Token distribution and fundraising models: an overview


Bastien Choquez

The considerable number of new projects emerging within recent months with the ambition to build the foundations of Web 3.0 or shape the future of DeFi turned both sectors into a more competitive environment. The consecutive daily influx of new tokens in the market makes it harder for prospective clients and investors to appreciate the intrinsic value of new projects. Besides the technology they are developing, one of the key metrics for new enterprises to differentiate themselves from other projects and pursue their objectives lies in adopting a token distribution model that fully matches their ambition and structure.

Token distribution refers to the different mechanisms that the issuer of a token can use to distribute it among multiple entities. Therefore, this term covers both the distribution of tokens for free, in their different forms, and the distribution of tokens against a financial contribution, usually in the form of payment in fiat or other crypto-assets.

While projects already funded by venture capital firms can focus on developing their product and community, other projects try to remain independent from venture capital firms to keep control over the project's direction. Therefore, before questioning which jurisdictions offer the best legal regime to set up the legal entity responsible for issuing the token (a topic we cover in another article), founders must first define their needs and draw the distribution model to fit them better.

From this perspective, token distribution is one of the most powerful tools in the hands of the founders to create the “tokenomics” that are most suitable for their project. This article aims to define which distribution mechanisms can be used by token teams to address their needs and how these mechanisms might impact not only the direction of the project but also the token itself and its value. To demonstrate this point, this article will study the token distribution models adopted by various projects, such as Arbitrum, Celestia, and Celo. However, to fully capture the strategic importance of the token distribution model elaborated by these projects, it is important to understand the challenges they are facing in their early stages.

What is a token distribution model, and how can it be used to develop a project?

When looking at the distribution model adopted by projects within the Web 3 space, a strong pattern emerges in relation to how tokens are allocated to different groups of individuals. Developing a project requires much more than just a good concept – it requires funding and people with certain skills who also believe in the project. In such circumstances, a token distribution model is a tokenised incentive used by projects to attract and retain talent within their team and start growing a user base.

Before even finding the talent who will constitute their teams and develop their projects, founders are likely to encounter expenses, which at this stage might be handled through bootstrapping from the founders. One way for founders to be compensated for this personal provision is to allocate a percentage of tokens to themselves, which might be sold at a price that remains dependent on the project's success.

This token attribution in the hands of the founders may apparently be similar to shares, rewards or loyalty schemes offered to founders in more traditional economic sectors and corporations. However, it must be noted that some features, such as voting rights, are not necessarily defined at this stage and remain conditional to the future constitution of a DAO and the governance rules it might impose on token holders if it applies to the project being developed.

Secondly, as the competition intensifies within the space, projects need to be and remain attractive all along the different steps of developing their product or service. Allocating tokens to team members and advisors of the projects is a great incentive that also attracts people who truly believe in the project – and the future value of the tokens allocated. However, to preserve the token's value and its price, this allocation to team members and advisors is usually subject to vesting.

Vesting means that not all the allocated tokens will be distributed at once. Still, they will rather be distributed when certain criteria are met or over the period during which the service is provided by the team member or advisor to the team. By vesting the allocated tokens, founders can ensure that tokens are distributed according to team members’ performances or to reward their most loyal contributors. Additionally, once effectively distributed, such tokens might be subject to a lock-up period during which the team member or advisor cannot sell the tokens – a similar mechanism to share options used in more traditional sectors.

Besides the founders, team members and advisors who will together build the product or service and develop the ecosystem overall, projects usually reserve a pool of tokens for the maintenance of the ecosystem itself and its expected growth over time. For example, such a pool may concentrate the tokens that will be distributed to validators and delegators who stake their tokens to validate blocks and ensure the security and performance of the network. Usually, in the most recent layer-1 blockchain ecosystems, those who stake tokens will be rewarded through the issuance or distribution of new tokens, another incentive for users and a tool that allows projects to grow their community further while providing additional security to the network.

It is important to note that while these pools are common to almost all projects, founders can use any terminology of their choice to accommodate each pool better and include any group of persons under the same or different pools. In this perspective, the token distribution model adopted by Non-Fungible Trading Limited, the issuer of the BLUR token, introduces two separate pools for core contributors and advisors. On the opposite hand, Arbitrum Foundation, the issuer of ARB, introduced a token distribution model that fits the description given previously, with a specific token allocation to the team (26,94%), the Foundation (7,5%) and the DAO treasury (35,28%).

At this stage, the token distribution model adopted draws a clear diagram of how the project plans to evolve and how its ecosystem will be managed. Most importantly, it gives prospective investors a signal that allows them to assess the opportunity to invest in such a project at a time when the project might need to raise more funds to reach the following step.

