A new decentralized onchain economy is being created, supported by blockchains and decentralized protocols that unlock new and competitive financial and organizational structures. A new paradigm requires new tools to consistently measure and evaluate these systems.

In Part 1: On DEXs, Dromos examined the evolution of decentralized exchanges, demonstrating how models to date have not effectively solved for the DEX Trilemma. In Part 2: On the Token, Dromos showed how the MetaDEX model solves for this through the primacy of its token.

In Part 3: On Issuance, Dromos will dig deeper into the question of how to evaluate and understand issuance, a question that plagues our industry and is top of mind in the wake of the low-float / high-FDV mania that has discouraged participants of many types.

Themes covered:

• All forms of issuance are reallocations of control of an organization

• Effective issuance programs grow organizations by reallocating control to active contributors who value this control

• Analyses of issuance programs that applied to centralized organizations need to be reimagined for decentralized contexts

• Many decentralized organizations today are setting themselves up for failure by adhering to old norms for issuance rather than distributing control where it is best used

Much of this industry struggles to understand issuance

Issuance comes in many forms and via many mechanisms: programmatic token emissions, liquid team allocations, investor unlocks, etc. But the effect is fundamentally the same: tokens are created and / or distributed to someone for something, and the circulating supply grows.

One of the most common questions asked about the MetaDEX concerns issuance of newly minted tokens (often called “emissions”): is it sustainable? Isn’t it just a short-term incentive with an expiration date, as we’ve seen with loads of other projects with their liquidity mining and airdrops? There’s an infinite potential token supply – what gives? 

Meanwhile, L1 protocols such as Bitcoin or Solana that mint tokens to bootstrap network security rarely face the same kind of skepticism. Other token-based projects that drop massive quantities of insider stakes on the market, multiples of what is available publicly, haven’t been questioned about their sustainability. 

But all of these cases are different expressions of the same action: redistributing protocol ownership by increasing supply. And despite DeFi’s promise to upend organizational structures for the better, the industry’s reluctance to update thinking on ownership and dilution has slowed innovation and, at worst, allowed for widespread negligence and abuse.

It’s time to standardize our approach to these things.

This essay lays out a framework for understanding issuance—or, more broadly, dilution—in centralized and decentralized settings. It will also critically examine the disparity between potential and reality in token-governed organizations. Following this essay will be a discussion of the MetaDEX’s own approach to dilution.

Defining proportional ownership

Ownership or control of an organization, project, or asset usually entails some measure of proportion. Someone can own 25 of a company’s 100 equity shares, be one of four signers on a 4/4 multisig, or get access to a timeshare once every 13 weeks, and these would all more or less reflect the same idea: ownership of about a quarter of the thing.

Proportional ownership is a zero-sum game. For someone to acquire a larger stake in a business, someone else must lose some ownership—because the thing everyone has ownership of remains the same.

Dilution is a specific rearrangement of proportional ownership. It occurs when there is an increase in the quantity of the denomination of ownership, such as stock shares, and only some players are given the newly created stakes. 

An example is stock issuance. Suppose a company with 100 shares creates another 100 shares. If it distributes these new shares 1:1 to existing shareholders, this is a stock split and has no actual effect on ownership. Nobody is diluted; nothing material has changed.

But if it takes these 100 shares and only assigns them to 50 of the existing 100 shares, owners of the 50 remaining shares would see their interests diluted from 50% of the total to 33%.

In both cases, even though the number of shares increases, the thing that these shares collectively represent ownership of remains the same. What is materially relevant in dilution is not the creation of new shares but the redistribution of ownership.

The point is dilution, unlocks, emissions, L1 PoW rewards, and inflation are all referring to the same thing: some parties are getting extra liquid ownership at the expense of others. Any sort of issuance or dilution should always be viewed through this lens. 

Whether dilution is productive depends on whether stakeholders (and which particular stakeholders) are better off as a result.

Defining good dilution

Put simply, good dilution catalyzes growth. It doesn't just slice the pie into smaller pieces, it grows the pie (or creates an environment where the pie will grow over time). It does this by increasing ownership for participants who benefit from growth and will work for it to happen.

