On the 14th of February, a project “Viva la Libertad” launched the meme token $LIBRA on Solana. In its first hour, the token valuation skyrocketed to a high of $1.16bn in market capitalization (~$4.5bn in fully diluted valuation). However, it subsequently plummeted over 95%, wiping out over $280m in value from nearly 75k individual traders. Dubbed the ‘Cryptogate’ scandal, the launch allegedly involved the participation and endorsement from prominent parties like Argentinian President Javier Milei and Web3 investment firm Kelsier Ventures.
Allegations of insider trading and market manipulation quickly surfaced, with some wallets, including that of Kelsier Ventures, making over $110m from liquidity provision and sniping the token at launch. This triggered major outburst from the crypto community, and a political crisis for Milei with fraud accusations and calls for a federal investigation.
Kelsier’s CEO Hayden Davis’ was also found to have played a part in First Lady Melania Trump’s $MELANIA token launches. These events not only highlight the ongoing issues with influential celebrity-related cryptocurrency launches, but also the ever-pressing need for a more transparent and equitable token launch mechanism in the crypto market.
The History of Token Launches
Since the advent of cryptocurrency, the evolution of token launch mechanisms has undergone much innovation and adaptation, with each new mechanism offering its own traits and advantages.
Mining: The earliest method of token launches was mining, first demonstrated by Bitcoin in 2009. Using a Proof-of-Work (PoW) consensus mechanism, it involves network participants (miners) expending computational power to validate transactions and compete for the opportunity to propose new blocks on the blockchain, receiving rewards in the form of newly minted tokens in return if successful. However, mining has been associated with significant challenges - including miner centralisation, high energy consumptions and environmental concerns. This has led to regulatory efforts aimed at mitigating them, such as restrictions on carbon-intensive mining operations in certain regions.
Pre-mining: Following mining, pre-mining emerged as a method to allocate tokens to different stakeholders of a project (team, advisors, investors, etc.) prior to the token’s public launch. Initially, pre-mining was criticized as a potential tool for dishonesty and centralization. Transparent allocation has since improved this practice. Projects can now benefit from development funding to build a strategic reserve for future initiatives and incentivize early contributors. However, the market still lacked an effective means of distributing tokens to retail participants.
Fixed-price Sales: The Initial Coin Offering (ICO) boom of 2017 would bring about the first popularized solution — fixed-price sales, where tokens could be sold to the public at a predetermined price. This provided a simple way to calculate token allocation based on funds raised and gave participants an equal opportunity to purchase tokens early on. Despite this, fixed-price sales are not without problems. Mispricing of tokens triggered volatility post-launch while large investors still have the upper hand because they can buy up more tokens. Regardless, ICOs were instrumental in raising capital quickly between 2017-18.
But by 2018, it was obvious that these unregulated token sales would face increased skepticism due to the large presence of scams. This led to a rise in alternative forms of fixed-price sales such as Initial Exchange Offerings (IEOs) and Initial DEX Offerings (IDO). These new offerings involving third parties help add a layer of verification and legitimacy to projects.
Dutch Auctions: Implemented by projects like Algorand and Gnosis, Dutch auctions introduced a new way for the market to price tokens. This approach starts with a high price that gradually decreases until a reserve price, allowing users to buy in at any price they deem the token to be worth. The final token price can be higher than the reserve price if demand exceeds supply before the time period is over. Compared to fixed-price sales, Dutch auctions are more inclusive and can help to reduce post-launch price volatility. This method is best utilized when the founding team is confident that the public market is able to make an informed decision about the valuation of the asset they are selling.
Fair Launches: Exemplified by Yearn Finance and Monero, fair launches aimed to distribute tokens transparently and equitably, with no one group having significant control over the protocol. This is a step further from fixed-price sales and Dutch auctions as all parties - including the founding team, would be required to acquire tokens at launch through purchasing or participating in liquidity mining. The community will then get the power to decide on the direction of the protocol, ensuring that early supporters are always aligned with the protocol’s growth. This could be a double-edged sword as while it ensured decentralization, it could also skew decisions towards the hands of a few ‘whales’ - who can buy up token supply to directly impact voting decisions.
Liquidity Bootstrapping Pools (LBPs): Liquidity Bootstrapping Pools (LBPs) on Balancer and Fjord Foundry emerged as a new innovation on Dutch Auctions, using dynamic weight ratios to determine token prices and distribution. Starting with a heavily weighted ratio (e.g. 99% tokens to 1% stablecoins) that gradually adjusts over time to a balanced ratio, this creates a natural price discovery process. Whales are discouraged from large early purchases while enabling projects to launch with minimal capital requirements. LBPs also offer project teams considerable control over sale parameters, including the ability to pause swapping when needed. However, they also present challenges, such as complexity for participants and the need for careful parameter design to prevent manipulation.
