Crypto Projects Lose Billions Due to Poor Token Design

Even the most promising network launches can fail due to poor token design, as seen in the spectacular flameouts of Terra LUNA and Celsius. These projects exposed the dangers of financial sleight-of-hand, such as algorithmic stablecoins and yield schemes masquerading as innovation. However, there are many other high-potential projects committing economic suicide through easily avoidable mistakes. Blue-chip projects with genuine technical merit and legitimate use cases, like Aptos, have watched billions in market cap evaporate overnight due to mismanaged token unlocks and poor communication. It is critical for crypto founders to increase their emphasis on token design so that great projects can build economic foundations as strong as their technical ones.

The biggest tokenomics mistakes observed in otherwise solid projects include large valuation gaps, poor vesting schedules, overselling by founders, and high listing valuations. While it is customary for projects to offer early investors lower-priced tokens compared to later rounds, founders should be careful in allowing wide pricing spreads between these early rounds and public buyers. This may be easier said than done as shrewd investors demand lower prices against the threat of withholding investment. However, an investor with a low entry price in comparison to a later round essentially guarantees their upside even at prices lower than the cost basis of a public buyer. This means that a loss for buyers in later rounds may still result in gains for the earliest token holders, creating an unfair imbalance in the project’s token economy.

Far too many projects turn their public buyers into exit liquidity for early investors and insiders. Nothing destroys community faster than watching early insiders dump tokens while public buyers hold withering bags. The timing of unlocks is important. While a long vesting and lockup schedule seems good for value appreciation, they almost always guarantee predictable sell pressure as investors who’ve been forced to hold for too long scramble to unload. Fast unlocks may provide rapid price discovery and expand the token holder base, but they also allow whales to dump, creating “red candles” and evaporating public confidence. Sometimes the prospect of turning recently minted digital tokens into real value is too tempting for the founders that created them. Even the most disciplined of them are tempted to sell their holdings and trade their project tokens for cash. For instance, Mantra suddenly lost 92% of its value in just 90 minutes. Despite statements by the CEO to the contrary, blockchain analysts were quick to point out substantial insider movements of at least USD 227 million onto exchanges, suggesting an insider dump.

Founders are often enticed to list at larger valuations as they make for bigger headlines, raised optics, and build hype. However, overvalued project listings create a lot of “air” underneath them, and when everyone is in the money, it’s almost a guaranteed race to the bottom and token holders are quick to cash out to get more favorable pricing than the person next to them. A high starting valuation also means the prospect of public buyers earning a multiple on their investment is slimmer, thinning out secondary market demand. When you have a lot of holders selling and nobody to buy, the result is an eventual death spiral. Projects like Hamster Kombat set industry engagement records and listed on the top exchanges in the world, but its overvaluation at listing resulted in an 87% price decline to its recorded all-time-low.

BTC and ETH hold the top market cap positions for good reason. Beyond being early, they’ve demonstrated several core principles that separate sustainable token models from hollow speculation vehicles. Bitcoin’s 21 million fixed supply cap isn’t powerful just because it’s scarce—it’s powerful because the market believes with absolute certainty that this limit won’t change. The fundamental question every project should answer honestly is: Could your product function without a token? If yes, you’re likely forcing tokenization where it doesn’t belong. Projects like Filecoin embody this principle well—their token is essential to the network’s storage marketplace function, making it nearly impossible to separate the product from its token. By contrast, projects that bolt on tokens as afterthoughts typically see their tokens wither in value over time.

Projects should structure valuations across each sale round with reduced spread and design a lockup schedule that prevents lower-priced buyers from “dumping” their tokens on participants in later rounds. Creating a layered vesting schedule that restricts early sales for buyers with a low entry point while allowing for later-round participants to de-risk first offers a reasonable balance of upside for early buyers and price protection for later buyers. Well-structured token economics goes beyond what is written in a document. Projects should take a step further and ensure their tokens are custodied by a third-party audited, irrevocable smart contract guaranteeing transparency and compliance by all parties. Lower initial valuations might feel like leaving money on the table, but they create room for meaningful appreciation. Projects launching at already-inflated valuations leave little upside for new participants, killing momentum and community growth. A low total supply allows for better price control and market responsiveness. It imbues tokens with more significance, making manipulation more difficult and price movements more meaningful.

Good tokenomics isn’t set-and-forget—it requires ongoing stewardship. Some best practices include strategic supply management, buyback programs, and controlled liquidation. Increase circulating supply only during rising markets to prevent dumping additional tokens into already weak markets. Implement token repurchases when sell pressure is high to stabilize the price and signal project commitment to a high token valuation. Require large investors to use market makers when selling significant positions to prevent large price impacts from sudden dumps. The most successful projects approach tokenomics as an extension of product design rather than exclusively an exercise of financial engineering. Thoughtful tokenomics are a signal to the market of a thoughtful product and team. Your token is ultimately your best marketing tool—it rewards loyalty and financially aligns users.