More precisely: for stakeholders to be better off, any issuance plan must solve for one or both of the following objectives: maximizing growth (ownership should flow to current contributors) and maximizing utility (ownership should flow to those who value it most). 

This belief flows from the intuition that any organization’s internal alignment and success come from stakeholders with the most to offer to the organization’s health and with the most to gain from it. Those with the most to offer will help the organization grow the most; those with the most to gain will contribute for the lowest compensation.

This may seem disadvantageous for early stakeholders, but consider: if contributing participants grow the pie faster than early owners can, reallocating ownership should leave the early owners better off—and should attract the best participants. What would be inefficient would be for resources to be locked with past contributors rather than current ones. In effect, early stakeholders who remain begin to look like any nonparticipant being diluted: they are making the bet that contributors will grow the organization faster than their share will decrease.

Evaluating dilution

Dilution has four basic parameters that should be considered when implementing an issuance plan or evaluating one for its merits.

1. Who is diluting whom?

Parties adding value should dilute those that are not. Participants or active stakeholders should dilute passive holders. 

2. What end goal does dilution serve?

There should be an explicit link between the dilution program and an organization’s growth strategy, whether it’s through raising capital, attracting contributors, or incentivizing key stakeholders. The dilution should in principle carry a growth multiplier ($1 of dilution drives multiples of that in the organization’s value).

3. What is the rate of dilution? 

Dilution should be sized in accordance with an organization’s growth expectations and timed to take advantage of favorable market conditions or strategic needs. 

4. What bundle of rights is being transferred by dilution? 

The underlying asset must offer tangible benefits or utility that is of value to those gaining stakes.

Evaluating dilution, historically

Although these four questions seem obvious, dilution is not typically examined from such a broad perspective. This is because organizations have typically been centralized, with clear boundaries between contributing insiders and noncontributing outsiders. 

On the inside, a typical corporation has a defined group of contributors responsible for setting and executing a growth strategy, and it has some governance structure tasked with monitoring the organization’s execution. On the outside, it has shareholders with limited control who depend on contributors to deliver results.

In the case of most centralized organizations, corporate cash flows are analyzed from the perspective of the noncontributing shareholder. There is a single flow of value: a company generates cash flows against its treasury, it pays its contributors, and passive equityholders get rights to their share of the residual cash flows. An efficient company maximizes the residual value generated off its balance sheet. 

When corporations redistribute ownership, they typically favor insiders or new investors over public shareholders—and this usually works well. In centralized organizations, insiders or new investors contribute to the organization’s value generation and benefit from incentive alignment through share-based compensation. Such an organization has no need to compensate existing shareholders, who do not help the company grow. 

Stock analysts, representing existing shareholders, thus principally view dilution as a cost against their ownership rights, offset by anticipated growth in the company’s value generation resulting from their dilution. This is understood as a natural cost of business.

Dilution in onchain economics can be revolutionary

Decentralized settings flip much of this analysis on its head. In these settings, the traditional benefits of organizing as a corporation—reduced transaction costs and centralization (and oversight) of management—are less relevant. As the need for a central team coordinating growth decreases, the boundary between insider and outsider blurs; success increasingly depends not on insider effort but on distributed user contributions and exchanges of value.

Analyzing dilution in decentralized contexts

Although it is popular and convenient to analogize tokens to stocks, they are not the same thing. Equity ownership is a standardized concept; it grants the right to surplus value generated by an organization’s insiders but rarely allows much more than this without a controlling stake. Tokens, on the other hand, can entitle holders to all sorts of control and value. They might also not entitle them to anything.

The frame of analysis can thus differ considerably between equity and tokens. Models assuming a centralized organization, with revenues and expenses attributable to a single accounting ledger, no longer necessarily apply in decentralized contexts, where value is exchanged directly between stakeholders; what affects the bottom line of one participant may not affect that of another, and a decentralized organization’s sustainability might not be measurable by aggregating various stakeholders’ revenues and costs. New entrants can be contributors, not just speculators—and when they analyze the benefits of opting into such systems, they must consider their unique roles.

