Can equity be tied to tokens to save cryptocurrencies?

We now need to tell regulators what a “sustainable token economy” looks like.

Article by: Brian Flynn

Translation: AididiaoJP, Foresight News

Over the past five years, I’ve been trying to solve the problem of “misaligned incentives” in the cryptocurrency space.

Most token designs encourage holders to compete against each other.

This is completely opposite to the goals they are supposed to achieve. Tokens should bring teams, investors, and users together around a common goal. If everyone holds the same asset, naturally everyone wants the project to succeed—that idea is correct. The problem is that the token models we’ve built make people profit from “selling” rather than “holding.” This single design choice has messed everything up.

This article isn’t about promoting a specific project I’m working on. Instead, I believe the core issue the industry needs to address—and what we should be advocating to regulators—is this.

Eight years in, we’ve been watching the same script: project launch, market hype, insiders unlocking, dump and run, retail investors caught holding the bag. This pattern is so familiar that we hardly see it as a problem—like tokens are supposed to work this way. But I think we’ve never honestly confronted the root cause. And I haven’t seen anyone pushing for a truly better token model—a model we can point to and say, “This is what we should be doing.”

Now, we’re facing an unprecedented regulatory window. But the problem is, we haven’t even figured out what a “good token” should look like before stepping into this window.

Race to the Exit

When you profit from selling tokens, every other holder is your competitor.

The team issues tokens, early investors come in. The team also holds a large stash, but it’s gradually unlocked. Users buy on the market; on the surface, everyone’s interests align. In reality, everyone is watching each other, trying to figure out when to sell. Investors watch for the first big unlock, the team looks for cash-out opportunities. Users are watching too, trying to sell before insiders run away. This isn’t aligned interest—it’s a race to the exit.

Lock-up and unlock mechanisms don’t solve this problem. They only determine who can run first—the answer is always insiders before retail investors. Everyone’s “ultimate game” isn’t “growing the project,” but “when should I sell.”

Even “smart” solutions don’t help

What about buybacks? Burn mechanisms? Staking rewards? These are all attempts to fix the problem, but they share a common flaw: they’re too complicated. Buybacks and burns can push prices up—but you still have to sell tokens to make money. Staking rewards are even more problematic, issuing new tokens to holders, which dilutes the token’s value and creates new selling pressure. These aren’t real gains; they’re just treadmill rewards dressed up as profits.

If your token model requires holders to sell tokens to profit, then your incentive mechanism is fundamentally misaligned—you’ve just built a game of musical chairs.

Industry Progress

There are signs that the industry is exploring the right direction. Projects like Aave, Morpho, and Uniswap are pushing to unify equity holders and token holders, bringing insiders and the community to the same table, eliminating opposition. This is a very important step.

But it still doesn’t solve the “race to the exit” problem. Everyone is still playing the same game: making money by selling tokens. Adjustments like fee switches or governance revenue sharing are steps forward, but still superficial. To truly fix the race to the exit, we need to go all the way.

Effective Models

Imagine this scenario: 100% of a protocol’s revenue is decided by token holders. Not by the team, not behind closed doors. Everyone votes: how much is directly distributed to holders, how much is reinvested into development, how much is reserved. Public companies do this—shareholders vote on dividends or reinvestment, and in crypto, it’s more direct and transparent.

No lock-ups, because no one needs to play the “who runs first” game anymore. You don’t make money by selling tokens; you make money by holding. As long as the protocol generates income daily, you get a share based on the votes. Sell, and you stop earning; hold, and you keep earning. It’s simple to calculate, and the strategy is clear: help the protocol earn more.

For example, suppose a protocol earns $1 million annually. Holders vote to distribute 70%, reinvest 30%. There are 1 million tokens. Each token then earns $0.70 per year, and with ongoing development funding, the protocol can grow further. You don’t need to worry about timing buys and sells or calculating other holders’ moves. Just hold and keep earning.

The right direction for competition: your protocol and others compete for users and revenue, not holders competing against each other.

When everyone can profit from holding, the motivation shifts from “running away” to “holding and supporting the project.” Such projects will resemble traditional companies more than VC-style gambling. They focus on dividends, not hype; on income, not bragging. This might be exactly what crypto needs right now.

Why hasn’t anyone done this earlier?

Two reasons, both of which are gradually changing.

First, previously, insiders could make faster money through “inside trading.” As long as they could hype retail investors and sell for 10x returns, who would bother building a genuinely profitable business? But that era is ending. Retail investors are getting smarter; on-chain data makes insiders’ moves transparent. Teams that are still working seriously are the ones truly committed to staying.

Second, legal issues. A token that shares income with holders looks very much like a security under the Howey Test. Because of this, all reputable teams have been afraid for years. Even if founders see that income sharing is better, they dare not start because it might be classified as an “unregistered security.”

That’s why many protocols resort to indirect methods like burns and buybacks—not because they’re better, but to avoid direct dividends and justify it legally: “See, we don’t pay out directly.” In fact, much of the current token design is driven by legal fears, with technical limitations also playing a role.

Another practical challenge: infrastructure. To implement large-scale, trustworthy, programmable income distribution on-chain, you need low transaction costs, reliable smart contracts, and robust infrastructure. Five years ago on Ethereum mainnet, transaction fees alone could surpass most protocols’ revenues. Now, with layer 2 solutions and modern infrastructure, it’s feasible.

Why now is different

In the past year, regulatory changes have been greater than the previous eight years combined. The U.S. SEC established a dedicated crypto task force in January 2025, led by Commissioner Hester Peirce, with a clear mission: “Define clear regulatory boundaries and provide practical registration pathways.” Peirce also proposed a “token safe harbor” plan, giving projects a buffer period before final classification. The SEC and CFTC have jointly issued statements about coordinating digital asset regulation. These are not empty words—they are concrete rules being developed.

But this window won’t last forever. Midterm elections are happening this year, and the current relatively open political climate may not last until the next cycle. If we just wait, the window might close before we have anything worth supporting. Worse, if the industry doesn’t propose credible alternatives, the next token crash could set a regulatory template—leaving no room for us to speak.

That’s why it’s so important to act now. Not passively react or patch things after the fact, but to proactively shape the narrative. If we don’t tell regulators what a “good token” looks like, they’ll use bad examples as templates. Projects that scam retail investors or pump-and-dump schemes will become the “standard,” while legitimate income-sharing models risk being unfairly targeted.

Projects like Aave, Morpho, and Uniswap—integrating equity and token holders—show that the industry is moving toward real economic value. Regulators should support this direction, not oppose it. But we must clearly articulate and openly communicate this before the window closes.

Questions every founder should ask

If you’re designing a token today, ask yourself: Are your holders making money by selling tokens, or by holding?

If the answer is “selling,” then you’ve just built a game of musical chairs. Some will grab a seat, most will be left standing. Those who miss out will remember forever.

If the answer is “holding,” then you’ve created something where everyone can profit by growing the pie. That’s true aligned interest.

Of course, it’s not simple. Income sharing involves complex issues like token classification, distribution mechanisms, governance, and more. But it’s a better starting point than what we have now.

The regulatory window is open, but it won’t stay open forever. Midterms will shift the landscape. The next big token crash might happen before income sharing models get a fair shot. If we want better rules, we need to tell regulators what “better” looks like—now, not later.