What Are the Most Popular Token Distribution Models
While many Web3 projects can operate and provide their services without native tokens, several opt to issue them. The reasons vary, from rewarding community members to offering extra services or discounts, and financing third-party development.
Creating and issuing tokens is straightforward for any project, but ensuring a fair distribution among users poses a challenge. Various popular token distribution models are available, and the team of Dexola is about to take a closer look at them. Yet, the best token distribution model is still up to you.
How Token Distribution Tackles Crypto’s Inequality Issue
Blockchains aim to address a significant global issue: the concentration of wealth among a small group of wealthy individuals, commonly known as “whales”. Blockchains are permissionless, enabling anyone to execute any operation definable in code. However, whales with deep pockets can outmaneuver average users. If a Web3 project simply lists its token on an exchange, whales may scoop up the majority, leaving little for genuine enthusiasts.
To mitigate this, Web3 projects have adopted token distribution models rather than straightforward token sales. These models ensure that while large investors can still purchase tokens, impacting price and liquidity positively, enthusiasts receive a fair share of the tokens and remain engaged with the project.
Launching Tokens via Crypto Launchpads
Launchpads are popular models of token distribution. A crypto launchpad is a platform based on a decentralized exchange (DEX). It introduces Web3 projects before they are publicly available for trading.
Through launchpads, projects offer their tokens at a discounted rate to draw in more investors. These investors can then sell their tokens for a profit or use them as they were originally intended.
Launchpads now conduct thorough due diligence to ensure that the projects looking to sell tokens are legitimate. It boosts investor confidence and encouraging them to invest. Moreover, these platforms often implement basic Know Your Customer (KYC) procedures. They also enforce restrictions for users from certain jurisdictions where token sales might be prohibited.
This entire process is commonly referred to as an Initial Coin Offering (ICO). Though it may be called an Initial DEX Offering (IDO) if the offering takes place on a DEX, or an Initial NFT Offering (INO) if the project is offering Non-Fungible Tokens instead of fungible tokens.
There are two main advantages for investors using launchpads: they receive their tokens immediately, and the tokens come at a uniform price, ensuring fairness. However, wealthier investors, or “whales,” still have the ability to purchase large quantities of tokens, maintaining a “first come, first served” basis.
Token Allocation via Launchpools
A crypto launchpool is similar to the farming in DEX pools, hence the name. In launchpools, the participants lock their base tokens, such as ETH or USDT, to earn rewards in the form of the project’s tokens.
Launchpools frequently appear on centralized crypto exchanges, enabling the exchange to highlight their own tokens. Typically, users must lock the tokens to take part in the reward distribution.
The Web3 launchpools are designed to be relatively equitable. They often run for several days, providing ample opportunity for all interested parties to participate and earn tokens. Additionally, the rewards in launchpools are capped. It minimizes the advantage of large-scale investors, or “whales,” as their potential token earnings are limited. Coupled with Know Your Customer (KYC) policies, launchpools aim to ensure a fair distribution of tokens among genuine participants.
However, launchpools come with a notable downside: they are predominantly centralized, meaning the exchange alone determines which projects are featured. Yet, gaining approval for your project on a leading centralized exchange (CEX) can significantly boost its value and attract considerable interest. Particularly, if it’s followed by a listing of the tokens on the same exchange.
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Rewarding Users with Token Airdrops
Airdrops serve as direct rewards to active users, with developers sending tokens straight into their wallets.
Developers must establish the criteria for these airdrops. For instance, in a DeFi protocol, those who frequently use services like swaps, provide liquidity, or engage in lending and borrowing would be considered eligible. For a blockchain platform, it would be users who regularly make transactions and actively engage with the ecosystem.
Once the criteria are defined, the next decision is whether to conduct a retrodrop or a standard airdrop. In a retrodrop, developers take snapshots of users’ past interactions, adjust for significance, and allocate tokens based on their on-chain activities.
For a standard airdrop, the project may outline specific tasks that users need to complete to qualify. Developers could assign points for these tasks, perhaps even creating a leaderboard, or simply specify actions that will make users eligible for future drops.
Although airdrops effectively reward the most active participants, they’re not without their drawbacks — namely, airdrop hunters. These individuals meet the minimum requirements to receive free tokens, which they then sell. Despite this, airdrops are an excellent method for generating interest in a project and attracting new participants to the ecosystem.
Liquidity Bootstrapping Pools for Fair Token Distribution
Liquidity Bootstrapping Pools (LBPs) are unique liquidity pools with a dynamic pricing mechanism. These commonly used token distribution models allow participants to purchase and receive tokens instantly, under the condition that the token price is responsive to market actions.
The process within an LBP begins at a higher price point. Price adjusts based on buying activity — increasing with purchases and decreasing in periods of inactivity. This pricing strategy deters large investors and automated trading bots from making bulk purchases by imposing higher costs. Still, it enables everyday participants to buy tokens in reasonable amounts. Furthermore, LBPs incrementally increase the pool’s liquidity, providing participants with the flexibility to choose the most opportune moment and price for their purchase.
While LBPs offer advantages in terms of facilitating fair price discovery and equitable token distribution, the novelty of the crypto distribution model may pose challenges in drawing a broad base of participants.
Key Takeaways
Launching a native token is often a wise move for a project.
For the initiative to be successful, the token distribution must be equitable, both to reward engaged users and to establish the token’s value solidly. There are four main strategies for distributing tokens:
- Launchpad: Direct sale of tokens at a predetermined price;
- Launchpool: Allows participants to earn tokens by committing other types of tokens;
- Airdrop: Rewards tokens directly to the most active and engaged users;
- Liquidity Bootstrapping Pool (LBP): Implements a Dutch auction system for selling tokens, adjusting the price based on demand.
Launchpads and LBPs are effective for generating additional funding, whereas launchpools and airdrops lean towards fostering community engagement and activity. Different models of token distribution are there at your disposal. The choice of which method to employ, paid models of token distribution, free models, or a combination thereof, rests with the project’s founders. It depends on their specific objectives and the goals they aim to achieve.
Navigating the various token distribution models can feel overwhelming. Each method offers unique advantages, from generating capital through fundraising models (launchpads, LBPs) to fostering community engagement (launchpools, airdrops). The best approach depends on your project’s goals, tokenomics strategy, target network (e.g., Ethereum), and long-term vision.
Beyond immediate fundraising, a well-designed token distribution strategy considers security, regulatory compliance within the cryptocurrency industry, and the needs of all stakeholders – from investors and users to foundations and agencies.
Visit our Dexola blog for in-depth resources on how to build a crypto trading bot, token distribution models, crypto credit card system development, and more. Contact us today for a free consultation about your blockchain venture.
