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The way in which you structure the token sale has a big influence on the outcome of your ICO. There has been a lot of debate about the optimal method for a token sale, but the truth is, there is no single solution best for every situation.
The optimal method depends upon your goals for your ICO and your company.
Do you want to maximize the amount of money you raise?
Do you want to encourage a fair distribution of the tokens among investors?
Do you want to avoid a pump and dump of your token once it goes live on exchanges?
Do you want to minimize any negative downstream effects of your token sale upon the rest of the token ecosystem?
You must consider these questions and other relevant factors before selecting the best ICO company model to adopt for your project. We can examine several different Cryptocurrency ICO/token sale models now and see how each model has its own peculiarities. These models range primarily from Capped to Uncapped Sales models.
The Capped Sales model can then be further distinguished by the nature of the raise, including the Soft Caps, Hard Caps and Hidden Caps. The Uncapped Sales model implies a loser interpretation of ceiling, or applies no ceiling at all. Also, a Fixed Rate form of contribution applies to both Capped and Uncapped models of fund raisings.
“Capped Sale Model
In this model, a fixed number of coins are sold at a predetermined price, thereby giving a fixed valuation for your network. The primary benefit is the transparency and certainty of the valuation you are placing on your company tokens.
If investors believe your network is worth more than the valuation implied by the token price, they will feel confident in purchasing your tokens. If you are lucky enough to be launching a particularly hot ICO, it may become a race by investors to buy up as many tokens as possible. Of course, investors are hoping to sell those tokens later, for a profit, after listing on an exchange.
People wait on the webpage determined to get in early. Bid requests start coming in the instant the token sale goes live. Bigger investors pay higher transaction fees to get in first. They buy up a majority of tokens before the average investor has a chance to buy any.
This trading strategy is often used when the token first goes live. Then the bigger investors might dump the coins onto all the people who were excluded from the first round of transactions. These later investors pay a higher price because they are desperate to buy in. Early investors can take advantage of such intense investor demand to hike the price and resell the tokens as soon as possible. This may not be the most ideal situation for your token sale, but at the same time, this is a very nice problem for you to have. Your project is popular.
“Capped Sale Model
A cap is set, but after this cap is reached, there is an extended time period until the full closure of the sale. A soft cap is typically a lower limit, more like the minimum amount a team is aiming to raise. A soft cap is often also used in conjunction with a hard cap, so, instead of having a certain time period before closing the token sale, the sale ends once a specific monetary or cryptocurrency value is raised. If a team doesn’t reach their soft cap at all, the funds should be returned to investors.
There is just one fixed cap, and the ICO stops as soon as this monetary limit is reached. There will usually be a specific time period limitation attached as well. A hard cap is the absolute upper limit of funds a team will take for their tokens. If a team receives funds in excess of their hard cap, those funds should be immediately returned to investors. A failure to promptly return excess funds is a big red flag.
“Capped Sale Model
Key Attributes 2
In a Hidden Cap model, the participants do not know when the allocation will be finalized. This is revealed during the actual progress of the ICO. It is not common in most ICO business models. It is more likely to be used during the private pre-sale stage of an ICO. The team might be attempting to gauge investor interest without giving away too many details yet. But this model isn’t popular during a public sale for the obvious reasons. Investors like more clarity about the business and they like to know exactly where they stand as investors in the company.
A real-world example of a capped ICO sales model is Assetreon Energy. Assetreon published their soft cap figure of $170,000 and a hard cap of $3.35million in the weeks prior to the ICO. They also included a detailed breakdown of why they needed to raise that amount.
The figures were calculated by accounting for expenses such as staffing costs, infrastructure, office payments, developers and so on. It is important to investors that the soft and hard caps have a comprehensible and sensible basis of some sort, ideally one grounded in necessity. Theoretically, a lower amount raised can allow the project to multiply in value even more after listing on an exchange. If a company has already raised a very large amount of money, for example, it may be more difficult to double $100 million to $200 million, as opposed to $1 million to $2 million.
“Uncapped Sale Model
This is the direct opposite of the Capped sale model. There are no set limits for coins to be distributed at a predetermined price.
The more people invest, the more total tokens you will mint. The nice part about this is that everyone gets to participate. No one needs to rush to make their investment before all the tokens are sold-out, bought up by large investors.
The major disadvantage about this model is that it is somewhat impossible for an investor to know the implied valuation of the project. The number of tokens being sold is ultimately unknown. So even though this may allow for smaller investors to actively participate, these smaller players may get a poor deal. If too many coins are sold, there can be an imbalance at the time of trading on an exchange, with too much supply and too little demand.
Fixed Rate Contribution Mechanism
In this model investors are required to exchange cryptocurrency or fiat for tokens at a fixed ratio. Early contributors tend to receive a better rate per token, (although that is not always the case), and later investors often receive less discount, or no discount at all on that token price. This model will use a specific period for contributions.
This mechanism is popular because it can help to attract important early investors and allow them to earn a greater return for taking more risk by buying in early.
