Daedalus’ Labyrinth: The “Token Economic Model” Hidden from Retail Investors

Original title: Phantom Tokenomics, Inside the Obscure Daedalus Labyrinth
Original author: 0xLouisT, L1D partner

Original translation: Azuma, Odaily Planet Daily

Editor's note: The token economic model has always been an important criterion for investors to evaluate a certain target, but L1D partner 0xLouisT revealed in his recent article that in addition to the conventional token economic model shown to the market, many projects also hide another invisible "token economic model" underwater. Except for the team and related persons, it is difficult for outsiders to know the true distribution plan of a certain token.

0xLouisT uses the story of "Daedalus' Labyrinth" in Greek mythology as an analogy, arguing that these hidden versions of "token economic models" are like mazes, and the project parties that create these mazes are like Daedalus, who will eventually be trapped in their own cocoons and go to destruction.

The following is the original content of 0xLouisT, compiled by Odaily Planet Daily.

In Greek mythology, there is a bloodthirsty creature called Minotaur, which has a body structure of half man and half bull. King Minos was afraid of this creature, so he invited the genius Daedalus to design an intricate maze from which no one could escape. However, when the Athenian prince Theseus killed the Minotaur with the help of Daedalus, Minos was furious and retaliated by imprisoning both Daedalus and his son Ikaros in a labyrinth built by Daedalus himself.

Although Ikaros ultimately fell due to his recklessness (flying too high during his escape and the sun burned his wings), Daedalus was the true architect of their fate - without him, Ikaros would never have been imprisoned.

This mythological story reflects the hidden "insider trading" that is prevalent in the current cryptocurrency cycle. In this article, I will reveal these types of transactions - the maze structure carefully planned by an insider (Daedalus) that doomed the project (Ikaros) to failure.

What is "Insider Trading"

The "high FDV, low circulation" token structure has become a hot topic, and the market has debated a lot about its sustainability and impact. However, there is a dark corner in this discussion that is often overlooked - "insider trading". These transactions are often made by a small number of market participants through off-chain contracts and agreements, which are usually covered up and almost impossible to identify from the chain. If you are not an insider, you will most likely never know about these transactions.

In @cobie’s latest post, he introduced the concept of “phantom pricing”, highlighting how true price discovery is done in private markets. With this background, I want to introduce the new concept of “phantom tokenomics” to reveal how the public token economics model is used to disguise the real “phantom token economic model” - the publicly visible token economic model often only represents the “upper range” of a certain allocation category, but this is misleading, and the “phantom version” is the most accurate allocation.

While there are many types of “insider transactions”, some of the most noteworthy types of transactions are as follows.

· Advisor allocations: Investors can receive additional tokens for advisor services, and such shares are usually classified under the team or advisor category. This is often a means for investors to reduce their costs, and they will provide little or no additional advice. I have personally seen an institution with an advisory share that was 5 times its investor share, which can reduce the institution's true cost by 80% compared to official funding and valuation data.

· Market making allocation: A portion of the token supply will be reserved for market making on centralized exchanges (CEX). This is a positive because it can enhance the liquidity of the token, however, a conflict of interest arises when the market maker is also an investor in the project - allowing them to use market making shares to hedge their investment shares that are still locked up.

· CEX listing: In order to list on top CEXs such as Binance, projects often need to pay marketing and listing fees. If investors can assist and ensure the listing of tokens on these exchanges, they sometimes receive additional business fees (which can be as high as 3% of the total supply). Arthur Hayes previously published a detailed article revealing that these fees can be as high as 16% of the total token supply.

· TVL Leasing: Whales or institutions that can provide liquidity are often promised a higher rate of return. Ordinary users may be satisfied with an annualized rate of return of 20%, while some whales can quietly earn 30% returns with the same contribution through private transactions with the foundation. This approach may also have certain positive significance and help maintain early liquidity, but the project party should disclose these transactions to the community in the token economic model.

· OTC "financing": OTC "financing" is common and not necessarily a bad thing in itself, but since the terms are usually not disclosed, these transactions often cause greater opacity. The most notorious of these is the so-called "KOL round", which is seen as a short-term catalyst for token prices. Some top Layer 1s (I don't want to reveal their names) have recently adopted this strategy - KOLs can subscribe to tokens at a large discount (about 50%) and a shorter lock-up period (six months of linear unlocking). For the sake of their interests, they will work hard to market xxx as the next xxx (you can bring in a certain Layer 1 here) killer. If you have any questions, you can take a look at the KOL speech translation guide I posted earlier.