The traditional aspect of token distribution: Raising funds through private and public sales

It might seem inaccurate to refer to fundraising as a traditional aspect of token distribution since Web 3.0 remains a fledgling industry with extraordinary potential yet to be fully developed. However, this reference outlined how narrow the relationship between fundraising and token distribution used to be, to the point that both concepts are still sometimes confused.

To understand this point, it is important to remember that the decision to distribute the token supply entirely belongs to the token team developing the project, outside of any legal or regulatory interferences. Of course, some legal and regulatory requirements will apply to the token issuing entity – or Token Special Purpose Vehicle (SPV) – of the token, depending on its jurisdiction of establishment, making this decision extremely strategic. Nevertheless, these requirements do not directly interfere with the specific token allocation of each pool nor with the constitution of the pools. Moreover, the proposed token distribution model is usually adopted before the Token Generation Event (TGE), during which the project will mint the tokens.

This explains that the token distribution model often appears as an incredible opportunity for projects to raise funds through funding rounds. Indeed, the token distribution adopted by the project can reserve a percentage of tokens for investors. This attribution allows projects to raise funds before issuing their tokens and consequently before having a fully operational product or service, enabling them to face the operational expenses that such projects require. This article does not aim to cover in detail the different fundraising mechanisms that projects can opt for. Still, defining what mechanisms can be used and how they articulate with each other remains essential.

Funding rounds encompasses private and public sales. Private sales typically target a selected group of investors, often institutional or accredited, who are offered the opportunity to buy tokens at a discounted rate. These private sales are usually organised in consecutive rounds, such as Seed, Series A and Series B, the main difference being that the project is expected to have a functional product or service and some revenue from the Series A stage.

Celestia, through its issuing entity named Strange Loop Labs AG and based in Liechtenstein, is one of the most significant examples when it comes to adopting a token distribution model that aims to raise funds for the development of the project. Indeed, the team dedicated over a third of the initial token supply of 1,000,000,000 TIA tokens to its early investors. Among this share, 15,9% has been secured for Seed investors, while another 19,7% has been specifically attributed to Series A and B investors, which results in a total share of 35,6% reserved to early backers of the project[1].

On the other hand, public sales involve offering tokens to the public at a set price. It must be noted that the term ‘offering’ does not mean that tokens are transferred for free but simply that they are proposed at a specified price. This is possible since the project is still at an early stage, meaning the token is not yet listed on secondary markets, and its issuer determines its price. Public sales generally regroup Initial Coin Offering (ICO), Initial Exchange Offering (IEO), or Initial Dex Offering (IDO).

An ICO is a crowdfunding method that is fully and solely undertaken by the token issuer, who decides to sell tokens to the public against fiat or other crypto-assets. Nevertheless, the issuer might use diverse platforms called launchpads to make its tokens available to a larger amount of investors, but tokens remain sold by the issuer to investors. Oppositely, an IEO is conducted through an exchange platform, which will facilitate the purchase of the token to its clients before eventually listing the token on its platform. Similar to an IEO, the IDO is conducted through a decentralised exchange. It is important not to confuse ICO and IEO or IDO, specifically since exchanges also use the term ‘launchpad’ to define the tools they offer to projects to launch their tokens through their platforms via IEO or IDO.

Besides public sales being available to a different class of investors than private sales, the purpose is also usually different since public sales enable the project to raise interest within the community. In contrast, private sales primarily focus on raising capital from venture capital firms. For this reason, it is not surprising to see projects using both private and public sales to grow financially while making themselves a name.

For example, the Celo Foundation raised $104,500,000 within the first four years of its creation in 2017, including $10,000,000 through an ICO in May 2020[2]. Despite using both mechanisms, the project only attributed a small proportion of tokens to early investors: only 12,3% of the total token supply of 1,000,000,000 CELO tokens has been reserved for token sales, which is the second smallest attribution within CELO token distribution, just above the 7,3% attributed to Operational Grants[3].

These fundraising methods used within the Web 3.0 industry raised discussions and debates on whether they sufficiently protect investors, notably retail investors. In 2017, the Securities and Exchange Commission (SEC) adopted a rigorous approach towards ICOs launched in the United States due to the practice of some venture capital firms buying tokens at a discounted price during private sales and realising a profit by selling them at a higher price after the project launched an ICO. This is one – but not only – reason that explains a switch in the token distribution adopted by more recent projects, which tend now to advantage the community over early investors.  

