making. In other words, do not blindly follow your lawyer in regulatory matters - you need to exercise your judgment and assess risk preferences, especially considering that the law itself is constantly changing.

Choosing the Right Time for Monetization through "Fee Switch"

Many protocols (especially DeFi) defer "fee income" to a future date through fee conversion. The purpose of doing this is to subsidize the largest short-term growth and defer monetization to later. This is similar to how Web2, Facebook, and other social networks deferred advertising/monetization until they had a sufficient number of social graphs. If you are optimizing to attract new users, deferring monetization makes complete sense. The risk of deferring monetization is that it may disrupt product-market fit. In general, if users are willing to pay for your service, that is the most powerful indicator that you have "real" users and stickiness. However, if your fees significantly impact the user base economically, deferring monetization may hide core issues in the protocol. But if your acceptance rate is moderate, the risk may be lower. Fee conversion essentially transforms from pure governance to accumulating value by distributing platform fees to token holders. It is often easier post-launch (e.g., GMX), but of course, this is not always the case (UNI and many others). Here are some characteristics of projects that may need fee conversion:

Reaching a critical mass of users;
Strong token liquidity;
Wide holder base;
Takers paying reasonable fees to liquidity providers.
Perhaps consider giving LP tokens during fee conversion through airdrops or similar distribution methods, so even if they no longer receive 100% of the fees, they still feel they are getting some return through the tokens.
Consider the minimum threshold target APY yield for token holders relative to other opportunities/markets and build meaningful and fair fee parameters in this scenario.
For staking rewards, 5% is considered standard, while 10% is considered high (LIDO can set 10%).
For exchanges, 2.5-5.0 bps is standard, and 10-25+ bps is high; better venues can charge higher fees.
For lending, a reasonable net interest margin (NIM) between borrowers and lenders is typically 1-2%, and it is expected to compress over time.

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