Returning to the principle that contributors should be the beneficiaries of dilution as it occurs, decentralized organizations are compelling for this purpose; unlike equities, here there aren’t tightly defined processes governing issuance or dilution. The design space here is immense.

Who is diluting whom?

In centralized systems, insiders who contribute to a firm typically dilute passive shareholders. In decentralized systems, contributors dilute noncontributors—but this doesn’t necessarily imply insiders diluting outsiders.

This is because instead of automatically favoring insiders, good dilution in decentralized systems—dilution that encourages growth and utility maximization—tilts toward rewarding broad participation as needed, without high transaction frictions. New entrants finding ownership especially valuable will in effect ‘pay’ through participation in exchange for ownership yielded by nonparticipants.

In this context, diluting early nonparticipating insiders to reward active participants isn't just inclusive—it’s more efficient at creating value. This is an upgraded form of capitalism; anyone can opt to contribute and get the full value of their labor.

What end goal does dilution serve?

Traditional companies dilute predictably through funding rounds, compensation, or M&A, but these initiatives often mismatch ownership and value creation. Employees, for instance, might wait years to vest equity, leading many to leave once they finally own it. Similarly, companies often grant equity before knowing what value they will get in return, a costly risk. 

Companies accept such inefficiencies because the alternatives (e.g., constant rehiring, loss of institutional knowledge, team disruption) are inherently costly or not scalable with centralized organizations. 

Decentralized systems have much more flexibility in designing dilution programs. For instance, they can implement real-time dilution that directly tracks value creation for more efficient compensation.  Dilution as compensation can relate specifically to defined tasks geared toward growth.

A classic example of a dilution program unique to decentralized systems is Bitcoin, which issues new coins to miners as they provide network security. The miners who secure the network today dilute all existing holders, but this dilution is accepted because it ensures the network's continued operation and value.

What is the rate of dilution?

Under decentralized systems, dilution can be dynamic and responsive rather than fixed, adjusting based on any kind of objective such as network growth, participation, or value creation. The rate of issuance could be determined by distributed voting or even programmatically. However it’s designed, issuance should be proportional to the expected growth generated as a result.

What bundle of rights is being transferred by dilution?

Fully programmable tokens can represent true productive capital over and above a simple financial stake. Contributors receiving stakes could easily value them in excess of their market price if they offer the kind of power and utility that are uniquely useful to them as network participants. Such a design would create a positive feedback loop, where each round of dilution attracts valuable contributors who seek long-term benefits, ultimately strengthening the network.

Dilution in onchain economics has fallen far short of its promise

Despite the step change in efficiency offered by decentralized networks, we are largely reproducing traditional corporate structures without a need to do so—and often with worse and at times perverse incentive alignment.

In many cases, these ownership structures devolve into insider-driven value extraction rather than broad-based value creation. Protocols optimize dilution schedules for investors and team members to exit large stakes quickly in massive profit—not to hold as an incentive to continue contributing. They offer tokens that serve little purpose other than to be sold to a public interested only in their speculative value. As the charts below illustrate, the public’s interest in their speculative value is at best fickle.

Awareness of this breakdown in distribution has steadily grown, but largely absent from this discourse is an examination of the root causes of this breakdown—which include the misallocation of ownership away from current contributors to early, inactive contributors, and ultimately to people with no particular affinity for the organization.

Who is diluting whom?

In fully efficient systems, relative ownership flows from passive noncontributors to active contributors, regardless of their initial position. But today, we usually see the opposite: privileged insiders maintaining and even increasing their ownership share over time while current contributors capture limited returns.

This creates a fundamental inefficiency: those generating value today are effectively transferring liquid ownership to those who may have helped yesterday but aren't helping anymore. A disproportionate advantage given to insiders offering varying degrees of participation on vesting is fundamentally a drag on growth, limiting a decentralized system’s ability to outcompete other organizational models. 

In effect, onchain projects running dilution programs like this are operating as though their operations are centralized. To insiders, the dilution is not cost but compensation; to outsiders, it’s strictly a cost. If these projects don’t rely on public participation and use, that may be fine, but if they do, there may be a misallocation of resources.

What end goal does dilution serve?

