The Labyrinth of Daedalus: The "Token Economic Model" Hidden from Retail Investors

Original Title: Phantom Tokenomics, Inside the Obscure Daedalus Labyrinth

Author: 0xLouisT, L1D Partner

Compiler: Azuma, Odaily Planet Daily

Editor's Note: Tokenomics has always been an important criterion for investors to evaluate a project. However, L1D partner 0xLouisT reveals in a recent article that, in addition to the conventional tokenomics presented to the market, many projects hide another invisible "tokenomics" beneath the surface. This hidden model is difficult for outsiders to discern, except for the internal team and associated individuals, making it hard to know the true distribution scheme of a token.

In the article, 0xLouisT draws an analogy to the story of "Daedalus's Labyrinth" from Greek mythology, suggesting that these hidden "tokenomics" are like a labyrinth, and the project teams that create these mazes are akin to Daedalus, ultimately leading themselves to entrapment and demise.

Below is the original content by 0xLouisT, compiled by Odaily Planet Daily.

In Greek mythology, there is a bloodthirsty creature called the Minotaur, which has a body that is half man and half bull. King Minos feared this creature, so he asked the genius Daedalus to design a complex labyrinth from which no one could escape. However, when the Athenian prince Theseus killed the Minotaur with Daedalus's help, Minos was furious and retaliated by imprisoning Daedalus and his son Icarus in the very labyrinth he had built.

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

This myth reflects the pervasive hidden "insider trading" in the current cryptocurrency cycle. In this article, I will reveal these types of trades—labyrinthine structures meticulously crafted by insiders (Daedalus), destined for the project's (Icarus) failure.

What is "Insider Trading"?

The "high FDV, low circulation" token structure has become a hot topic, with extensive debate in the market regarding its sustainability and impact. However, there exists a dark corner in this discussion that is often overlooked—"insider trading." These trades are often reached by a few market participants through off-chain contracts and agreements, typically concealed, making it nearly impossible for outsiders to identify them on-chain. If you are not an insider, you may never know about these trades.

In @cobie’s latest article, he introduced the concept of "phantom pricing," emphasizing how true price discovery occurs in private markets. Against this backdrop, I would like to introduce the new concept of "phantom tokenomics" to reveal how the visible tokenomics can disguise the real "phantom tokenomics"—the publicly visible tokenomics often only represent the "upper limit" of a certain distribution category, which is misleading; the "phantom version" is the most accurate representation of the distribution situation.

While there are many types of "insider trading," some of the most concerning types are as follows.

• Advisor Allocation: Investors can receive additional tokens through advisory services, and these shares are typically classified under the team or advisor category. This is often a means for investors to reduce their costs, and they provide little to no additional advice. I have personally seen an institution's advisor allocation being five times that of its investor allocation, reducing the institution's real cost by 80% compared to official financing and valuation data.

• Market Maker Allocation: A portion of the token supply is reserved for market making on centralized exchanges (CEX). This has some positive implications as it can enhance the liquidity of the token; however, when market makers are also investors in the project, conflicts of interest arise—allowing them to use market-making shares to hedge their still-locked investment shares.

• CEX Listing Fees: To list on top CEXs like Binance, project teams often need to pay marketing and listing fees. If investors can assist and ensure the token is listed on these exchanges, they may sometimes receive additional business fees (up to 3% of the total supply). Arthur Hayes previously published a detailed article revealing that these fees could amount to 16% of the total token supply.

• TVL Leasing: Whales or institutions providing liquidity are often promised exclusive access to higher yields. While ordinary users may be satisfied with a 20% annual yield, some whales can quietly earn 30% through private transactions with the foundation for the same contribution. This practice may have some positive implications for maintaining early liquidity, but project teams should disclose these transactions to the community in the tokenomics model.

• OTC "Financing": OTC "financing" is common and not necessarily a bad thing, but since the terms are usually not disclosed, these transactions often lead to significant opacity. The most notorious of these is the so-called "KOL round," which is seen as a short-term catalyst for token prices. Some leading Layer 1 projects (I won't name names) have recently adopted this strategy—KOLs can subscribe to tokens at a significant discount (about 50%) and with a shorter lock-up period (six months linear unlock), and for their own interests, they will strive to market xxx as the next xxx (insert a certain Layer 1 here) killer. If you have questions, you can refer to my previously published KOL script translation guide.