Lockdrop + Liquidity Bootstrapping Auction (LBA): The lockdrop + LBA is an innovative token launch mechanism that is designed with a two-phase process to promote fair distribution and sustainable price discovery. Phase 1 involves participants pre-committing collateral to the protocol, receiving protocol tokens based on the duration and size of their commitment. These would remain locked until the end of Phase 1. Phase 2 is the price discovery stage, where previously locked tokens are granted to participants who can choose to deposit them into a liquidity pool for additional rewards. The LBA is typically divided into two further parts: in Part A, users can deposit tokens and stablecoins but only withdraw stablecoins, while in Part B, stablecoin liquidity withdrawal is gradually restricted to lock liquidity into the pool. At the end of the auction, remaining tokens and stablecoins are used to determine the final token price, and participants receive LP shares proportional to their deposits.
This model offers several advantages, including reduced initial price volatility, fair token distribution, and a mechanism that discourages immediate selling pressure. It also helps projects gauge community commitment and attract long-term alignment. However, this is not without challenges. The complexity of the process may deter some participants, and the locked assets can limit short-term liquidity.
Fair Launches 2.0: As users became disillusioned with low float high FDV tokens, we saw a shift back towards more decentralized and ‘community-first’ fair launches. Fair Launches 2.0 can be defined as decentralizing the token creation and trading process coupled with innovative accelerating mechanisms. Pump.fun entered the scene in January 2024, introducing a ‘one-click’ launchpad for anyone to launch a token. Tokens will only be tradable on pump.fun’s platform, until they surpass $100k in market cap - whereby they will ‘graduate’ from the platform and have a liquidity pool seeded on Raydium with $17k of liquidity.
This whole process reduced the time and knowledge needed for token creation, automated liquidity management and made it much more transparent as compared to before - signalling a shift of power from centralized entities. It also reduced the risk for creators to near zero in terms of putting upfront capital to seed liquidity. Meanwhile, its social elements rallied users together to support what they believe in, as being an early adopter meant significant upside once a token ‘graduates’. This created a flywheel which spurred its exponential growth as token creators are incentivized to launch on pump.fun while users are constantly looking out for the next gem on the platform - ensuring that there is constant demand and supply.
Many other platforms have spawned out trying to replicate pump.fun’s success, such as flaunch.gg on Uniswap v4. It introduces buybacks and revenue sharing back to users, making it more attractive for users to trade or launch tokens on their launchpad.
Diagnosing Problems and Flaws
The surge in memecoin activity and the rise of new launchpads have highlighted the persistent flaws amongst existing token launch mechanisms. High-profile exploitative incidents involving tokens like $LIBRA and $MELANIA reiterates the need for more comprehensive solutions, as it undermines the industry's principles of fairness and decentralization. While the evolution of token launch mechanisms represents a continuous effort to create more equitable and efficient mechanisms, it is clear that some issues have yet to be resolved.
Insider Trading due to Information Asymmetry: Insider trading remains rampant in token launches . In the $LIBRA launch, insiders were given large percentages of token supply while others engaged in "sniping”, purchasing large amounts of tokens immediately after launch. This was followed by the Argentinian president’s seemingly coordinated endorsement of the token on social media, causing a massive influx of buys from retail participants inflating the token’s market capitalization to highs of over $4.5bn. Soon after, the early buyers were observed to be exiting their positions on-chain, resulting in losses for many new entrants. The online endorsement would then be deleted, causing more sell pressure.
Similarly, $MELANIA saw a single wallet holding 80% of its supply, raising concerns about ownership concentration. The admission by Hayden Davis profiting greatly off $LIBRA and $MELANIA launches underscores the issue on insider access. Coupled with the influence of celebrities and political figures, these cases demonstrate that existing launch mechanisms remain vulnerable to coordinated efforts by insiders.
Bot & Whale Domination: While many modern launch mechanisms strive to minimize bot and whale domination, inherent trade-offs allow these issues to persist. Even in supposedly fair launches, where participation is open to all, sophisticated bots and deep-pocketed whales are still able to acquire a disproportionate share of the token supply. This enables whales to control significant portions of liquidity and trading volume, allowing them to execute coordinated market manipulation schemes which leaves smaller retail participants at their mercy. This results in an unfair advantage, contradicting the initial promise of equal opportunity.
