On Token Migrations
Today’s issue is all about pivots. Change is a constant. And that applies to startups and tokens too. Shlok breaks down why, when, and how tokens pivot in today’s issue. It is an analytical treat for those tracking markets.
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Crypto tokens often evolve to serve purposes beyond their original design.
When Satoshi invented Bitcoin, he intended it to be censorship-resistant, peer-to-peer money. While it still serves that purpose, Bitcoin has evolved to primarily function as 'digital gold,' or an 'alternative store of value.' With the recent emergence of inscriptions, Runes, and L2s, Bitcoin is now on its way to becoming a general-purpose token.1
When Vitalik Buterin wrote the Ethereum whitepaper, he envisioned the token ether (ETH) to serve two purposes: "a primary liquidity layer to allow for efficient exchange between various types of digital assets" and "a mechanism for paying transaction fees." While ETH continues to facilitate these, it now does so much more—from acting as a security token for a new generation of blockchains to becoming a yield-bearing asset and, for some, a form of "ultrasound money." During this journey, the token itself had to undergo fundamental changes.
If you think of crypto tokens as products, this starts making more sense.
Successful products often follow a trajectory where the way people end up using a product is very different from what the creators first had in mind. When Apple first released the Apple Watch, they marketed it as a fashion accessory2 and companion to the iPhone. But when it emerged that people were using the watch as a fitness device more than anything else, Apple doubled down on this, adding features like blood oxygen, ECG, and sleep monitoring.
Today, the Apple Watch is marketed as “the ultimate device for a healthy life” and has become “doctors’ favorite medical device.”
Like other products, it can be difficult to get a crypto token right on the first attempt. The industry is nascent, markets are in constant flux, and, as is often the case for startups, pivots are common. So, if and when a token does need to evolve, the founders often resort to a process called "token migration," where the existing token is replaced by a new one.
In this piece, we'll look at instances of teams choosing to migrate their tokens and try understanding their rationale for doing so. We'll also draw parallels with similar concepts in traditional finance. This is a topic that is uniquely crypto-native and highly fascinating. Let’s dive in!
Why Token Migrations?
Tokens are defined by smart contracts, essentially flexible software code, making the design space for tokens infinite. This is also why the concept of crypto as “programmable money” is so powerful. Teams use this freedom to define a set of key features for their token, including the token name, symbol, total supply, distribution, and inflation rate. Because smart contracts are immutable, once a token is deployed, these parameters become set in stone. This is both a feature as well as a bug.
Immutability is a feature because it acts as a commitment mechanism; token parameters, once the contract is deployed, cannot be arbitrarily changed, even by the creators of the token, providing certainty and trust to the token holders. However, it is also a bug because if the design of a token no longer aligns with the goals of an evolving project, the team cannot make any changes, even if the holders support them. In such cases, a token migration, where the existing token is replaced by a new one, becomes the last resort. (The new token is represented by a new smart contract with different or additional functionalities.)
Token migrations are facilitated by smart contracts that accept and burn old tokens and issue new ones in return. Users holding tokens in their self-custodial wallets must interact with this smart contract to take part in the migration (the team may or may not sponsor gas fees). For those holding tokens on centralised exchanges, the exchange typically coordinates with the project team and handles the swap process, while the user’s balances automatically reflect the change.
As you can imagine, token migrations require high levels of communication (with token holders), coordination (with exchanges and dependent projects), and, as with anything in crypto, come with their own set of risks (smart contract and execution). They also require social consensus—existing holders cannot be forced to migrate to a new token unless they believe it is beneficial for the project (and the price of their holdings). These risks and factors mean that projects need highly compelling reasons to migrate to a new token.
What do these reasons look like in practice? Let’s explore some notable instances of token migrations from the past.
Functionality
First up, Aave. As a leading DeFi project and a core pillar of the EVM ecosystem, Aave has become a crypto household name. But that’s not how they started. Aave initially launched as EthLend, a name that reflected the project’s first product, a peer-to-peer lending smart contract on the Ethereum blockchain. EthLend was represented by the LEND token, which it introduced in an initial coin offering (ICO) in 2017.
In 2018, EthLend transitioned from a peer-to-peer solution (where lenders and borrowers were matched directly) to a liquidity pool-based one (where lenders deposit funds that borrowers can withdraw from), while also introducing additional features like staking rewards and flash loans. The change was accompanied by a rebranding of the company from its generic name to “Aave” (the kind of abstract and exotic-sounding name preferred by ambitious tech companies).