“Alternate ICO Models
The Dutch Auction
The price of the offering gets set after taking in all bids and then determining the highest price at which the total offering can be sold. Bids are sorted from highest to lowest. The highest bids are accepted until the desired quantity of tokens will all be sold.
Then, after the final bid is accepted, all bidders with an accepted bid will pay the same price, the price of the final bid, for each token
A real-world example of a Dutch Auction occurred in the sale of Ethereum.
The Ethereum sale ran for 42 days. The sale price was 2000 ETH for 1 BTC for the first 14 days, and then started increasing linearly, finishing at 1337 ETH for 1 BTC.
Nearly every uncapped sale is criticized for being “greedy” although there is also another more interesting criticism of these sales: they give participants high uncertainty about the valuation at which they are buying in.
In the Ethereum sale, buyers who really cared about predictability of valuation generally bought on the 14th day, reasoning that this was the last day of the full discount period and so on this day they had maximum predictability together with the full discount. “
“Alternate ICO Models
The Reverse Dutch Auction
This is by definition a capped sale. However, the portion of tokens given to purchasers depends on how long the sale takes to finish. If the sale finishes on the first day, only X% of total tokens are distributed among the purchasers. If the sale finishes on the second day, X+Y% of total tokens are distributed among the purchasers, and so forth.
The Gnosis token sale is an example of an ICO that implemented a Reverse Dutch Auction.
There was a capped sale of $12.5million. However, the portion of tokens that would actually be given to purchasers depended on how long the sale would take to finish. If it finished on the first day then only ~5% of tokens would be distributed among purchasers, and the rest held by the Gnosis team; if it finished on the second day, it would be ~10% distributed, and so forth.
The purpose of this is to create a process wherein, if you buy at time T, then you are guaranteed to buy in at a valuation which is at most 1 / T. The goal is to create a mechanism where the optimal strategy is simple. First, you personally decide what is the highest valuation at which you would be willing to buy (call it V). Then, when the sale starts, you don’t buy in immediately; rather, you wait until the valuation drops to below that level, and then make your purchase.
” Alternate ICO Models
There are two possible outcomes:
-The sale closes before the valuation drops to below V. Then, you are happy because you avoided buying what you thought were overpriced tokens.
-The sale closes after the valuation has dropped below V, allowing you to purchase tokens for what you believe is their fair value.
Alternate ICO Models:
Collect and Return
The total contribution amount is fixed, but the Smart Contract is open to investments which can exceed the set amount. At the end of designated period, the contributions are adjusted by an appropriate ratio, and any resulting difference in contribution amounts are then returned back to the investors.
A Dynamic Ceiling is a mixed system of the aforementioned models with a series of hidden hard caps set at specific block intervals. This method limits the maximum amount that can be deposited for any given block ceiling, meaning that larger contributors would have to split up their investments, thereby incurring more costs per transaction. If a transaction goes beyond the ceiling, funds are immediately returned.
“Let’s discuss most popular ICO Models now & in the future!
ICOs are exploding in popularity recently. Regulatory authorities are having difficulty keeping up with the changing landscape. Traditional investors and market commentators are left with questions about direction and sustainability in this new market. What models of ICO will be able to withstand the challenges and actually thrive in this ever-changing cryptocurrency environment? In this lesson we will examine the most popular ICO business model structures and learn why they are so well-regarded by many project teams.
In the past year we have seen an increasing amount of innovation in token sale models. Just two years ago basically every ICO followed a Capped model. They would set the token price, raise funds from investors, and then list on exchanges to provide their investors with liquidity. Uncapped models soon followed as a result of larger projects coming to market and the generally hyperbolic atmosphere surrounding cryptocurrencies and ICOs at the time.
These still remain the most popular models that projects employ today. But there has also been a dramatic surge of interest, both in terms of theoretical investigation, and many cases of real-world implementation of different fund-raising models.
Hybrid Capped sales, Reverse Dutch Auctions, Vickery Auctions, Proportional Refunds, and many other mechanisms all are being explored today as potentially viable ICO models. Now we will focus on examples of Capped and uncapped ICO sales models that stand out as the most popular and widely used of all.
“Introduction to Tokenomics/Tokenmetrics
In the cryptocurrency and blockchain realm, the relation between a blockchain and its token is now pretty well understood after long and intense scrutiny by everyone involved. Investors are expected to understand that they aren’t purchasing an equity stake in a venture, but rather they are purchasing the utility tokens which will be used as a part of the ICO company’s solution.
But it is still true that a token is a little unusual, and it can be tricky to get your head around this at first. Many people initially tried to value tokens as if they were equities, (like a share of common stock in Apple or IBM), but tokens did not conform to those valuation norms or frameworks.
The more you think about it, the more you realize how difficult and important this question of valuation is. Exactly how do we assign proper value to a specific token? Also, what about other factors that may relate? We may need to consider more than we first thought. How do we get the information we need? Tokenomics or tokenmetrics forms one of the most crucial parts of an ICO. This is a collaborative product by every member of the team to produce relevant information in usable form.
