Token Distributions and Supply Schedules – What is the Recipe for Success?

Investors in the wild west of cryptocurrencies must evaluate a project's long-term viability but fear not. There are ways to do it! Examining a token's supply distribution and supply distribution schedule can help determine if a project is fairly launched and if its founders and developers are incentivized enough to see it through to completion.

Supply distribution refers to how a token's total supply is distributed among different entities. This distribution must be fair, or it can lead to centralization, manipulation, and market volatility. From time to time, a new project or layer-1 comes by (this time it was SUI that triggered me to write this story), which becomes a textbook example of how not to distribute tokens. 

Imagine you’re in line for pizza, and you see that the people in front of you are getting a slice for just $1. Now you come up to the counter and they charge you $10 for the same slice! I know most people would be quite upset about this, but unfortunately, this is the reality that both traditional finance, and crypto live in. I have always been a strong supporter of crypto. Not just for the sake of decentralization or self-custody, but also for the ability to offer the same financial opportunities regardless of who you are. I always like to say that everyone buys Bitcoin for the price they deserve. Relative to future generations acquiring you may be better off taking the chance to be an early adopter. I think this is especially relevant for layer 1 cryptocurrencies, which aim to be a universal currency on and beyond their open-source platform.

For many new tokens this analogy doesn’t work anymore, because token distributions and supply schedules have gotten a lot more complicated. Let’s use Sui (SUI) and Aptos (APT) as examples, both layer-1’s well known for being spin-offs of the failed Meta project “Diem”. A significant portion of tokens are reserved for the team, venture capital investors, early contributors and test net participants (largely comprising of VCs). It is only afterwards that the token is introduced to public sales, This can be done in a variety of ways, such as through investment tiers or lock drops. What does the initial token distribution look like for some well-known cryptocurrencies?

Initial Token Distributions for the Top 5 Blockchains

Source: Messari, data as of 30/04/2023.

Clearly, there is not just one recipe for success as all the top blockchain networks and their tokens are relatively successful compared to their competitors further down the line. Ethereum has a strong and community-driven development team which makes up for the lack of incentives. Solana has high incentives to build and use the technology but it lacks in terms of community relative to Ethereum. 

For SUI, half the supply of the tokens is allocated to the Community Reserve—a fund managed by the Sui Foundation. This is significantly more than what we have seen in previous projects. Most of the remaining tokens will be allocated to those who contributed to the project, and 14% will be allocated to investors according to the Sui Foundation. SUI is meant to be a currency on the Sui network, but potentially outside of the network as well. Imagine if the ECB would do the same when developing a Digital Euro, it would create some social unrest. I know that this isn’t an entirely fair comparison because tokens are also used as a funding method and for their utility on the network. Perhaps projects should find other ways to reward team members, early contributors and the community as opposed to diluting the supply of the network’s currency.

Next, we should look at the supply distribution schedule. This is how the token supply is released over time, which can be done in various ways, including pre-mining, airdrops and lock drops. Pre-mining can give early investors and the project team an unfair advantage. Airdrops can artificially inflate the perceived value of a token, leading to market manipulation. Seed investments from venture capitalists can be a good sign, but they can also raise funds without selling tokens to the public. In most recent token drops, not all tokens are released at the time of sale. A significant portion of tokens are vested (essentially meaning that they are locked), and a portion of tokens become available periodically in a pre-programmed manner.

Investors should look for projects with a fair supply distribution that is diverse among different entities. This can help prevent centralization, market manipulation and create a sustainable ecosystem. Investors should also look for projects with a transparent supply distribution schedule that outlines how and when the token supply will be released over time. This transparency helps investors understand a project's long-term viability and gain confidence in its potential for success.

In conclusion, examining a token's supply distribution and supply distribution schedule is a useful way to evaluate a project's long-term viability. It ensures that a project is fairly launched and that its founders and developers are incentivized to see it through to completion. So, let's hope for a pizza party where everyone gets a fair share of the pizza. As always, investors should do their research before investing in any project.