This article on understanding token sale models for your ICO is part of our “How to Launch an Initial Coin Offering” comprehensive guide. If you are interested in learning all the necessary aspects to launch an ICO we recommend you download our guide here.
Defining and communicating every aspect of a token sale is essential to mitigate risks and illustrate trust and transparency. This means projects will need to be clear about all the details regarding token utility, crypto economics, and the terms of the sale event itself.
Ideally, once these get announced, they should be fixed. Some projects, however, have been forced to change these afterward which has resulted in a loss of credibility. With this in mind, it’s best to take the necessary time to establish all the little details.
Token events are coming in all shapes and sizes these days, many of them are complex in their structuring for valid reasons. This may not only stem from distribution-related causes, but also because of jurisdiction. The jurisdiction chosen by a project will impact the structure of an offering, dictate who a project can and cannot offer tokens to and outline what the encumbrances are if a decision is made to target a global market.
Token Sale Models
There are several different token sale models- understanding them will help you decide which one makes the most sense for your project. Below you can find some of the most common ones, but projects are constantly trying new ways to improve distribution and fairness of the process.
Uncapped with fixed rate: Buyers exchange cryptocurrency or fiat for tokens at a fixed ratio. Early contributors can receive a better rate, and the number of tokens received per the same amount of contribution can decrease later in the selling period. This model has a specific period of contribution.
Soft Caps: A cap is set, but after this is achieved there is an extended time-based closing period until the full closure of the sale. This can be mixed with a hard cap, so, instead of having a time period before closing if the contribution amount meets or exceeds the hard cap, the token sale ends.
Hard Caps: There is just one fixed cap, and the sale stops when this number gets reached. It usually has a specific period of contribution as well.
Hidden Caps: Participants do not know when the allocation is finalized. This is revealed during the event.
Dutch auction: The price of the offering gets set after taking in all bids and 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 sum of the desired quantities is enough to sell all the offered tokens. After the last bid is accepted, all bidders with an accepted bid get the last bid’s price for each token.
Reverse dutch auction: A capped sale is defined. 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 amongst the purchasers. If it finishes on the second day, X+Y% of total tokens are distributed amongst the purchasers, and so forth.
Collect and Return: The total contribution amount is fixed, but the Smart Contract is open to contributions which can exceed the fixed amount. Upon finalization, the contributions are adjusted by ratio and the difference of the contributions are returned back to their rightful owners.
Dynamic Ceiling: A mixed system of the above methods with a series of mini hidden hard caps set at specific block intervals. This method limits the maximum amount that can be deposited for any given ceiling meaning that larger contributors would have to split up their transactions into much smaller ones, thereby incurring more costs per transaction. If a transaction goes beyond the ceiling, it is rejected.
Although a lot of different mechanics exist with the purpose of making the sale as even and accessible as possible, it’s always good to have in mind that keeping it as simple as possible also contributes to understanding and the avoidance of any unexpected conflicts.
When done properly, token distribution events have a major role to play in the distribution of tokens to reach a quality and properly distributed user base.
Essential information for ICO contributors
No matter which kind of token sale model you choose, certain details should always be shared beforehand with your interested supporters. For security reasons some of these may get published close to the dates of the token sale, but nonetheless should be stated internally.
- Date or block number: What date and time, or mined block is the sale going to start?
- Duration: For how long will it go on? Is it time or block framed?
- Caps: Are there any soft or hard caps? Mixed caps?
- Supply: How many tokens will exit and how many are being put on for distribution?
- Token minting: Are tokens mined or pre-mined? What happens if some tokens are not sold
- Exchange Rates: What are the rates for acquiring tokens in exchange for the accepted cryptocurrencies? (i.e 2000 Project token’s = 1 ETH)
- How much of the tokens will be distributed in the sale?
- How much will be kept by the organization?
- How much will go for advisors, community, sponsors, etc?
Allocation of proceeds:
- How will the received funds be used?
- Percentage distribution on development, marketing, legal, business development, etc.
Token Allocation and vesting:
- What are the criteria for a team to be able to access the tokens they retain in the sale?
- Are there any vesting or cliff periods to keep incentives aligned?
There still hasn’t been a perfect token sale and there probably never will. Different approaches will serve different interests and projects. Just like Vitalik Buterin, Ethereum Co-Founder states on his post on Token Sales Models (published before the 2107 ICO frenzy),
“we have still not discovered a mechanism that has all, or even most, of the properties that we would like on a token sale. Although the space has evolved this is still being iterated on.”
The most a project can do is be very clear, detailed and transparent to make the process as best as possible for contributors, community, and team.
- Several sales models exist to distribute your project’s tokens. It is important to understand the differences and define which one fits best for your intended allocation.
- To strengthen trust and transparency, information regarding token utility, crypto economics, and the terms of the sale event should be clearly shared with potential buyers before the ICO launch.
- Although it’s almost impossible to conduct a perfect token sale, founders should try to find the model that best serves the project and stakeholders interests.
For more details on each of the steps and more in-depth explanations download our “How to Launch an Initial Coin Offering” comprehensive guide. And if you are looking to launch an ICO and need some help check out our service TokenDeck.
If you have any questions or would like to connect you can find me on Twitter or email me at [email protected] I’m always interested in meeting people working, learning, or involved with the blockchain space.
Disclaimer This document does not constitute legal or investment advice nor should be taken as such. You should not rely on it and if seeking to do an ICO or any other related activity you should seek separate professional counsel. It is for informational purposes only. Views do not represent the views of my employer, investors, or partners. Furthermore, the blockchain industry and technology is undergoing constant development so this post is intended as a guide at the current moment of publication and the issues and topics, and therefore the guidance, covered are vulnerable to change and development. The reader should bear this in mind when reading.