Then, in 2020, the first Aave Improvement Proposal floated the idea of migrating “LEND” to “AAVE” to the Aave community. The proposal allowed the holders of LEND, which had a total supply of 1.3 billion, to redeem their tokens for the new AAVE at a 100:1 ratio. As a result, 1.3 billion LEND would be converted to 13 million AAVE. An additional 3 million AAVE would be created to serve as an ecosystem reserve fund, bringing the total supply of the new token to 16 million.
The addition of the ecosystem reserve fund was fundamental to the protocol’s long-term sustainability. A portion of these funds was allocated for the Safety Module, a program where holders who locked their AAVE in a smart contract would earn AAVE token incentives from the reserve in exchange for allowing the protocol to use their locked funds in the rare case of a Shortfall Event.
Additionally, the reserve fund would be used to grow the Aave ecosystem through schemes like incentivizing liquidity provision and providing grants for developers building on the protocol. Although LEND holders would get diluted by agreeing to the new token, they voted in favor of the proposal because the additional funds were being allocated for the long-term benefit of the protocol.3
This scenario is common in traditional finance, where companies routinely issue and sell additional stock. They typically do this to raise more capital, drive expansion and growth, or strengthen their balance sheet. Additional stocks can be created with the approval of a company’s Board of Directors and shareholders. These are then either sold directly to investors (or debt holders) or to retail in the open market.
In crypto, on the other hand, even if a majority of token holders agree to issue new tokens to fuel the growth of a project, there is no means to add more supply to an existing token (unless such a design is baked in when the token is deployed). In this case, creating and migrating to a new token is the only option.
Branding
Another reason projects undertake token migrations is when the old token no longer represents its brand or core product.
LEND was an appropriate token name when Aave was called EtherLend, and its only product was a lending tool on Ethereum. Today, however, Aave is a sprawling multi-chain ecosystem with a multifaceted product lineup, including a social platform (Lens), a game (Aavegotchi), and even a wallet (Family). A token named LEND could have been mistaken for any of the hundreds of other lending solutions and was not representative of the company’s true nature.
Aave’s migration was timely. It preceded the infamous DeFi Summer of 2021, where Aave became a true DeFi blue-chip. The price of the new token captured the attention driven to the project and the rising DeFi sector.
Similar dynamics have played out in other token migrations as well.
Merit Circle started out as a DAO “focussed on developing the play-to-earn economy” in 2021. At that point, when many considered play-to-earn to be the future of gaming, this vision made sense, and Merit Circle was one of the top guilds that operated in the space. Their token, MC, was valued at over $10 billion at one point. However, since then, as it became clear that play-to-earn guilds were not going to revolutionize gaming the way some thought it would, Merit Circle moved on to creating a range of other products. These included a gaming NFT marketplace, open SDKs for game developers, smart contract account solutions, and a gaming-focused blockchain called Beam.
In July of last year, the community agreed to a proposal that would migrate the MC token to ‘BEAM.’ From the proposal:
‘Initially, parts of Merit Circle could arguably have been framed as a gaming guild. However, shortly after its inception and already by the time the MC token was launched, this term became irrelevant in the context of Merit Circle, as it simply did not then (and particularly not now) reflect the state of the organization or ecosystem. Externally however, the DAO is inaccurately still categorized as such by some.
Databases, marketing outlets, and social media often base their research and information on the token that is affiliated with the ecosystem, and in turn, the organization. Likewise, researching parties will use information typically found on platforms such as CoinGecko and Datadrops to form an opinion. All of this information currently leads to the MC token, which in one way or another, is still associated with outdated information from the initial phases of the DAO.’
Tokens are much more than a ticker for the price of a project on an exchange; they also represent communities and movements. A token name can carry the baggage and reputation of a project through multiple cycles. When people think of play-to-earn, their mind immediately goes to the MC or YGG token, even though both projects have moved past that business model4. Because crypto is narrative-driven and the play-to-earn narrative is dead, this can negatively affect the price of these tokens. (This is also the reason why some projects are currently clamoring to associate their tokens with AI, regardless of whether AI plays a legitimate role in their product or not.)
The move to BEAM gives Merit Circle and its market perception a fresh start. In a game of who can capture the most attention, such a refresher can prove to be invaluable. Since the migration, BEAM has risen by over 900%, significantly outperforming the rest of the market. This rise has occurred without any change in the fundamental utility of the token, showing the premium the market can place on a new car with an old engine.
