Equity Vs. Equality In Cryptocurrency’s Token Models’ Distribution
by Katherine Webb
What Are Equity And Equality In A Token’s Distribution Model?
Equity token models distribute tokens in proportion to those that bring the most value to the project. This can be thought of as the distribution of assets based on the needs of a user within that ecosystem. Through this model, we would expect projects to reserve tokens for future growth and development.
An equality token model distributes tokens evenly, regardless of whether a user has contributed value to the ecosystem. Here, everyone is given the same resources regardless of their needs. For example, everyone would receive the same number of tokens from an airdrop, independent of the value each individual brings to the ecosystem.
Bitcoin Started By Using An Equality Model. Now It’s Shifting Toward An Equity Model For Token Distribution.
Let’s start with the biggest cryptocurrency Bitcoin, which was designed and developed to be focused on an equality token distribution model using its Proof-of-Work (PoW) consensus mechanism. When Bitcoin was first developed, anyone with a computer and internet connection could participate in the network and earn rewards as an individual miner, no special equipment required. The first Bitcoin was created on January 3rd, 2009 by Satoshi Nakamoto who mined the Bitcoin genesis block. The 50 Bitcoin mining rewards were un-tradable, and there is some debate around whether it was intentional or a quirk of the Genesis block.[i]
Hal Finney was the first recipient of a bitcoin transaction on January 12, 2009. Since then, the rewards from Bitcoin mining have naturally shifted towards an equity model, which favors rewarding miners who contribute the most mining power, as these are the miners most likely to solve the mathematical proof to be able to mine the next block. The rate at which new Bitcoins are created is algorithmically cut in half roughly every 4 years or, more precisely, every 210,000 blocks. Bitcoin has gone through three halving’s to date: November 2012, when miners earned 25 BTC as a block reward. July 2016, when miners earned 12.5 BTC as a block reward. And most recently in May 2020, where miners earn 6.3 BTC as a block reward, which is still the current amount. A Bitcoin block is generated, on average, every 10 minutes. Mining pools are one clear example of an equity model that is now used for distributing Bitcoin rewards, where a miner is paid a portion of any block rewards based on the portion of the hash rate provided to the mining pool to mine that block.
Ethereum – Launched With A More Equity-Based Token Distribution Model
The team behind Ethereum, the 2nd largest cryptocurrency, recognised the belief that equity is important to the team and hence why 20% of the initial Ethereum supply, 12 million ETH, was allocated to the Ethereum Foundation to be used for continued blockchain development.[ii] 80% of the initial Ethereum supply, 57.6 M ETH, was purchased by crowd sale investors, raising $18.3 million (31,7300 BTC). These tokens were usable or transferable before the launch of the Genesis Block on July 31, 2015.[iii]
Why Was There A Shift Equality Models To Equity Models?
Instead of the majority of tokens being sold, as was the case in 2017, token distributions are now much more focused on an equity model. Presales, VC’s, and seed investors are dependent on the value they bring to the project and often receive smaller allocations of tokens and have vesting periods built in to ensure they deliver value, usually in the form of capital, before receiving their tokens. Team allocations can range from 10-20% of the token supply, which is usually vested over fixed time periods. One possible reason for the shift away from equality proof of work cryptocurrencies is that it leaves little incentive for developers to keep building and developing the network. If there is a fair launch, then developers receive no additional rewards for the work they have contributed to building and developing the network.
Examples Of Equality Token Models Which Have Elements Of Equity
Crypto is decentralized, but we still live in a centralized world, and it is one where people will take advantage of certain situations. One example is VC firm Divergence Ventures, which was accused of insider trading after an analyst working for the fund made 702 ETH on an airdrop from Ribbon Finance, which the VC fund was financially invested in.[iv] Airdrop models are intended to be free rewards for users/holders, but they rarely follow an equality model. Instead, they tend to vary rewards based on your wallet holdings or on the amount that a wallet has spent using a protocol.
UniSwap’s token airdrop has been considered one of the most equal, where each address that used the Uniswap platform was given 400 UNI tokens. Individual users who used multiple wallets were able to claim 400 UNI tokens per wallet, removing some of the equity from the model. The UNI airdrop for the liquidity pool providers, 15% of UNI supply (150 million tokens), were given as rewards for liquidity providers using an equality model that was based on how much liquidity a person had provided on the platform.[v]
Crypto Punk NFT project started with an equality model wherein 2017 anyone could claim their own Crypto Punk NFT from the project website for the cost of the Ethereum gas fees only.[vi] As the distribution also included a 10% supply for the development team, we, therefore, see an equity distribution even within the fairest rewards.
In reality, even though cryptocurrencies have the aim of being truly decentralized, token models which choose to reward all users equally can sometimes disincentive the growth of the project. It may not be ideal to have a large number of token holders with no interest in a project, as there is no incentive for them to hold onto their tokens. Moving forward, most projects will likely favor an equity model over an equality model, seeing their tokens as valuable company assets. We have already seen projects move towards token rewards models where the value that an entity (individual, development team, investors or community member) brings to the ecosystem determines the number of tokens rewarded to each entity. One potential way to bring more equity toward token distribution is unlocking team and development resources based on achieving milestones, instead of being time-based, as is more common today. This would incentivize the team, developers, and community treasuries to commit to new developments and achievements for the network.
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