Regulatory Gaps & Enforcement Challenges: Unlike traditional financial markets where front-running and insider trading are illegal and actively prosecuted, crypto markets operate in a regulatory gray area with many ambiguities. This makes it unclear which laws apply and which authorities have jurisdiction, leading to regulatory arbitrage and hindering effective enforcement even when foul play has been identified. Moreover, the pseudo-anonymity of crypto assets and involved parties create data gaps for regulators - further facilitating money laundering through scam launches and exploitation of loopholes without the fear of significant consequences.
Alternatives and New Approaches
The above problems associated with token launches have profound implications for the cryptocurrency industry as a whole, affecting both memecoins and legitimate projects. As retail investors become increasingly wary of entering a space perceived as vulnerable to manipulation and scams, it stifles mainstream adoption and innovation – rendering technological advancements and UX improvements largely inconsequential. Therefore, we propose several comprehensive approaches to address these issues, ensuring that the industry can continue to progress in a positive direction.
Debt Issuance: This method involves projects issuing debt tokens that represent a claim on future revenues or assets. This emphasises on the value proposition of the project and potentially reduces volatility compared to traditional token launches. However, this does expose investors to default risk. Projects must be able to generate positive cash flows, suggesting that this method might be more applicable for established projects with working product and traction, and are in need of secondary fundraising from the public. Though this may limit the upside potential for early investors and requires more complex financial structuring, this serves as a major step in promoting access to sustainable long-term projects.
Liquidity Locking: One approach that has been gaining traction even amongst memecoins, is liquidity locking. Similar to the concept of lockdrops, this involves locking LP tokens in smart contracts for a predetermined period, allowing projects to demonstrate their commitment to their token’s long-term success. This mechanism prevents instant "rugpulls" by developers and serves as a preventive measure against malicious practices, boosting investor confidence, and encouraging long-term alignment from retail participants. This also contributes to ensuring sufficient depth of liquidity for trades, preventing instances of major slippage and even manipulation by large holders. Though this might limit projects in responding fast to the markets, more customizable solutions that allow for different mechanisms can be experimented with to identify a better balance for both projects and investors. Some examples include lock splits, incremental locks, milestone-based unlocks and more.
Launch Restrictions: While eliminating bot and whale participation entirely is likely unattainable, strategically implemented launch restrictions can significantly mitigate their impact on token distribution. One potential approach is to impose maximum bid or purchase limits per wallet, preventing whales from accumulating a disproportionately large share of tokens in a single transaction. Furthermore, integrating private social verification methods, such as requiring Twitter account authentication, could reduce bot activity. While restrictions are necessary, they should not impede decentralization efforts or limit community engagement. There should still be a balance between individual privacy and protecting the interest of the community - to allow for optimal user experience that enhances the industry’s reputation and trustworthiness.
Policy & Regulatory Improvements: To address the persistent issues in token launches effectively, several policy recommendations and regulatory improvements can also be considered. Mandatory disclosures, such as requiring pre-launch wallet transparency would help to serve as a precautionary measure in the case where concentration of token ownership and potential insider trading needs to be identified. Implementation of regulatory frameworks like the EU's Markets in Crypto-Assets (MiCA) regulation is also crucial as it provides clearer guidelines for token issuers and protects investors by establishing rules across the European Union. Alongside this, guidelines addressing the ambiguity surrounding legal jurisdictions would also be extremely beneficial. Enhanced due diligence by launchpads and exchanges before facilitating token sales should also be done to ensure that projects are legitimate and well-vetted.
Conclusion — The Road to a Level Playing Field
This article has charted the evolution of token launch mechanisms - from the foundational principles of mining to the complexities of liquidity bootstrapping auctions, revealing the persistent challenges in each token launch mechanism. Despite advancements aimed at enhancing fairness and decentralization, high-profile incidents like the $LIBRA and $MELANIA launches reveals the vulnerability of current systems to insider trading, market manipulation, and regulatory arbitrage. These issues not only erode investor confidence but also threaten the long-term stability of the crypto market, disproportionately impacting retail participants.
Looking ahead, the future of token launch practices hinges on the collective efforts of industry stakeholders and regulatory bodies. Policy recommendations such as mandatory pre-launch disclosures, and enforced liquidity locks can provide a crucial layer of investor protection. The implementation of regulatory sandboxes allows for safe experimentation with new launch mechanisms, while international cooperation is essential to address the global nature of cryptocurrency transactions. Ultimately, greater transparency and a commitment to ethical conduct can help us continue to build a more resilient and trustworthy crypto ecosystem.
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