Token unlocks provide one Mechanism in the crypto space where previously locked or restricted tokens are released onto the market. Many projects do not yet have their full token supply in circulation, but release this via a defined schedule, a so-called “vesting schedule”. This means that early investors and investors may only have their token share activated years after the token launch. That’s why they are an important factor when deciding to invest in a project.
Implications for crypto prices
With very linear token unlocks, where tokens are continuously put into circulation, the impact on prices is often muted. Buyers have enough time to buy up the inflow of tokens. However, it becomes particularly dangerous in projects whose tokenomics provide for a large release of the token supply in one fell swoop. One example is Arbitrum, which had an unusually high token release this year of almost 90 percent of the total supply. This is rarely the case, especially with successful projects, as the team wants to avoid such abrupt releases. Knowing that a large amount of tokens will be released into circulation in the near future, buyers are more cautious before investing in the project. At the same time, token holders are incentivized to sell their assets in anticipation of a dilution of the token supply. This dynamic connection therefore often leads to a strong price correction.
But Arbitrum is not the only crypto project where token unlocks could affect the price: dYdX is facing something similar.
dYdX: More tokens are being put into circulation
The dYdX crypto project is particularly successful because it trades perpetual futures contracts for over 35 different cryptocurrencies while supporting advanced order types completely on-chain. This niche product in the DeFi space is popular among traders and is clearly reflected in the trading volume of the platform. However, dYdX’s price development raises questions: after an above-average performance during the bear market, dYdX is struggling to reach new price levels this year. Although a rally in mid-March drove the price to an impressive $4.50, there was a lack of sustained support and a price correction of over 50 percent occurred.
This could be partly due to the Tokenomics the DeFi platform. The most significant token unlock for dYdX took place on December 1, 2021. Around 70 percent of the token supply at the time was released, which led to a strong price correction. Since then, investors and traders have had to face monthly token unlocks of sometimes more than 10 percent. Another such big unlock is coming on May 1st. A total of 33.33 million dYdX tokens will be released, representing 10.72 percent of the total token supply. A majority of the tokens released will go to seed investors who have already made significant profits and are likely to want to realize at least some of them. Given this selling pressure, there are simply no buyers on the other side to keep prices up.
When to expect a decrease in selling pressure
A reduction in selling pressure is unlikely to be realistic before June of this year. The last major token unlock will take place on June 1, 2024 before the transition to a more linear vesting schedule. Although dYdX’s entire token supply will not be in circulation until July 2025, the monthly increases will only be a few percent.
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