Prioritize Transparency.

Author: 0xLouisT

Compiled by: Deep Tide TechFlow

Token Economics Series

In mythology, the labyrinth was built to imprison the Minotaur, a terrifying creature with a human body and a bull's head. King Minos, fearing the Minotaur, summoned the genius craftsman Daedalus to design a complex labyrinth that no one could escape. However, when the Athenian prince Theseus, with Daedalus's help, killed the Minotaur, Minos was furious. He imprisoned Daedalus and his son Icarus in the labyrinth he had built as revenge.

While Icarus's hubris led to his tragedy, Daedalus was the true architect of their fate—without him, Icarus would not have been trapped. This myth parallels the hidden token trades common in the current cryptocurrency cycle. In this article, I will reveal these trades—labyrinthine structures meticulously designed by insiders (like Daedalus) that doom projects (like Icarus) to failure.

What are Backdoor Token Deals?

High FDV tokens have become a hot topic, with ongoing debates about their sustainability and impact. However, within these discussions, there is a dark corner often overlooked: backdoor token deals. These trades are made by a few market participants through off-chain contracts and side agreements, often hidden and nearly impossible to identify on-chain. If you are not an insider, you may never know about these trades.

In his recent article, @cobie introduced the concept of ghost pricing, pointing out that true price discovery now occurs in private markets. Building on this, I would like to introduce the concept of ghost token economics to illustrate how on-chain token economics may present a distorted and inaccurate picture of the actual off-chain token economics. What you see on-chain may seem like the true "capital table" of the token, but this is misleading; in reality, the ghostly off-chain version is the accurate representation.

While there are many types of token trades, I have identified some common patterns:

1. Advisor Allocations: Investors receive additional tokens for providing advisory services, which are often categorized under team or advisor allocations. In reality, this is often a way for investors to lower their costs without providing much additional advice. I have seen advisor allocations reach five times the investor's initial investment, effectively reducing their actual cost by 80% relative to the official valuation.

2. Market Making Allocations: A portion of the token supply is reserved for market-making operations on centralized exchanges (CEX), which helps increase liquidity. However, conflicts of interest arise when market makers are also investors in the project. They can hedge locked tokens with the tokens from market-making allocations.

3. CEX Listings: To list on top CEXs (like Binance or ByBit), project teams need to pay marketing and listing fees. If investors assist in completing these listings, they may receive additional performance fees (up to 3% of the total supply). @CryptoHayes recently published a detailed article indicating that these fees can amount to 16% of the total token supply.

4. TVL Leasing: Whales or institutions providing liquidity often receive higher exclusive returns. While ordinary users may be satisfied with a 20% annual percentage yield (APY), some whales quietly obtain 30% returns through private trades with the foundation. This practice may be positive and necessary to ensure initial liquidity, but these trades must be disclosed to the community in the token economics.

5. Over-the-Counter (OTC) Rounds: While common and not inherently harmful, OTC rounds often lack transparency, as their terms are usually unknown. The biggest impact comes from so-called KOL rounds, which act as catalysts for token prices. Certain top L1 projects (names not specified) have recently adopted this strategy. Large Twitter KOLs received highly attractive token trades with significant discounts (around 50%) and short lock-up periods (linear distribution over six months) to incentivize them to promote the token as the next [insert L1] killer. If in doubt, here is a convenient KOL translation guide to help you see the truth.

6. Selling Unlocked Staking Rewards: Since 2017, many PoS networks have allowed investors to collect unallocated rewards while staking allocated tokens. If these rewards are unlocked, early investors can profit more quickly. @gtx360ti and @0xSisyphus recently pointed out examples from Celestia and Eigen.

These token trades lead to "ghost" token economics. As a community member, you may see the token economics chart below and think it looks balanced and transparent (charts and data for reference only).

But if we peel back the surface and reveal the hidden ghost trades, the real token economics looks like this pie chart, with almost no share left for the community.

Just as Daedalus was the designer of his own prison, these arrangements have doomed the fate of many tokens. Insiders trap their projects in a labyrinth of opaque trades, causing token value to leak from all directions.

How Did We Get Here?

