Token distribution is an integral part of tokenomics research. It describes the proportions in which different groups of users and investors own blockchains tokens. You can consider token distribution as a pie chart where each piece represents a specific group’s ownership of the project.
All projects have initial token distributions in the beginning, whereby they decide how many tokens they will give, grant or sell, and to whom. These decisions also determine how ‘fair’ the project’s launch is. Generally speaking, a well-organized token launch is one that anyone can attend, with only a small portion of tokens distributed to inside investors.
It is also important to note that the centralization of token ownership goes against the key principle of blockchains, i.e., decentralization.
In the initial token distribution, blockchain projects distribute their tokens to four main groups: the public, their communities, insiders, and their own foundations. The public refers to anyone keen on investing in the project, while the community consist of users who are passionate about the project and want to help it succeed. Insiders are essentially the founder team, advisors and VCs, and the foundation is usually a non-profit that manages the project in one way or another.
Because crypto communities emphasize open-source principles, they expect the blockchain to permit funding from the public, who should receive ownership in return. Thus, some projects are criticized as for giving only a small number of insider investors the possibility of buying the first round of tokens.
A demonstration of Ethereum (ETH) token distribution
1. It started with 72 million ETH tokens, of which 60 million were distributed to around 1,000 investors, who bought the tokens from an open-crowd sale in 2014. The Ethereum network used the raised money (about 18 million USD) to fund protocol development, research, legal expenses, and communications.
2. The network shared the remaining 12 million tokens between the Ethereum foundation and early contributors to the protocol.
What can you learn from Ethereum token distribution?
A small number of crowd sale participants means few individuals can influence the token price. The concentrated ETH distribution also means token owners can easily vote on the future development of the protocol. Therefore, how decentralized the network really was to begin with is questionable.
Nowadays, the situation is different as early buyers of Ethereum have sold parts of their holdings to new entrants, and proof-of-work (PoW) mining has created a lot of new token supply. However, it is still the case that there are some ‘whale’ holders who can influence the price of the token with their holdings.
On the plus side, Ethereum sold most of its tokens in the public sale, unlike some blockchains that allocate a significant portion of their tokens to insiders.