Is "Fair Launch" a Better Model for Token Distribution?
Jay Hao is the CEO of crypto exchange OKEx.
Everybody's talking about “Fair Launch” nowadays. So, what exactly is “Fair Launch,” and is it a better model for token distribution? Actually, Bitcoin (BTC) can be considered a typical fair launch coin; that's to say, no Private sale, no ICO, no pre-mining. Anybody who wants BTC needs to mine or buy it. Flash-forward more than 11 years and now, projects like yearn.finance (YFI) are promoting the concept again.
Almost all projects that adopt the distribution model of Fair Launch share one main goal: to allow all participants to join the game following the same rules. But who are we referring to when we talk about participants?
In the Bitcoin network, the "participants" (or rather, those who benefit from fair launches) are those who buy mining machines or hashrate to mine Bitcoin following the same rules: PoW (Proof of Work). The portion of these participants in the entire cohort is small. After mining Bitcoin, they can sell it in the secondary market at will. There is sufficient buying power to cover it. Moreover, with the increase in user education and Bitcoin's popularity, buying power is getting stronger, resulting in Bitcoin's price continuing to rise.
But when it comes to the DeFi era, the beneficiaries from token mining become almost everybody. Everyone who holds the necessary token can participate in DeFi mining. Centralized exchanges such as OKEx have even begun to provide one-stop mining for DeFi tokens that makes DeFi mining even easier.
So, with all this action surrounding Fair Launch we now have a situation in which everyone has a lot of DeFi tokens in their hands and all of them follow the same process - 'Mine-Sell-Withdraw'. You can see how this might not end well…
Eventually, we find ourselves seeing a repeating trend in which 1,000 sellers “fight” for one buyer in the secondary market. The seller is caught in a vicious circle of low-price competitions and it is very common that a market promptly plummets or even collapses soon after a "Fair Launch."
A closer look at token distribution
From the above, it's obvious that Bitcoin mining and DeFi mining are completely different and, as such, the notion of a fair launch has totally different effects on the two. So, let’s look into this further from the token distribution angle. Without a private sale, ICO, or institutional funds, there may be two possible outcomes for the token distribution.
The first is that there are too many participants, causing the distribution of tokens to be too scattered. Most of the tokens are in the hands of retail investors who tend to follow each other and move with market sentiment. This can lead to extreme price fluctuations extremely quickly. Any positive or negative news can seriously affect market sentiment, which leads to superlatively high fluctuations. In this situation, it is no longer the big players manipulating the market, but the players who can grasp the key information.
For example, let's say a certain token founder goes missing, others take over, the founder returns, or starts to sell off his or her stake… Sometimes the drama provided by the crypto space can be more thrilling than watching Netflix. But the price of the token also fluctuates accordingly, resulting in retail investors being burned by the same token. Obviously, the cost of market manipulation has been significantly reduced.
Another possibility is that there are too few participants, in which case, Fair Launch becomes a playground for "whales," and people with more tokens get more tokens. Compared with non-Fair Launch projects, the concentration of tokens is even worse. Especially in the bull market, high-frequency trading causes high gas fees due to the blockage of Ethereum (ETH), which makes the gas fee more expensive for retail users to join in. And, the huge amount of tokens mined/farm through staking by whales has no lock-up mechanism, meaning they can sell the tokens at any time. The so-called "Fair Launch" token has once again become a market for big players.
Either way, the degree of token dispersion is inappropriate - it is too high or too low.
As for the project itself, does the lack of support from early institutional investors raise the threshold for project development? Does it force the project to place more effort on how to sell a good story to the public instead of using operational data to convince the investors? SushiSwap, yearn.finance, cream.finance… all of them have a good story, and I personally can't wait to see more of their creative build.
However, until the above problems have been adequately solved, I don't think we can say that Fair Launch is a better token distribution model. At a push, we could say that it might be suitable for a certain type of project, which is the type of fork token that does not require a large amount of initial development. That said, simply forking liquidity through a fairer distribution method is not an improvement in the industry.
These innovations in token issuance are certainly interesting to see, but it will take some time until the fundamentally flawed fair launch becomes a truly sustainable alternative.
Learn more: If You Can't Stand the DeFi Heat - Get Out of the Sushi Chef's Kitchen