“Introduction Tokenomics and Tokenmetrics
There is no such thing as the perfect Tokenmetric structure. Many different factors are involved. Each situation must be evaluated on a case-by-case, project-by-project basis. Everyone on the team needs a basic understanding of tokenmetrics. Each individual team member also needs to understand how all the other team members are expected to work together too. Everyone should feel comfortable with the project framework and be able to provide significant input to the project.
Capped with Time Preference
In this structure, a set number of tokens is made available for purchase by investors. A project will typically decide how much money they wish to raise and how many tokens they need to make their ecosystem function successfully. Then they will determine a price and number of tokens. Investors who participate early will pay for and receive the number of tokens they desire. But once all of the specified number of tokens have been sold, that is the end of the process.
Uncapped with Time Preference
In this structure there is no limit on the number of tokens made available. Projects may release multiple waves of tokens, different numbers at different price points, within a specific time period. This model is typically used for sale of tokens before an ICO, with a very low price agreed upon in advance.
“Tokenomics/metrics Notable Structures
As we have discussed previously, within an auction framework, a set number of tokens is minted and investors are able to place bids to acquire tokens. Auctions can be run in either the Dutch or Reverse Dutch arrangements. While this structure doesn’t necessarily set a final amount for the total funds raised, it does allow the project to expose the token to the hype and intensity of the market for whatever good or bad effect that might have on the token price. Of course, a positive reception in the market will bolster the token value. But if there is not enough excitement about a project, then the token will either fail to sell or will only decrease in value.
In a proportionate framework, the company determines the number of tokens it wishes to sell and the amount the company wishes to raise at a specific price, before allowing the market to commit capital towards the project. Each investor receives a proportional number of tokens determined by a weighted formula of the bid price and amount of money offered as part of the total pool.
Companies will frequently offer bonuses and discounts to earlier investors in order to encourage investment.
Limitations may be placed on the number and/or the amount of money one individual is able to control in tokens. This is done to help keep the register of token holders diversified, as well as to avoid market manipulation upon listing.
“Tokenomics/metrics: Influence upon Investors
You are developing more insight into tokenomics with these models in mind. You are beginning to appreciate the relative advantages and disadvantages of each structure and understand its influence on tokenomics. When a token is listed on an exchange, the value will move up or down based on factors which only build upon the framework as initially set. There is more for you to learn about that in the advanced module.
It is important for each team member to appreciate the different primary structures we have discussed in this lesson. Each member should contribute to the discussion about which structure is best for the project. And of course, the finance and business development team should be watching how the token will be received when it lists on an exchange.
Ensuring your ICO investors feel comfortable about the valuation and the price they paid for the tokens will go a long way in supporting the token price in the secondary market. No investor wants to purchase your tokens if they are only going to sink in value when they list on an exchange.
“Future ICO Company Models
These are some ideas we expect to prevail in future ICOs:
Reverse Dutch Auction in Tranches
A Gnosis type reverse Dutch Auction where tokens are sold in tranches for different prices, increasing or even discounted prices, throughout the entire ICO process.
Note that this is not restricted to either just in the presale or public ICO phase. The Dutch Auction continues for the entire ICO process.
Price Floor and Ceiling
Sell an unlimited number of tokens at a price of $X and put 90% of the proceeds into a smart contract that guarantees a price floor of $0.9 * X. Have the price ceiling go up hyperbolically toward infinity, and the price floor go down linearly toward zero, over a five-year period.
Traditional Seed Rounds
Raise funds closer to what traditional startups do, in rounds. Identify an immediate use, and raise money only as you need it. The primary issue with this is that many investors prefer to have a set cap on the number of tokens minted.
Company Originated Market Making
This is a mechanism wherein tokens are slowly released into the market, allowing for a traditional auction to occur while ensuring that a market is always being made. This is good because it gives investors a great degree of certainty and it also provides liquidity in the market. The only downside of course is if you stop making a market and selling tokens into the market”
“Real-World Examples of Future ICO Company Models
Here are some notable examples of ICO companies that have raised funds by mechanisms most likely to persist and continue to be useful into the future:
Datawallet conducted a mostly private ICO, but also with a small allocation available for the public. This first enabled them to set a price and sell their tokens to private buyers without needing to come to the public market. And selling a small allocation of tokens to the public gives investors a degree of the liquidity they desire, as well as establishing a valuation for the token in both private and public markets.
GoNetwork conducted a traditional Dutch Auction. This is a tried and trusted method that has been in use for the past few hundred years. While the mechanism does have its flaws and concerns, it is something every investor can understand and feel comfortable with.
Akropolis is one of the most well-known ICOs on the market. It is most notable for conducting the entirety of their fundraising in private. Maybe there was some concern about the lack of transparency and liquidity for existing investors. But the team could keep their ideas and progress confidential by only having to answer to a select group of private investors, rather than talking to all the investors on a public exchange.
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