Like most market inefficiencies, this issue stems from a severe imbalance between supply and demand.

Due to the venture capital boom of 2021/2022, a large number of projects flooded the market. Many projects waited over three years to launch their tokens, but now they are all squeezed into a highly competitive market, vying for TVL and attention in a much colder market. It is no longer 2021.

Market demand cannot meet supply. There are not enough buyers to absorb the large number of new token listings. Similarly, not all protocols can attract funds for TVL deposits, making TVL a scarce and sought-after resource. Many projects have failed to find a natural product-market fit (PMF) and instead fell into the trap of overusing token incentives to artificially boost KPIs to compensate for a lack of sustainable appeal.

Currently, the private market has become the main active venue. With retail investors exiting, most venture capital and funds struggle to achieve substantial returns. Shrinking profits force them to create revenue through token trades rather than asset selection.

Token distribution remains a major issue. Due to regulatory barriers, it is nearly impossible to distribute tokens to retail investors, and the team's options are limited, primarily relying on airdrops or liquidity incentives. If you are a team trying to solve the token distribution issue through ICOs or other means, please contact us.

Conclusion

Using tokens to incentivize stakeholders and accelerate project development is not inherently problematic; it can be a powerful tool. The real issue lies in the complete lack of on-chain transparency in token economics.

Here are some key suggestions for cryptocurrency founders to enhance transparency:

1. Do not grant venture capital advisor allocations: Investors should provide full value to the company without needing additional advisor allocations. If investors require extra tokens to invest, they may lack confidence in the project. Do you really want such people on your shareholder list?

2. Market-making services have been commoditized: Market-making services have been commoditized and should be offered at reasonable prices. There is no need to pay excessively high fees. To help founders better understand this area, I have written a guide.

3. Do not confuse fundraising with unrelated operational matters: During fundraising, focus on finding funds and investors that can add value to the company. Avoid discussing market makers or airdrops at this stage—do not sign agreements on these issues too early.

4. Enhance on-chain transparency: On-chain token economics should accurately reflect token distribution. In the initial stages, transparently allocate tokens to different wallets to reflect your token economics chart. For example, ensure there are six main wallets representing allocations for the team, advisors, investors, etc. Proactively contact the following teams:

   

• @etherscan, @ArkhamIntel, and @nansen_ai to tag all relevant wallets.

• @Tokenomist_ai for vesting schedules.

• @coingecko and @CoinMarketCap to ensure the accuracy of circulating supply and FDV.

• If you are L1/L2/appchain, ensure your local block explorer is intuitive and user-friendly.

1. Use On-Chain Vesting Contracts: For teams, investors, OTC, or any type of vesting, ensure that it is transparently and automatically implemented on-chain through smart contracts.

2. Lock Staking Rewards for Insiders: If staking locked tokens is allowed, at the very least, ensure that the staking rewards are also locked. You can check my thoughts on this practice.

3. Focus on Product, Ignore CEX Listings: Do not overly focus on getting listed on Binance; this will not solve your problems or improve your fundamentals. Take @pendle_fi as an example: it traded on DEX for years, achieved PMF, and then easily got listed on Binance. Focus on developing the product and growing the community. Once your fundamentals are solid, CEXs will actively seek to list you under more favorable conditions.

4. Avoid Token Incentives Unless Necessary: If you issue tokens too easily, it may indicate issues with your strategy or business model. Tokens are valuable resources and should be used cautiously for specific goals. They can serve as growth tools but are not a long-term solution. When planning token incentives, ask yourself:

• What specific, quantifiable goals do I want to achieve with these tokens?

• What will happen to this metric once the incentives stop?

If you believe the results will drop by 50% or more once the incentives cease, then your token incentive plan may have issues.

If there is only one key takeaway from this article, it is: Prioritize Transparency.

I am not here to blame anyone. My goal is to spark a genuine discussion to promote transparency and reduce false token trades. I sincerely believe this will strengthen the space over time.

Please stay tuned for the next part of my token economics series, where I will delve into a comprehensive guide and rating framework for token economics.

Let’s make token economics transparent again and escape the labyrinth of Daedalus.

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