Rare is the dilution program that explains why it exists. Many practices are de rigueur in the industry, ostensibly for the purpose of bootstrapping a network, but for the most part the only consistent outcome linking them is the enrichment of protocol teams and their investors. Vesting for insiders is an exit, not an entrance.

A less generous read of these programs raises even deeper concerns. Emissions farming programs distribute tokens without establishing a committed user base, while preplanned, telegraphed airdrops act as metric-gaming exercises rather than genuinely rewarding participants and prospective contributors. Most troubling of all, these mechanisms remain largely permissioned and vulnerable to manipulation by insiders, subverting any possibility of efficient distribution.

What is the rate of dilution? 

The scale of dilution can be staggering. Projects often launch with a tiny circulating supply compared to their total token allocation, obfuscating the true extent of future dilution. 

Complex vesting schedules and opaque unlock and spending mechanisms further obscure the relationship between dilution and growth. The situation becomes even more precarious with governance tokens, which can activate large treasury allocations, effectively giving insiders a blank check for value extraction.

And what’s worse, this liquidity occurs quickly – in comparison with venture investments that typically take at least 5-8+ years to exit, one finds typical dilution schedules concluding in a fraction of this time, often well before protocols achieve PMF, let alone large scale.

What bundle of rights is being transferred?

Tokens need to distribute and manage the value that the organization generates. Even when projects succeed in rewarding the right people in the right way for the right contributions, compensation models without this attribute lack long-term sustainability. The question that often goes unanswered is: why would insiders or investors hold on to a token after it vests?

Many tokens provide little beyond speculative appeal, and governance rights become effectively meaningless under the weight of insider control. When their tokens vest, insiders have little practical reason to continue holding them. New entrants have little reason to acquire them. 

Nobody has compelling reasons, ultimately, to continue doing work for the organization, except insofar as speculators will provide liquidity for exits. The result is an ecosystem largely devoid of robust value capture mechanisms, locked in cycles of dilution without corresponding value creation.

Getting dilution right

Despite the promise of the onchain economy to unlock profound organizational efficiencies through better ownership allocation, the past decade has seen frustratingly few examples of genuine attempts to do so. Permissioned, private redistributions have been the norm, and market participants have long supported this status quo despite its having repeatedly hobbled projects while enriching insiders on their way out. This must change if the industry is going to outcompete offchain incumbents.

We challenge protocols to rethink their internal economics and embrace frameworks that go beyond short-term gains, prioritizing sustainable growth and resilient ecosystems—because if they don’t, others that do will beat them. Meanwhile, we hope that investors and speculators will continue to update their expectations of what constitutes investable tokens and valuable ownership.

The next installment will build on this framework to discuss how the MetaDEX deliberately runs toward this opportunity, and why its use of emissions is not a dilutionary burden but a self-sustaining growth accelerant that distributes control where it should go.

Appendix: Profiles in Issuance

Uniswap

Uniswap represents itself as permissionless and "zero-cost" at the smart contract level. From some perspectives, this is certainly true; absent a token, the protocol has up to now worked just fine (if not sustainably in a competitive environment) between LPs and traders, the two stakeholders in its model. All value is exchanged directly between these parties. Pundits laud the team’s well-earned status at the vanguard of AMM design and point to the protocol’s years-long preeminence and countless forks as compelling evidence of product-market fit.

However, from the perspective of UNI token holders, for years the situation has been quite the opposite. UNI’s token distribution heavily favored privileged insiders through massive team/investor allocations, whose value has been supported for years by promises of eventually returning fees to tokenholders. Moreover, these same insiders have for years actively undermined value distribution to UNI holders. There also remains uncertainty over the share of value that is slated to go to UNI versus Uniswap Labs, the independent company responsible for the protocol’s development.

Who is diluting whom?

Following a universally praised airdrop of 15% of the total supply to Uniswap users, 99% of the remaining supply dilution has gone to insiders and affiliates.

This pie chart provided by Uniswap Labs doesn’t tell the entire story. The 60% “community” share does not break out the 45% allocation to the Uniswap Foundation, an organization that is majority governed by insiders—not by users of the protocol or other parties that may act to grow the network.

Dilution in this context can be understood as a cost with no corresponding value attribution.