The modern approach of token distribution: Raising capital through Airdrops

The term ‘airdrop’ is now commonly used within the crypto industry to refer to the distribution of free tokens directly into the wallets of existing holders – usually after checking their eligibility and claiming their tokens. However, the characteristics defining these airdrops remain sometimes unclear due to the large variety of airdrops existing out there. Nevertheless, as previously mentioned, this definition outlines the main difference between airdrops and private or public sales. By default, tokens acquired through an airdrop are acquired for free, unlike tokens bought during a private or public sale. Yet, airdrops are sometimes qualified as a fundraising method, and this is not entirely incorrect (a point that will be developed later in this section).

Some confusion may also emerge from the fact that certain launchpads do not only assist projects in launching their tokens through an ICO or IEO but will also distribute tokens for free to their users. For example, the MEXC launchpad (following the name of the centralised exchange MEXC) provides users with free airdrops weekly, with the only condition being to hold a minimum of 1000 MX tokens in their spot wallet. Therefore, while launchpads are primarily associated with supporting the launch of new tokens through ICO, IEO or IDO, they can also be used to distribute tokens through airdrops.

Another point to consider while assessing whether the tokens are effectively airdropped for free is the information users must provide to receive their tokens. According to Article 4 of the MiCA Regulation states that the rules applicable to the offering of crypto-assets other than electronic-money tokens (EMTs) or asset-referenced tokens (ARTs) do not apply if such crypto-asset is offered for free. However, the article also mentions that a crypto-asset shall not be considered as offered for free if users are required to provide personal data to the offeror in exchange for the tokens. Therefore, for future airdrops that might benefit EU residents to fall outside the scope of the MiCA Regulation, issuers must ensure that they do not collect users’ personal data as defined under the GDPR.

According to the definition provided above, the second main characteristic of airdrops is the distribution of tokens directly to the wallet of pre-existing holders, who will be rewarded by receiving new tokens. Again, this part of the definition must be nuanced because the requirements to be eligible for an airdrop are exclusively defined by the token team issuing the token and can be various. Sometimes, token holders will effectively be rewarded by simply holding the token in their wallet. For example, CoW Protocol, the issuer of the COW token, released an airdrop in March 2022, rewarding, among others, holders of the Gnosis DAO token, GNO. For this purpose, the issuer expressively reserved 10% of its token supply of 1,000,000,000 COW to airdrops[4].

More often, token holders will be rewarded not just for holding the token but mostly for participating in the ecosystem by staking their tokens for block validation, completing tasks within the testnet, or even participating in other chains or protocols. This type of airdrop is sometimes referred to as ‘conditional’ airdrops, in opposition to airdrops, where users are not required to accomplish any specific action other than holding the token.

The successful airdrop campaign launched by the Jito Foundation in December 2023 is an excellent example of which requirements can be introduced for users to be eligible for such airdrop. Indeed, not only JitoSOL token holders have been rewarded through this airdrop, but the eligibility criteria also included Solana validators operating the MEV client and users engaging with the token on various other DeFi protocols such as Raydium, Kamino or MarginFi[5]. Again, the token distribution model adopted by the Jito Foundation reflects this willingness to reward active users, with 10% of the total token supply of 1,000,000,000 JITO allocated to airdrops.

Consequently, airdrops are usually attributed to users based on their previous actions rather than being exclusively addressed to pre-existing holders. Indeed, one of the main characteristics commonly shared by airdrops launched since the third quarter of 2023, including those mentioned in this article, is their retroactivity. Airdrops will usually reward users based on actions they accomplish before the airdrop and its eligibility conditions are released. Such a system introduces fairness and ensures that users who trust the project and actively participate are recompensed, unlike those who complete tasks to qualify for the airdrop without contributing to the project itself.

Retroactively rewarding users based on previous actions is made possible through a mechanism known as snapshots. A snapshot is a record of the state of a blockchain at a specific block height. It captures the entire blockchain ledger, including all existing addresses and related data, such as the token holder's balance at a certain time. In that way, snapshots are used to determine users' eligibility regarding airdrops, and by taking this snapshot at an earlier date than the date of announcement of the airdrop, the token team can prevent users from accomplishing further actions susceptible to qualify them for the airdrop.

Outside of these scenarios, being eligible for an airdrop sometimes does not require holding the token or participating directly in the ecosystem from a technical point of view but rather contributing to the project through its different social media. The Pyth Data Association, the issuer of the PYTH token, decided to launch an airdrop in the last quarter of 2023, during which PYTH tokens were notably airdropped to users with special roles on Discord, a social media platform primarily used by projects to communicate and enhance their community. This type of token distribution, which still fits the definition of an airdrop, is usually referred to in the community as a bounty program.

