Optimism, an Ethereum Layer 2, had a lot of buzz when it launched its OP token a few months ago. For a long time, people had been calling for L2s to launch tokens, as hardcore Ethereum believers viewed investing in L2s to be the same thing as investing in the future of Ethereum. Today it seems like Starkware is the only major player who has decided not to launch a token at all.
Not all token launches are made equal though. Many tokens have predatory issuance schedules–a common practice in the DeFi world that usually takes the form of printing large amounts of tokens to fund the project's growth. In DeFi, this looks like making new tokens at the time of paying out customers for offering liquidity, or other similar actions. Those tokens are often sold shortly after.
This does two things: first, it gives immediate access to new funds for the project to incentivize behavior or payments. While this has some upsides, generally companies that turn to alternative forms of accessing capital do it because they don’t have access to traditional forms of capital–and that’s rarely an accident. Investors are all too eager to buy into successful companies, so why do these companies have to pay for use by undermining their own assets? Remember, having good cash flow and high value equity is how these founders make money.
Second, this spikes the supply on the market, resulting in price decline. In some cases this is an immediate crash, in some cases it’s a slow and steady down trend. The most common case for immediate crashes is seen when a large lockup period concludes. In general, Venture Capitalists who invest have lockup periods after a token or stock goes public and can be traded. In the crypto world, the average lockup length for VCs seems to be 1 year, after which some investors choose to sell the bulk of their shares and introduce a lot of supply to the market. These lockup periods often apply to tokens earned by employees.
Optimism launched with 200M tokens a few months ago. But that was only one phase of a multi-phase plan that includes issuing an additional 1.8B tokens, starting the next phase Monday July 18th. According to a governance vote page, a goal of this next phase is to “immediately deploy 36M OP tokens.”
Some of these new tokens will be used to trickle out rewards to users, but it should concern investors that an additional 18% of total token supply is being immediately deployed, with plans to 10x the total supply.
To be clear, I’m of the opinion that controlled and limited deployment of new tokens is a fine practice, and can be very beneficial to the company. Tech companies generally raise a round, then work like crazy to build enough to justify raising the next round. Web3 token issuance can flatten out these lump sum fund raising rounds, and build more predictable capital accessibility. Token issuance is never directly good for the investor, for each +1% of tokens printed, your shares are worth -1% (though this is often a lagging indicator as the market catches up). The only time this is good for investors is when the entire company outgrows the issuance rate. That doesn’t seem like a good bet in this market.
On top of all of this, the OP token launched on June 1, 2022. That means next June, there will be VC and employee tokens entering the market as people realize some of their gains after their 1 year lockup period ends.