In this article, we will briefly explain what tokens are and how they are distributed. We will also cover a few token distribution models and approaches.
What Are Tokens and Their Roles?
Before we dive into how tokens are distributed, let’s shortly see what they are and what roles they have.
Crypto tokens are units of value, developed by blockchain-based projects and organizations and built on top of an existing blockchain network.
They are a type of cryptocurrency that represents a specific use or an asset.
Tokens serve a variety of functions and can be used to make purchases, store values, and access platform-specific services. They can also be employed for investment purposes.
Understanding how and why a token will be used holds great significance when it comes to understanding its value.
Token Distribution Stages
DeFi projects have used various strategies and methods to distribute tokens.
When deciding on a token distribution design, a project typically considers the following stages:
- Genesis distribution – which defines the starting conditions of a network, or simply put, who owns tokens and how many of them at network launch; and,
- Ongoing distribution – which is usually transparent, based on rules and continues throughout the network’s functioning. It frequently subsidizes network operation elements.
For example, during its initial token distribution, Ethereum sold the genesis supply of ETH, allocating a portion to the Ethereum Foundation. The ongoing distribution is based on block rewards, going entirely to ETH miners.
Token Distribution Methods
Tokens have been distributed in different ways throughout time, with this area evolving continuously.
Some of the most important token distribution mechanisms include the following:
- Token sales – The most notable types of token sales are Initial Coin Offering (ICO), Initial Exchange Offering (IEO), Initial DEX Offering (IDO), and Simple Agreement for Future Tokens (SAFT).
- Internal allocation – where tokens are allocated to those who participate in the project in order to incentivize and compensate them. Team members, advisors, and partners are among these participants.
- Passive airdrops – through which tokens are allocated automatically to passive public participants. The tokens are usually allocated at zero or nominal cost.
- Interactive airdrops – through which tokens are granted to active public participants at no cost.
Recent advancements in this field have also led to community sales and launch auctions.
Token Distribution Approaches
Some DeFi projects have even bypassed token sales, launching and distributing the token directly into the wallets of those using their protocols.
For example, Compound, Uniswap, and 1inch decided to approach token distribution differently, airdropping more than $1B in tokens to their users in 2020. This incentivized usage and provided participants with governance rights.
Some projects may even allocate no tokens at the genesis block, all of them being earned through subsequent contributions to the network.
Many token distribution mechanisms don’t even include a fundraising component. Such methods focus on distributing tokens to network contributors, such as liquidity providers.
Conclusion
To sum up, there is no single distribution model. However, successful token offerings need to ensure a fair distribution and strike a balance between short- and long-term considerations.
For example, not enough tokens in a company’s treasury may lead to its incapacity to pay for future expenses.
On the other hand, if a large share of the token supply is controlled by a small group of owners, the other investors may see the price falling when these owners decide to sell.