A Fair ICO Model: RoosterRed’s Uncapped Blind ICO Auctions

A Fair ICO Model: Uncapped Blind ICO Auctions

Hello Friends!

I am presenting an ICO model that fixes many of the issues that plague current ICOs. First we will talk about the three most prominent ICO models and the problems with each. Then I will present an Uncapped Blind ICO Auction model that uses Smart Contracts to both maximize ICO price and give all participants a fair deal. When I refer to market cap it is to the market cap of the public token sale (for simplicity). The total market cap and circulating market cap can both be derived easily given a specific situation. I focus on this market cap rather than token price for two reasons. First, it will force the ICO company to be forthcoming and crystal clear about the breakdown of its token sale. Two, it will force ICO participants to truly evaluate the ICO terms and the market value of the token.

Capped ICO’s

Most ICOs are capped ICOs today. The company specifies how much money it hopes to earn. For instance, a company will say it is selling one third of its initial tokens with the goal of raising one million dollars. The participants know the maximum amount the market cap will initially be. The participants know the minimum number of tokens they will get from participating.

There are at least three major issues that plague capped ICOs. The first is that not everyone who wants to participate is able to. Whitelist spots are rare and are often sold on forums and chat rooms. This is inefficient and major loss of utility. The second is that since the ICO price is capped, the company often raises less money than it could have. The third is that FOMO (fear of missing out), shilling (dishonest marketing), and trading between fake parties allows dishonest investors to flip their ICO purchases to bag holders (the conned) who legitimately feel ripped off. This endangers the whole ICO system, and multiple governments have considered banning crypto trading because of it.

Uncapped ICOs

Uncapped ICOs are popular with companies because they maximize the amount of money the ICOs raise. In an uncapped ICO, the company says that it will offer one third of the initial tokens over a one month period. The number of participants and market cap are not set. Proponents of uncapped ICOs claim the market sets the price, though that is not always true.

Serious issues plague uncapped ICOs that make them unpopular with participants. Several major uncapped ICOs declined in value, leaving participants feeling ripped off. The market often cannot keep track of the funds being raised both at the beginning and end of the auctions. A participant will often buy at one market cap and then see market cap shoot up dramatically. Early participants often rightfully feel ripped off. They buy in thinking the market cap will end up being much lower than it ends up being (this is one reason why uncapped ICOs often decline in value). Savvy investors wait until the very end of the the ICO to participate when they have an informational advantage. Still, there could be a rush of investors at the end of the ICO, and the market cap could shoot up higher than any participant wanted to tolerate.

Soft Capped ICOs

In a soft capped ICO the ICO reaching a certain milestone triggers an event, usually the auction ending earlier, but does not stop the ICO. For instance, a company offers one third of its initial tokens over a one month period. If the ICO raises one million dollars, the ICO is set to end three days later. The ICO could still end up raising much more than a million dollars, and all the issues that plague uncapped ICOs, plague soft capped ICOs.

Uncapped Blind ICO Auctions

In my Uncapped Blind ICO Auction model there is no set amount of money that an ICO can raise. There is no set amount of participants either. Everyone that wants to participate can participate, and the company raises the maximum amount of money it can.

A company will thoroughly outline its ICO. Participants in the ICO bid two numbers: The amount of money they are offering in the ICO, and the highest market cap they will tolerate. Participants are ranked first by market cap and then randomly (with those of the same bid). Participants cannot see each other’s bids. A Smart Contract collects all the funds and finds the maximum market cap that can be funded with the bids. Participants who were priced out or positioned out are automatically refunded.

Let’s look at an example. Mark bids twenty thousand dollars at a maximum market cap of three million. Jay bids ten thousand dollars at a maximum market cap of two million dollars. Jerry bids two thousand dollars at a maximum market cap of one million dollars. The Smart Contract calculates that the maximum market cap that can be funded is two million dollars. At that price, there were over two million dollars in funds. Mark gets one percent of all tokens. Jerry is refunded. Even though Jay’s bid was valid and at the market cap, he is refunded as people like Mark were given priority and he was ranked too low amongst those who bid two million. This system incentivizes participants to honestly bid the maximum market cap they will tolerate.

The auction needs to be blind to prevent savvy investors from using timing to game the system. If the bids were public, the winning strategy would be to wait until the very end of the auction and bid yourself into the ICO. This isn’t fair to early participants in the ICO. In this Uncapped Blind ICO Auction, it is only advantages to bid the maximum market cap you can tolerate. Since the auction needs to be blind, some of the calculations may have to be done off the blockchain right now, but I suspect in the near future this won’t be the case.

This system has the added benefit that short term raises in value immediately after the ICO are still probable as people like Jay may develop FOMO. Also, people like Mark may think the market cap is so low that suddenly he wants more than twenty thousand dollars worth. A bump in value is not guaranteed though, which is important. More importantly, every single person who participates in the ICO is happy and feels they got a fair deal, and the company got to raise the maximum amount of money it fairly could.

Most ICOs will likely specify that market cap bids will be rounded to the nearest hundred thousand or million to discourage gaming of the system (like bidding $1,300,000.63).

A company can slightly modify these procedures to help out the everyday investor. A company could rank the bids first by market cap, then by ascending bid amount, and then randomly for those with the same bids. This would still maximize the amount of money the ICO would raise. The difference is that poor participants have a slight advantage over rich participants in getting into the ICO.

If a company wanted to encourage early bidding, simply rank bidders first by maximum market cap and then by bid time.

Finally, you could of course bid the maximum token price you would tolerate instead of market cap. I explained why I focused on market cap in the introduction. I think it promotes a more rational market.

I feel this is a great system. Please share it.

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Your Friend,
RoosterRed
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Note: I usually have to correct grammar mistakes in my articles, so this will likely slightly change. It is usually little, inconsequential mistakes like “their” instead of “there”. More substantial changes were needed with this article. It is still a work in progress.

Addendum 1
A few issues came up on another medium. A company can easily add price floors and ceilings to this system. Price floors are likely. Price ceilings aren't, but a company may do it. The system still works. With a price ceiling it could turn into basically a lottery if most bid the ceiling.

People who are confident the market will underestimate value will bid more than they think the contract can fund, guaranteeing themselves ICO participation. This is risky, and again, only people betting that a post-ICO bump is guaranteed, it isn't, will do this.

Finally, yes, speculation bubbles can still pop up because of the previous problem. You could have a mass of people irrationally bid crazy high numbers just to get into the ICO. However, this is discouraged because the bids are blind. Most will be less sympathetic to speculators in these bubbles too. Every single one has to dig their own grave. In current uncapped ICOs, other people can dig your grave and throw you in it. You can buy in at a 30 million dollar cap a few hours before the ICO ends and end up looking at a 150 million dollar cap. This is also why I encourage having people bid the market cap instead of the token price (which is optional). They have to at least think about things more.

Whitepaper Examples of Uncapped Blind ICO Auctions
https://steemit.com/whitepaper/@roosterred/whitepaper-examples-of-uncapped-blind-ico-auctions