The gaming project Crypto Unicorns has undergone a migration for similar reasons. Their initial governance token, called RBW (standing for Rainbow), did not reflect the project’s core offering—a farming game featuring Unicorns. To address this, they are migrating their token to CU (Crypto Unicorns) as they shift chains. This change aims to strengthen “the Crypto Unicorns brand identity by aligning the primary value/governance token with the overarching name of the game and its IP.”
Splits and Reverse Splits
Another interesting aspect of the Merit Circle migration is the swap ratio for MC to BEAM, which is 1:100 (holders get 100 BEAM for each MC).
This is very similar to the practice of stock splits in traditional finance, where companies divide their existing shares into multiple shares. When this happens, although the number of outstanding shares increases, the total dollar value of the shares remains the same compared to pre-split amounts. In most cases, the primary reason for a company to do this is to increase the liquidity of their shares. Most traditional stock exchanges do not support fractional shares; shares can only be traded as a whole. This means that when the stock of a company rises, the minimum threshold for a new investor to purchase a single share also increases accordingly, making the stock less liquid.
Apple’s stock (AAPL) has split five times since its IPO, resulting in one original share now equating to 224,000 shares. Had these splits not occurred, a single AAPL share would cost almost $40 million today, a price out of reach for most investors.
However, this reasoning doesn’t really hold for crypto, since most crypto tokens can be traded in fractional amounts, often up to 18 decimal places. Why, then, would a project choose to still split its tokens?
One reason is the “Nominal Price Illusion.” The human brain is wired to “overestimate the room to grow for low-priced stocks relative to high-priced stocks.” In other words, even if two companies share the same valuation, humans would perceive the one with lower stock prices (or, correspondingly, more outstanding shares in traditional finance or a higher total supply in crypto) as cheaper than its counterpart. This also explains why stock prices surge in the short term immediately after a stock split, even though the fundamentals remain the same.
Coming back to BEAM, one of its utilities is to act as the gas token for the Beam blockchain. According to the migration proposal, “you are more likely to use whole numbers when utilizing tokens, rather than decimals.” In other words, the team wants to make it convenient for users to size how much they’re paying for in gas, and they believe a bigger unit of measure is the way to do so.
In our earlier Aave example, the redeem rate was 1 AAVE for 100 LEND, which is the exact opposite of a stock split, and is known in traditional finance as a reverse stock split. If you consider the inverse of the Nominal Price Illusion thesis, the human mind places a premium on a more expensive asset (a concept Robert Caldiani explores in his excellent book, “Influence”).
Famously, Warren Buffet has refused to split Berkshire Hathaway class-A shares, with the decreased liquidity designed to attract investors who align with his “buy and hold long-term” philosophy. Each of these shares trades upward of $600,000 today.
Whether splitting or reverse splitting, changing this fundamental characteristic of a token cannot be done without a token migration.
Expanded Scope
As we’ve written about in previous articles, there is a growing trend among crypto projects with significant user adoption to launch their own blockchains, as Merit Circle did with Beam. When a project makes this shift, it usually requires a revamp of the tokenomics. This is because the design of a token that serves a single project is very different from one that seeks to capture value from a standalone blockchain. This makes it common for an application-to-blockchain shift to be accompanied by a token migration.
BitDAO started as an open platform for crypto experimentation, governed by the BIT token, where they incubated projects like Game7 for web3 gaming and EduDAO, an alternative funding platform for education and nonprofits. One of these experiments was Mantle, a layer-2 blockchain on Ethereum. Over time, Mantle emerged as the primary product in the BitDAO ecosystem, leading to fragmentation of attention between the chain, which was the future, and the preexisting governance token.
This led to a community proposal to migrate BIT to MNT, a token for Mantle, and place Mantle at the center of the ecosystem. This would be a 1:1 swap with a couple of unique features.
First, out of the original supply of 9.2 billion BIT, around 6 million tokens were allocated to the treasury. The team decided to migrate only 3 billion of these BIT treasury tokens to MNT, effectively burning 33% of the supply by reducing it to 6.2 billion tokens.
Such a reduction in supply is the opposite of what we saw earlier with the LEND to AAVE migration and a design mechanism unique to crypto. (The closest equivalent in traditional finance is stock buybacks, but those need to be paid for by the company in cash. That is not the case here.)