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

All of these "insider trades" collectively construct the "phantom tokenomics." As a community member, you may often see tokenomics charts like the one below and feel satisfied with their distribution and transparency.

But if we peel away the layers of disguise and reveal the hidden "phantom tokenomics," you may find that the true token distribution looks like the image below, leaving little opportunity for the community.

Just as Daedalus designed a prison for himself, this distribution method determines the fate of many tokens—insiders trap their projects in the labyrinth of opaque trading, causing the token's value to leak from all sides.

How Did We Get Here?

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

There are too many projects entering the market, many of which are byproducts of the 2021/2022 venture capital boom, with many projects waiting over three years to launch their tokens, now all crowding together, struggling for TVL and attention in a colder market environment—please note, it is no longer 2021.

Conversely, demand has not kept pace with supply, with not enough buyers to absorb the crazily emerging new listings. Similarly, not all protocols can attract funds and accumulate TVL, making TVL a scarce resource.

Many projects have not found product-market fit (PMF) and have instead fallen into the trap of overpaying token incentives, artificially inflating key metrics to cover up the lack of sustainable appeal of the project.

Nowadays, many trades are conducted privately. With the departure of retail investors, most venture capitalists and funds struggle to maintain meaningful returns; their profits have shrunk, forcing them to create excess returns through insider trading rather than simply choosing value-added assets.

One major issue remains the token distribution; regulatory barriers make it nearly impossible for project teams to allocate tokens to retail investors, leaving them with limited options—typically only airdrops or liquidity incentives. If you are a project team trying to solve the token distribution issue through ICOs or other alternatives, feel free to talk to us.

Revelation

Using tokens to incentivize stakeholders or accelerate project growth is fundamentally not a problem; it can indeed serve as a powerful tool. The real issue is that it easily leads to a complete lack of transparency in the tokenomics.

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

Do not offer advisor shares to investors: Investors should be providing as much help as they can to your company without needing extra advisor shares. If an institution requires additional tokens to invest, they likely lack true confidence in your project. Do you really want such people on your investor list?

Seek competitive market maker quotes: Market-making services have become highly commoditized, and you should seek competitive quotes without overpaying. To help founders navigate this issue smoothly, I previously wrote a guide .

Do not confuse fundraising with unrelated operational matters: During fundraising, you should focus on finding funds and investors that can help add value to the project. During the fundraising phase, you should avoid discussing market making or airdrops, and do not sign any documents related to these topics on a whim.

Maximize on-chain transparency: The public tokenomics should accurately reflect the true state of token distribution. During the token genesis phase, tokens can be transparently distributed through different addresses to reflect the real tokenomics distribution situation. For example, in the pie chart below, you need to ensure you have six main addresses representing the distribution for teams, advisors, investors, etc. You can proactively contact teams like Etherscan, Arkham, Nansen to label addresses, reach out to Tokenomist to create unlock schedules, and contact CoinGecko and CoinMarketCap to display accurate circulation and supply data.

Use on-chain unlock contracts: For teams, investors, OTC, or any type of unlock, ensure that it is executed transparently on-chain through smart contracts.

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

Focus on the product, forget about CEX listings: Stop obsessing over whether you can list on Binance; this won't solve your fundamental issues or improve your fundamentals. Take Pendle as an example; it initially only stayed on decentralized exchanges (DEXs), but after finding product-market fit (PMF), it easily gained support from Binance. Focus on product development and community growth; as long as your fundamentals are solid enough, CEXs will rush to list your token at better prices.

Avoid using token incentives unless necessary: If you easily distribute your tokens, there must be an issue with your strategy or business model. Tokens are valuable and should be used cautiously for specific purposes. Incentives can serve as a growth tool at certain stages, but they should not be a long-term solution. When planning token incentive programs, ask yourself: "What will happen to a metric once the incentives stop?" If you believe a metric will drop by 50% or more once the incentives cease, your token incentive program likely has flaws.

In summary, if this article has only one core point, it is "prioritize transparency." I write this article not to blame anyone but to spark a genuine debate to improve industry transparency and reduce the phenomenon of "phantom tokenomics." I sincerely believe this will improve over time.