The perfect token sale structure

Spoiler alert : it doesn ’ t exist With a newly blockchain token sale happening every few days, it ’ s a good meter to examine the different ways that token sales can be structured. It ’ south important to remember the differences between ( 1 ) how the keepsake and the network actually function, ( 2 ) the trouble that the application or protocol is trying to solve, and ( 3 ) the social organization of the keepsake sale. This article focuses only on the third point. I am a lawyer, but this article isn ’ thymine about legal issues.

What is a token sale? What is an ICO?

‘ ICO ’ ( Initial Coin Offering ) is a misinform term for a nominal sale. This is particularly true for many people who are exploring the blockchain and token space for the first fourth dimension right nowadays. Unlike an IPO— which is a well understand and rigorous summons for taking a individual ship’s company public — a token sale is an unregulated sale of digital assets that represent the potential value of an early-stage project or concept. The investment thesis is much closer to speculation capital than investing in a public company. There are many phrases that describe this better : ‘ token sale ’, ‘ token launch ’, ‘ crowdsale ’, ‘ pre-sale ’, ‘ token generation consequence ’, ‘ token sale volunteer ’ or truly about anything early than ‘ ICO ’. A properly designed keepsake sale doesn ’ deoxythymidine monophosphate promise ‘ investing returns ’, ‘ dividends ’ or ‘ profits ’. alternatively, it focuses on selling a digital asset that will have a clear manipulation case in a decentralized application, as a mean of both incentivizing development and solving the chicken-and-egg problem for the network. A by rights designed token actually serves a determination : it is required in ordering to participate in the net, preferably than good being a fund mechanism. We designed the Blockchain Token Securities Law Framework to explain how this differentiation besides affects the securities jurisprudence treatment of a token .

What are the objectives of a token sale?

here are some of the things that a developer might want their token sale to achieve. This international relations and security network ’ t a dispatch list, or a gossip on any particular undertaking. As we ’ ll watch, a number of these objectives conflict with each other. It ’ s up to the developers to decide which of these things are most significant to their project. Raise a capped amount. You might want to limit your total raise to align with your actual costs of developing the network. You might not want the duty ( or the leave care ) of securing and holding far more money than you were expecting to. Sell a fixed percentage of total token supply. You might want to be certain about the share of tokens that you are selling v allocating to the development team, investors etc. While there is no clear standard about what share should be sold versus prevent, you might want to have control over this decision. Distribute tokens widely. You might want to try to distribute your tokens to a boastfully number of users to ensure that your decentralized lotion is actually decentralized. You might not want a big number of tokens concentrated in the hands of a few token holders, specially if your network is going live shortly after the sale. secondary markets could besides help to improve distribution. Sell tokens at the market value. You might want to let buyers decide the average market measure of your keepsake. On the other hand, it is unmanageable for buyers to value the token, specially if there is a long exploitation period before the network is launched. Guarantee that all buyers will get some tokens. You might want to give all buyers the opportunity to participate in your sale, rather than only those who can get their money in the quickest. Enable buyers to buy an ascertainable percentage of the total token supply. You might want buyers to be able to know what percentage of the sum supply that their purchase represents. Of run, there is besides the objective of actually raising enough money to fund the development of the project. however, in the current market, where many capped token sales meet their objective in a topic of hours, if not minutes, this is less of a concern .

What token sale structures are available?

here are some of the token sale structures which have been used to date, together with some alternative structures.

Capped First-Come First-Served

• A fixed number of tokens is sold at a fixed price on a first-come, first-served basis until all tokens are sold
• There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
• Insiders (i.e. foundation, investors and/or development team) are allocated a fixed percentage of the total token supply

This is the most common structure used in keepsake sales to date. Some sales provide a discount for a limited period to encourage early engagement. however, in the current climate this is unnecessary for most token sales, and has credibly exacerbated the FOMO-driven early sellouts for the most anticipated sales. Uncapped

• An unlimited number of tokens is sold at a fixed price over an extended period
• All buyers can buy as many tokens as they desire
• No cap on the amount raised
• Insiders are allocated a fixed percentage of the total token supply

Capped Auction

• Buyers bid a desired price and total spend
• A variable number of tokens are actually sold, at the lowest successful bid price, in proportion with each buyer’s pledged total spend
• Can be a dutch auction or a blind auction
• There is a cap on the amount raised
• Insiders are allocated a variable percentage of the total token supply, depending on how many tokens are sold in the sale

Uncapped Auction

• Buyers bid a desired price and quantity of tokens
• A fixed number of tokens are sold to the bidders in descending price order until all tokens are sold
• No cap on the amount raised
• Insiders are allocated a fixed percentage of the total token supply

Capped with re-distribution

• Buyers bid a desired total spend
• A fixed number of tokens are sold at a fixed price, in proportion with each buyer’s pledged total spend
• Buyers’ excess payments are refunded
• There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
• Insiders are allocated a fixed percentage of the total token supply

This structure guarantees that everyone can participate to some extent. however, if the sale is oversubscribed, buyers will receive fewer tokens than they wanted to buy, and a fond refund of payment. Capped with parcel limit

• A fixed number of tokens is sold at a fixed price on a first-come, first-served basis until all tokens are sold
• There is a limit on the total amount that each buyer can buy. This could be achieved by capping the amount of each incoming transaction, and making it difficult for a single buyer to send multiple transactions — for example by generating unique codes for each buyer in a way that is difficult for buyers to automate
• There is a cap on the amount raised (expressed as a cap on the number of tokens to be sold)
• Insiders are allocated a fixed percentage of the total token supply

If effective, this exemplary could promote a wider distribution of tokens, preventing concentration in the hands of ‘ whales ’, while besides selling a fasten number of tokens with a capped raise .

Are there other alternatives?

There are other alternatives to doing a public token sale — including selling to accredited investors only. In many ways, this international relations and security network ’ t actually a token sale, but rather a private placement of securities to a closed group of buyers. In any character, the buyers need to be identified and KYC ’ five hundred, which means that engagement is limited. Such a sale may besides cause a regulative problem for secondary trading, because securities are merely able to be traded on register securities exchanges .

How do these structures stack up against the objectives?

There are tradeoffs with each structure. For exemplar : it ’ s not potential to guarantee that all buyers will get tokens and undertake that buyers will get a fasten share of the total token provide. Let ’ s remember that there is a huge sum of pressure on developers of decentralized applications doing keepsake sales. They have one opportunity to make the right decisions about an event that shapes the future of the entire stick out. But even though there is no perfective structure, the choices that developers make in structuring their token sales tells us something about the relative importance that they place on these objectives. At the very least, developers should be clear and transparent about every aspect of their token sale, including how and why they decided on the chosen structure. This should be done well in gain of the nominal sale itself.

Are there any early structures you think could solve some of these problems ? Would love to hear your thoughts — gloss below ! obviously, nothing in this article is legal advice or investment advice. Thank you to many Coinbase employees specially Linda Xie, Justin Mart and Ankur Nandwani .

Further reading

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