Key Takeaways:
- FDV Trends:
- Median FDV was $140M in 2020, spiked to $1.4B in 2021, dropped to $800M in 2022, and rebounded to $2.4B in 2023 and $1B in 2024, featuring alt L1s and Solana projects.
- Float Matters:
- FDV can miss short-term market fluctuations; float (publicly available supply) is key. High FDV, low float tokens like World Coin ($800M market cap vs. $34B FDV) may mislead.
- Airdrop Effects:
- Airdrops boost protocol adoption but are often quickly sold. Most lose value long-term, with exceptions like BONK (~8x return).
One of the most hotly debated topics in the crypto world is tokenomics, the system governing how token supply is distributed. Tokenomics requires balancing the interests of various stakeholders while securing the current and future value of a project.
Crypto projects use different tokenomics strategies to incentivize specific behaviors within their ecosystems. Some tokens are unlocked for public trading, allowing users to own “shares” of a project and participate in price discovery. To foster project development, another portion of tokens can be locked up for early investors and team members, often at favorable rates and before public trading. Additionally, some projects employ airdrops, distributing tokens to users based on actions like providing liquidity to a decentralized exchange, voting on governance proposals, or bridging to a layer 2.
In this issue of CoinFactiva, we explore the various aspects of a project’s tokenomics and its effects on token valuation and on-chain activity.
Understanding Fully Diluted Value (FDV)
To grasp the nuances of token valuation, it’s essential to understand common valuation metrics. Circulating market capitalization considers only the tokens currently in circulation, excluding those locked for early investors, contributors, and future issuance. It reflects how the market perceives the current valuation of a token. Free float supply refers to tokens available for trading in open markets. Fully Diluted Valuation (FDV) represents the market capitalization once all tokens are in circulation, providing a glimpse into the market’s perception of a token’s future value.
FDV at launch can offer insights into how the market estimates the future value of new projects. Below is a chart showing the FDV at launch for several crypto tokens, segmented by the year of their launch.
FDV Trends and Token Launches
Major tokens launched in 2020 had a relatively low median FDV of $140 million, including significant DeFi protocols like Uniswap, Aave, and prominent L1s like Solana and Avalanche. In 2021, the median launch FDV surged to $1.4 billion, driven by NFT and gaming projects such as Gods Unchained, Yield Guild Games, and Flow. The launch FDV dipped in 2022, led by Apecoin’s launch and early L2 tokens like Optimism. However, 2023 and 2024 saw a rebound in launch FDVs to $2.4 billion and $1 billion, respectively, featuring new alt L1s like Aptos and Sui, and the rise of Solana projects like Jupiter and Jito.
Not All FDV Is Equal
While FDV can be useful for long-term value assessment, it doesn’t account for short-term market dynamics like liquidity and supply shocks. Therefore, it’s crucial to consider FDV in relation to its float, or the supply available to the public.
Tokens with a high float relative to their total supply, such as Bitcoin, are quite liquid, and market participants don’t expect future supply shocks from token issuance—over 90% of all Bitcoin has already been mined. In contrast, tokens with a low float relative to their total supply indicate much of their FDV is illiquid. Thus, tokens with high FDV and low float may present an inflated and misleading total valuation. For example, World Coin has a market cap of about $800 million but an FDV of around $34 billion—a 50-fold difference.
Generally, the industry standard has converged around unlocking 5-15% of a token’s supply to the community, with the rest locked for the team, investors, foundations, grants, or other unlock events. Projects launched before 2022 often had more varied distributions.
Airdrops and Protocol Activity
Some protocols use airdrops to distribute tokens and mitigate risks associated with low float. Airdrops reward early users with tokens based on certain behaviors that promote the protocol’s growth, akin to crypto stimulus checks. However, most addresses liquidate their airdropped tokens shortly after receiving them, leading to a long-term decline in value for most airdropped tokens.
Only about one-third of tokens have retained their value since the initial airdrop. The median return from holding airdropped tokens until now would result in a -61% return. However, some tokens, like BONK, have appreciated significantly (~8x).
Airdrops may boost short-term protocol usage, but sustaining long-term growth remains uncertain. The rise of airdrop farming, where users generate excessive on-chain activity to receive tokens, has led to the proliferation of sybil farms. These farms create multiple fake on-chain identities to mass-generate activity, receiving rewards without long-term interest in the network.
Protocol teams have started fighting back against sybils by developing methods to identify and withhold rewards from them. For instance, LayerZero offers sybils the chance to self-identify for a fraction of their allocation, risking the loss of all tokens otherwise. With major airdrops from EigenLayer and LayerZero on the horizon, it remains to be seen whether airdrops will achieve their intended outcomes or be abandoned altogether.
Conclusion
In many ways, crypto exposes every market actor’s motives. Tokenomics can be seen as the art of harnessing those motives to cultivate success and sustainability of protocols. Balancing token supply distribution, incentivizing behavior, and ensuring long-term value is a delicate task every project approaches differently. As market forces evolve and new trends emerge, it will be interesting to see how users and teams continue to adapt.