Second, the MNT token contract was minted as an upgradable contract, enabling the contract owner, Mantle Governance, to authorize future inflation of MNT without the need to migrate to yet another new token5. Given the effort required to plan and execute a token migration, such proactive measures are a sign of a maturing token contract design space.
Another migration similar to Mantle is that of Ribbon Finance to Aevo. Ribbon Finance started as a platform that offered structured products (like covered calls) for crypto assets. While the product was successful, it was restricted by the high gas fees, low latency, and lack of liquidity and capital efficiency on Ethereum. To address these issues, they created Aevo, the first Derivatives L2, focused on options and perpetual trading. Users can redeem RBN, the token for Ribbon Finance, for AEVO 1:1, with both projects sharing the same total supply.
Typically, when a project undertakes a token migration, they release the migration smart contract at the same time as the TGE (token generation event) of the new token. This makes sense, as teams don’t want to support the infrastructure of two separate tokens (remember, each token is a product in itself) and would prefer the migration to happen as quickly as possible.6
However, in the case of the RBN to AEVO transition, both tokens continued to exist at the same time for a few weeks before the migration contract went live. During this period, RBN holders could either stake their tokens for sAEVO, with a two-month lock up period and benefits like reward multipliers, or continue to hold their tokens and migrate 1:1 once the migration contract went live.
These dynamics led to an interesting price discrepancy between the two tokens before the migration contract was deployed. Once that happened, the prices converged rapidly.
Final Thoughts
Tokens carry the weight of a project and its community. In a hyper-financialised sector, price for the token becomes the flagbearer for what a project represents. The decision to migrate to a new token is not one that is taken without solid reasons backing it. So, when a team does choose to go down this path, it naturally piques our curiosity.
Given that every project and token is unique and that the concept of migrations itself is relatively new and completely crypto native, the long-term consequences of each play out very differently.
Token migrations have worked out well for projects like Aave and Beam (at least so far). As for the others, only time will tell. Successful migrations lead to renewed interest from users, developers, and the market, while failure might result in almost permanent irrelevance. Either way, migrations mark a crucial turning point for projects, a chance to alter not only their tokenomics and product but also to communicate their renewed vision to the market.
It’s a bold undertaking in which some will fail while others will succeed. Each will provide lessons to be learnt. We, as usual, will be keeping track of them.
In awe of Jude Bellingham,
Shlok Khemani
I think it’s quite remarkable that Bitcoin not only survived but maintained its position as the king of cryptocurrencies without any changes in fundamental tokenomics. Yes, social consensus plays a role, but it is also near-miraculous to get the design of a trillion-dollar asset class right at the first attempt.
Apple was so confident that Apple Watch would become a fashion symbol that they temporarily competed in the luxury watch market by releasing an 18-karat gold version priced at $17,000. Unsurprisingly, that version is now obsolete.
The aftermath of the Aave migration has had a couple of interesting consequences. First, when AAVE was still LEND, some users inadvertently sent LEND tokens to the LEND contract address. Under normal circumstances, these funds would be irretrievable and permanently lost. However, the token migration provided an opportunity to reverse this mistake, and a proposal was passed to allocate a percentage of AAVE in the migration contract to these users. Second, nearly four years after the migration, 2.5% of LEND (currently worth ~$30m) remains unmigrated to Aave. There have been community proposals requesting a halt to the migration and using the retrieved AAVE tokens to grow the protocol. Although this hasn’t been accepted so far, it remains significant money on the table.
We broke down YGG’s business model evolution in a previous article.
In 2021, BitDAO swapped 100 million BIT for 3.3 million FTT (the FTX token) in a deal with Alameda, with each publicly committing to holding the tokens for three years. When Alameda imploded in 2022, they were suspected of dumping their BIT holdings. Then, in 2023, once the migration from BIT to MNT was already underway, a community member floated a proposal stating that Alameda should not be allowed to convert their holdings to MNT because of “disqualifying factors.” The proposal passed. The migration contract was paused, and a new one was deployed, excluding Alameda from being able to convert.
When Apple releases a new version of the iPhone, they discontinue some of the existing models. This allows them to reallocate their limited supply chain capacity, marketing budget, and shelf space for the new model. Similarly, a crypto token consumes resources such as marketing budget, infrastructure (liquidity pools and market makers), and retail mindshare. When a team transitions to a new token, they naturally want to dedicate these limited resources to supporting the new token rather than expending them on the existing one.