In the life cycle of any token, there are times when the project wants to sell some of their tokens to generate cash from their liquidated crypto for running the business. There may also be large VC investors and whales who want to realize their returns. In these cases, it is important to not just sell the tokens blindly, as this will lead to substantial price depreciation and can negatively impact the trust in the community. flovtec’s Smart Token Liquidations offer the ideal way to address this. For better understanding, we will discuss the meaning of automated liquidations in crypto and explain the execution with a case study.
Blockchain technology has been revolutionary in the past decade bringing about innovation and spurring an array of cryptocurrencies and tokens.
New projects and startups in the blockchain and crypto industry are increasingly launching tokens to generate funding in private rounds and via ICOs (Initial Coin Offerings) and IDOs (Initial Decentralized Exchange Offerings). Token sales have replaced traditional investment rounds in most cases. Token buyers do not own equity in the company, but instead, own a digital asset that is used to operate the company’s protocols.
A significant part of token sales is bought by venture capitalists and large investors who seek to enter early, buy tokens at a low price and liquidate their crypto at a later stage, locking in the profits. Today crypto-focused VCs prefer tokens instead of equity for a number of reasons. One is profits - tokens tend to show massive returns, 1000% in a year has been no fantasy in the crypto world. The other reason is liquidity - investors can exit and take out profits more easily in comparison to waiting for an IPO or a private equity sale.
The project itself may have an allocation of tokens in treasury, which it may sellat some point should it require an additional operating budget. Also, startup teams usually hold a significant token allocation that they intend to sell inthe future to realize the gains - a time-locked incentive to ensure the team’s loyalty and dedication to the project.
Sellinga large volume of an asset is executed seamlessly in liquid markets, but the digital assets ecosystem is still fairly young; most of the tokens may not have deep liquidity on spot markets. When VCs or project teams decide to sell a significant share of tokens, they, unfortunately, realize that there is not enough liquidity to sustain the sale without a drastic drop in the price.
Since the crypto market is volatile and largely depends on the law of supply and demand, selling large amounts of the token without affecting the token's price becomes complicated.
Projects and large investors often choose to sell in a non-strategic and erratic way by simply selling large amounts of tokens at current market prices. This easily leads to a drop in the token's price. Not only do the sellers lose out by selling at suboptimal prices, but the action is also noticeable by the community and creates a perception of token dumps, which could hinder future growth of the project.
As a solution, flovtec has created Smart Token Liquidation (STL) algorithms - which are intelligent self-trading algorithms for liquidating crypto, meaning the act of selling over a longer time period at optimal conditions.
Specifically, a Smart Token Liquidation algorithm is designed to place passive sell orders into the order book during favorable market conditions. As most orders are small passive limit orders, this method has neither slippage nor a negative price impact.
This means that sellers can sell large amounts of tokens for greater value when compared to selling in a few large bulks. STL also ensures that trades are hardly detectable, making it ideal for project teams and large investors who want to sell their tokens at the best price.
For example, Venture Capitalists coming out of vesting periods can deploy STL to liquidate a percentage of their unlocked tokens to realize some gains without “dumping” their tokens. The project can also liquidate parts of its crypto treasury without any changes to the token's price.
Smart Token Liquidation (STL) has proven its efficiency in selling large amounts of tokens without affecting the market price. To share an example, by using a STL trading algorithm, we helped one of our clients to sell 40,124,632 native tokens in 39 days, totaling close to 232,000 USDT.
The STL algorithm placed several small limit orders over this period causing no price impact. The average liquidation price of 0.005778 USDT was higher than the average hourly bid price of 0.005589 USDT. This shows that the trades were executed at a higher optimal trading price within the period, leading to more efficiently liquidated crypto and a higher profit for our client.
flovtec a Swiss technology company proving market-making solutions to tokens, protocols and digital asset exchanges to create a liquid and efficient market. The company has developed fully automated market-making algorithms and connected to all major crypto exchanges to provide liquidity to both liquid and illiquid tokens.
Reach out to us to turn your tokens liquid or to learn more about our market-making algorithms and SmartToken Liquidation solutions, both for liquid and illiquid tokens.