· Selling staking rewards: Since 2017, many PoS networks have allowed investors to stake locked tokens and claim staking rewards at any time, which has become a way for early investors to profit in advance. Celestia and EigenLayer have both been recently pointed out to have this situation.

All of these "insider transactions" together build a "ghost token economic model". As a community member, you may often see a token economic model chart like the one below and feel satisfied with its distribution and transparency.

But if we peel off the layers of disguise and reveal the hidden "ghost token economic model", you will find that the real token distribution may look like the following figure, which does not leave much opportunity for the community.

Like Daedalus designing his own prison, this distribution sealed the fate of many tokens - insiders trapped their projects in a maze of opaque transactions, causing value to bleed from the tokens in all directions.

How did we get here?

Like most problems caused by market inefficiencies, this problem stems from a severe imbalance between supply and demand.

There is an oversupply of projects entering the market, many of which are byproducts of the 2021/2022 VC boom, many of which have waited more than three years to launch a token, and are now all huddled together, struggling to compete for TVL and attention in a much cooler market environment - mind you, this is not 2021.

Demand, in turn, has not kept up with supply, with not enough buyers to absorb the frenzy of new listings. Similarly, not all protocols have been able to attract funding and accumulate TVL, making TVL a scarce resource.

Instead of finding product-market fit (PMF), many projects have fallen into the trap of overpaying token incentives, artificially boosting key data metrics and masking the lack of sustainable traction.

Today, many deals are done privately. With retail investors fleeing, most VCs and funds are struggling to maintain meaningful returns, and their profits have shrunk, forcing them to generate excess returns through insider trading rather than simply selecting appreciating assets.

One of the biggest issues remains token distribution, with regulatory barriers making it nearly impossible for projects to distribute tokens to retail investors, leaving teams with limited options - generally only airdrops or liquidity incentives. If you are a project that is trying to solve the token distribution problem through ICO or other alternative methods, you can talk to us.

Revelation

There is nothing inherently wrong with using tokens to incentivize stakeholders or accelerate project growth. It can indeed be a powerful tool. The real problem is that it can easily lead to a complete lack of transparency in the token economic model.

Here are a few key points that cryptocurrency founders can use to improve transparency:

Don’t offer advisory shares to investors: Investors should provide you with the best help they can, not additional advisory shares. If an institution requires additional tokens to invest, then they probably lack real confidence in your project. Do you really want such a person on your list of investors?

Find the right market making quote: Market making services are highly marketed, you should look for competitive quotes, there is no need to overpay. To help founders navigate this issue, I wrote a guide.

Don't confuse fundraising with unrelated operational matters: During the fundraising process, you should focus on finding funds and investors who can help your project increase in value. During the fundraising stage, you should avoid discussing market making or airdrops, and don't sign any documents related to these topics immediately.

Maximize on-chain transparency: The public token economic model should accurately reflect the true situation of token distribution. During the token genesis phase, tokens can be transparently distributed through different addresses to reflect the true token economic distribution. For example, in the pie chart below, you need to make sure you have six main addresses, representing the allocations of groups such as team, advisors, and investors. You can proactively contact the following teams such as Etherscan, Arkham, and Nansen to mark addresses, contact Tokenomist to make unlock schedules, and contact CoinGecko and CoinMarketCap to display correct circulation and supply data.

Use on-chain unlocking contracts: For team, investor, over-the-counter (OTC) or any type of unlocking, make sure it is executed transparently on the chain through smart contracts.

Lock up staking rewards: If you allow investors or insiders to stake locked tokens, at least make sure that the staking rewards are also locked up. You can check out my detailed thoughts on this practice in this article.

Focus on product and forget about CEX listings: Stop obsessing about whether you can list on Binance, it will not solve your fundamental problems or improve your fundamentals. Take Pendle as an example, it started as a decentralized exchange (DEX), but after finding the product market fit (PMF), it easily got support from Binance. Focus on product building and community growth, as long as your fundamentals are solid enough, CEXs will rush to list your tokens at more favorable prices.

Don’t use token incentives unless necessary: If you give away your tokens easily, there must be something wrong with your strategy or business model. Tokens have value and should be used with caution for specific goals. Incentives can be a growth tool for a certain period of time, but they should not be a long-term solution. When planning a token incentive plan, you should ask yourself: "What will happen to which metric once the incentive stops?" If you think a metric will drop by 50% or more when the incentive stops, then your token incentive plan is likely flawed.

To sum up, if there is only one core point of this article, it is "prioritize transparency". I wrote this article not to blame anyone, but to spark a real debate, improve industry transparency, and reduce the phenomenon of "ghost token economic models". I sincerely believe that this will improve over time.

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