How locked tokens are holding back crypto liquidity
January 31, 2025
How locked tokens are holding back crypto liquidity? The crypto sector has gone towards a dependence on a pillar: locked tokens. In theory, their role is to circumvent quick sell-outs and stabilize the market and at the same time, align early investors’ incentives. In practice, however, they have posed an altogether different issue altogether-the extreme debilitating of liquidity. For a market that actually lives and breathes its fluidity and innovation, this in fact creates an issue.
Under the current system, investors have inflexible vesting timelines that deny them use of their money when most needed. Likewise, potential buyers and owners of protocols face impediments to efficiency in growth in the marketplace. Solving such challenges is no longer an option but a necessity considering that the crypto market evolves with each passing day.
The liquidity trap
Meanwhile, such tokens sit locked for extended stretches, sometimes taking months, even years, and thus leave early investors in a bind. That was initially designed to circumvent market dumps that tanked ventures. In such a scenario, stability comes at a cost of offering no room for adaptability.
The Lock-up periods can leave early investors in a bind economically. To expand the portfolio into an alternative investment, settle some unplanned expenses, rebalancing of portfolio in case of changing market conditions, they all fall through.
Bad enough, in case a project runs into a challenge or sees a significant transformation during a lock-up period, investors cannot reposition. That inescapability taps at the confidence such mechanisms were designed to instill.
Challenges for protocol owners
The effects of locked tokens don’t stop with early backers. New investors, too, crave getting exposure to exciting ventures. By the time such tokens go live-trading, their price could have gone through the roof, entering at a high cost.
This creates painful market gaps where high-conviction investors would undertake initial vesting schedules, but such tokens are not accessible to them. Where no bridge for such a gap exists, such opportunities will not be reached by many buyers.
A $177 billion problem
This ends up denting the interest of protocol owners who have a role to manage their pockets of an ecosystem. Where original investors seek liquidity, they will always go for Over-the-Counter deals, most times having a number of consequential issues regarding transparency, efficiency, and counterparty risks.
For such, therefore, for some semblance of control, protocol owners have to approve such deals manually. That is a very time-intensive process that doesn’t yield direct financial value to the protocol and doesn’t scale with increased demand. On top of that, even with vesting schedules, rapid sell-offs during token unlocks remain an actual concern.
Secondary markets as the solution
The solution to this would be to open a secondary market for locked tokens-one that permits trading but doesn’t in any manner touch the integrity of the vesting schedule. SecondSwap is one of the line of platforms in championing such a cause, providing such a service in a decentralized, equitable, and secure manner.
Through the use of smart contracts, SecondSwap allows:
- Sellers to unlock liquidity while adhering to vesting conditions.
- Buyers purchase locked tokens at discounted rates, gaining access to projects they believe in.
- Protocol owners to earn fees from transactions, diversify their investor base, and reduce the risk of abrupt sell-offs.
Unlike traditional OTC trades, these transactions are automated, trustless, and scalable.
Transforming the token economy
Secondary marketplaces for locked-up tokens have the potential to revolutionize the crypto universe. By freeing liquidity, such platforms generate value not only for the individual participant but for overall market efficiency and soundness.
The increased use of offerings such as SecondSwap opens doors to a more vibrant, accessible, and robust crypto economy. Unlocking liquidity opens to investors, buyers, and protocols, in turn, a glimpse of what trading in tokens will become in the future.
Be one of the first to experience how SecondSwap is changing DeFi and sign-up today.