What does this dilution accomplish?

The UNI token and its dilution schedule have primarily subsidized Uniswap Labs and affiliates’ development work on the back of speculation on the token by outsiders. Ostensibly the Uniswap Foundation’s own allocation has contributed to the protocol’s growth, but details on these efforts are outside the scope of this analysis.

How much dilution?

In four years, the 850mm UNI unlocked—5x the amount on launch—have amounted to at least $7B of value available for selling on the open market. For scale, Uniswap’s TVL today is roughly $5.6B, down from ~$9B during its 2021 peak. Any growth Uniswap is expecting from here will not have additional dilution available to spur it.

What bundle of rights is being transferred?

The UNI token confers rights to governance, which has a say in the deployment of the considerable amount of UNI in its treasury. However, the UNI token currently does not have any rights to fees generated by Uniswap. Consequently, the token’s value has been purely speculative rather than productive, with Unichain offering a potential remedy to this condition.

Conclusion

All told, this is at best a misapplication of irrelevant corporate practice to what should be a permissionless, contribution-based system. The result is predictably inefficient: ownership flows to passive early position-takers rather than active current contributors, who receive only the fees they generate. 

The Unichain announcement represents an attempt by some stakeholders to make this right—arguably, its primary concern is a stakeholder realignment than a product strategy—but without a credible path to unifying ownership with contribution, it is unlikely that the protocol in its current state will be durable to competitive pressures. In any case, Uniswap currently doesn’t have further dilution at its disposal to encourage growth.

Starknet

An example organization that saw little effective outcome from its initial vest schedule is Starknet. Long considered a front-runner among Ethereum L2 organizations, Starknet raised over a quarter billion dollars over the last several years and held its token generation earlier in 2024 with a retroactive airdrop of approximately 7% of its tokens. The airdrop received mixed reactions to, among other things, its handling of sibyl farming, its retroactive rewarding of spurious Github contributions, and opportunities for insiders to benefit. The enduring benefit of this airdrop remains unclear.

Who is diluting whom?

Insiders, including the team and early investors, are diluting the ownership of users by releasing a significant portion of tokens to themselves rather than to users who actively participate in or contribute to Starknet’s ecosystem. Most of the allocations shown in the chart below appear to relate directly to insiders and affiliates or are governed entirely by insiders.

What does this dilution accomplish?

Over the next three years, the amount unlocked to team members and investors will have amounted to roughly 7-8x the amount initially granted to users. Under this schedule, the vast majority of the circulating ownership will be circulated back to nonparticipating insiders, rather than users who would otherwise be capturing the value of their participation. It is worth noting that as aggressive as this schedule is in favor of insiders, it is in fact more gradual than Starkware’s original plan; the team adjusted the schedule following considerable public backlash.

While this approach might provide initial financial gains for insiders, it risks undermining the network's decentralized nature and discourages active user engagement, as users receive fewer incentives to stay invested in the protocol.

What is the rate of dilution?

The amount of dilution to date, roughly 50% of the initial circulating supply since April, has been wholly out of step with the network’s roughly flat growth. This, paired with the dilution highly favoring insiders and discouraging external participation of those who would actually contribute to growth, calls into question the sustainability of this particular token design.

The bulk of the dilution, taking the circulating supply from 20% or 80% of the supply cap, will occur roughly over the next two years. These years—and what the insiders will do to grow the chain after their tokens vest—will be critical to determining the network’s success.

What bundle of rights is being transferred?

It is not entirely clear as of this writing what the actual intended use of STRK will ultimately be. As it stands, the token does not definitively meet the proposed standards of good token design: it does not currently manage or distribute the network’s value. It does not act as an exclusive gas token on the network, and it is not currently involved in securing the network, which remains centralized. It does have some governance control, but as we observe in the distribution, governance for the time being remains overwhelmingly in the hands of Starkware, Starknet Foundation insiders, investors, and affiliates.

Conclusion

With the team and original stakeholders being fully vested within only a few years and before any further permissionless incentives go to the greater community, it is difficult to view the practical outcome of this structure as conducive to broad-based participation. As these insiders vest and exit, who is going to sustain the organization’s growth?