This example shows how airdrops can be used today as a marketing strategy to create awareness for a new project or token. Airdrops are a fantastic tool that token teams can use to incentivise and reward their community and increase the adoption of their token. In this view, airdrops are used primarily to raise interest within the community rather than raising funds. However, generating interest or acquiring users is not necessarily incompatible with raising funds. In most cases, the rise in the interest brought to a token will also significantly increase the project's revenue.

The correlation is easily demonstrated: if a project is expected to airdrop free tokens to users who completed certain tasks, many users will complete these tasks, such as buying, staking, or bridging tokens, before any announcement, with the hope of being eligible for a potential future airdrop. These actions are generally subject to a fee implemented by the token team. Therefore, the more users expect an airdrop, the more fees are paid, and the more the project raises funds.

All the mechanisms used for token distribution and previously mentioned will necessarily affect the price – and, in some instances, the value as well – of the launched token. In the same way that venture capital firms could benefit from an ICO by selling in profit the tokens previously bought at a lower price, users receiving an airdrop will often sell their tokens, which increases the selling pressure and pushes the prices down. The recent JUP token airdrop demonstrates this phenomenon, with the token price collapsing by 75% just five days after its launch. Seeking a remedy to regulate the price of their token better, new projects are developing a new token distribution method through an innovative concept called Liquidity Bootstrapping Pools.

Liquidity Bootstrapping Pools (LBPs)

A Liquidity Bootstrap Pool (LBP) is a type of Liquidity Pool that pairs a new token with a more liquid asset, allowing for better distribution of the new token. This mechanism allows new projects to generate liquidity with only a small amount of initial capital, as they are designed to facilitate fair and transparent token launches using a pre-configured price decay curve to regulate the token price.

LBPs are a specific configuration of Balancer’s Liquidity Pool, an Automated Market Maker (AMM) protocol functioning as a decentralised exchange on the Ethereum blockchain. Therefore, to explain how LBPs work, it is necessary to understand the mechanisms of Liquidity Pools. Traders use Liquidity Pools to trade a token for another at any time. Indeed, a Liquidity Pool comprises two different tokens, one being ETH. Initially, Liquidity Pools were based on a rebalancing ratio, which means that both tokens were consistently split on a ratio of 50/50.

To maintain this ratio, the Smart Contract running the Liquidity Pool would permanently increase the price of the token subject to the higher buy pressure. Incidentally, the volatility in the price of this token would increase since traders would benefit from the opportunity to sell the token back to the Liquidity Pool for a higher price, presenting an arbitrage for traders within the pool. Multi-asset Liquidity Pools emerged to bring more stability by pooling several tokens within the same pool. However, tokens launched without a substantial initial liquidity investment would struggle to reach the 50/50 ratio compared to more expensive tokens such as ETH.

Consequently, launching a new token through a Liquidity Pool would become an unnecessarily risky option since traders could ignore the token, ultimately leading to its death and potentially to the project’s death. Liquidity Bootstrap Pools were born in response to this challenge and quickly appeared as a great and fair way to distribute new tokens onto the market. In LBPs, the new token is paired with a token with more liquidity – or higher trading volume – so traders are incited to use the pool and the new token. This mechanism also enables new tokens to find their true value since the price will be determined by how traders trade the new token with the other, more liquid token.

Indeed, the initial ratio in the LBP is not necessarily even and could be as unbalanced as a ratio of 10/90. The token issuer can pre-determine a period during which the price will regulate itself to rebalance the ratio of the pool until it reaches the ratio of 50/50 at the end of the period. The price will increase or decrease when trading begins, depending on the trading volume. This incentivises traders to use the pool, leading to a broader distribution of the token and raising liquidity for the project as trading fees are generated.

On the other hand, LBPs offer an additional benefit to projects using such pools since they remain in control of the LBP created to issue their token and can decide to pause trading if they consider that the trading volume and buying or selling pressure could destabilise the token's price. This can be seen as a protective feature of the pool and a risk of centralisation and malicious activity from individuals within the token team. Nevertheless, the flexibility offered by LBPs allows projects to raise funds and make their token available to any investor with a very low amount of liquidity, which may increase the project's popularity within the community and lead it straight to dominate the competition.


In conclusion, despite a clear trend which leads more and more projects to prioritise their community through free token distribution rather than funding rounds, raising funds remains one of the major challenges new projects face within the Web 3.0 space. The different methods developed to this end have become more innovative and sophisticated, furthering the limits of traditional fundraising mechanisms. Nevertheless, the space is constantly evolving, and new projects now must consider the increasing regulatory pressure that might restrict or bring further requirements to specific token distribution models. In this new, highly regulated environment, seeking legal assistance to establish a solid legal entity in compliance with local regulations is essential for the project's success.








Crypto industry