Lessons from the Brave Token Sale

A month ago, Brave Software released a white paper detailing their intention to launch Basic Attention Token, an Ethereum token to model digital attention. The idea being that these tokens would live natively inside the Brave web browser, and be used as a means of exchange to access various types of digital content that are currently monetized with a harmful mishmash of advertising solutions.

On April 24th, Brave published details about their upcoming crowd-sale on their website.

The announcement publicly stated that Brave would be minting 1,000,000,000 BAT tokens. They would sell 700,000,000 (70%) of them to investors in an upcoming public crowdsale. They would disperse 200,000,000 (20%) of them to the Brave team to be used for operational expenses, and 100,000,000 (10%) of them would be put into a user growth pool to be distributed to new users when they first download the Brave web browser.

The 700,000,000 tokens would be sold to investors for a price of $15,000,000. What’s interesting here, is that tokens would actually be sold for Ether, not USD. But all of the public information was advertising the total price of the sale in USD. Selling 70% of all BAT tokens for $15,000,000 would put the value of all BAT at $21,400,000 (thank you Shark Tank).

This announcement drew immediate excitement from investors, due to the quality of developer talent behind the project, the magnitude of the problem the team was trying to solve, and the friendliness of the terms of the sale. To put it in perspective, another popular project in the Ethereum space, Gnosis, had sold only 4.5% of it’s tokens for $12.5 million in a token sale a month prior.

On May 12th, Brave announced that the crowdsale was to take place on Wednesday, May 31st, and would last for either 30 days or until all the tokens were sold. The contract would be audited and deployed onto the Ethereum MainNet on May 29th, two days before the crowdsale was set to begin.

On May 22nd, 9 days before the crowdsale was set to launch, Manuel Araoz of Zeppelin released the results of his audit on the Brave token sale smart contract.

People began to get excited that finally a project with production software and a large user base was launching an Ethereum token. And for once there didn’t seem to be any mayhem or shenanigans afoot that had plagued the previous token launches in the space. Hold my beer.

Later in the day on May 22nd, Brave announced that they were altering the terms of the crowdsale. They were changing the amount of money they were raising from $15 million to $24 million (again stated in USD), and the total percentage of tokens minted from 1,000,000,000 to 1,500,000,000. The total tokens sold in the crowdsale would now be 1,000,000,000 (or 67% of the total). Effectively raising the market cap of the BAT token from $21,400,000 to $31,940,000.

This announcement came unprompted, and only nine days before the date of the crowdsale. The reason Brave publicly states for choosing to raise the fundraising amount was the concern that large players would buy up all $15 million worth of tokens instantly and not leave enough room for small investors.

I’m not sure I entirely buy the logic of this. The crowdsale is open to everyone, it doesn’t matter how much money you’re putting in, you still have an equal chance to purchase tokens. All the code is publicly available, there is no private advantage that large players can gain. It’s perfectly within Brave’s right to change their own fundraising target, I’m just not sure how much it actually helps smaller investors.

Also of note, is that altering the parameters of the crowdsale meant that the contract that would be deployed onto the MainNet, is not the same contract that was audited. It might seem trivial on the surface, but I’m not sure that it is. Things like memory overflows from large numbers are a real thing in Solidity (the language that the contract was coded in), and tweaking variables that haven’t been properly tested doesn’t strike me as a particularly good workflow. I don’t think that many people who read and relied on the audit report would have realized that the contract deployed on the MainNet had been altered after that report was issued.

Even after the slight hiccup from the Brave team raising their market cap 9 days ahead of the sale, it still seemed like everything would go smoothly. A contract was deployed onto the TestNet on Friday afternoon. Developers were able to test the workflow, and then a contract was deployed onto the MainNet on Monday, May 29th, two days before the token sale as promised.

There was one catch though, which became apparent Tuesday morning. The Brave team had been advertising that they were raising $24 million USD. But they were actually raising that money in Ether. So what amount of Ether were they actually raising? They announced on Monday that they would be raising 156,250 Ether. If you divided $24,000,000 / 156,250 you would see that the peg of USD/ETH that Brave was using for their $24,000,000 raise was $153.6/ETH. The problem with this is that by Tuesday afternoon, Ether was on fire, trading at a market-rate of $220/ETH. So the number that Brave was publicly advertising of $24,000,000 was false, they weren’t actually raising that amount of money from investors, they were raising much more. Closer to $35 million.

Now, this was public information, and anyone could have done the math to figure this out, but every single person that I spoke to on Tuesday who had expressed interest to me in participating in the crowdsale, was unaware of this fact. Everyone assumed that Brave was raising $24 million USD as advertised, some not even realizing that the initial $15 million number had ever been changed in the first place.

The initial $15 million number appeared to everyone I knew as underpriced for how high the demand to participate was, so I completely understand why the Brave team chose to raise it. I just find it odd that the justification constantly used for altering the terms of the sale was to benefit the smaller, independent investors when from my own experience the smaller, independent investors were unaware of these changes being made in the first place, and were actively being misled (regardless of intention) about the terms of the deal.

The decision to peg the USD/ETH exchange rate at $153.6 is another interesting conceptual choice from the Brave team. Anyone who plays with cryptocurrencies knows that the high volatility is a massive business risk, and always something to keep in mind. Brave essentially made the decision to offload the downsides of the price slippage onto it’s users as opposed to onto the startup itself. I’m not sure if that’s a good or a bad thing, it’s just interesting to note the benefits/downsides of that approach.

The promise of application tokens is to democratize venture capital. I’ve never really given much thought to the implications of public ownership of early stage ventures, I personally prefer building things to investing in things anyway. But I’ve seen how into this people can get. People who work 9–5 jobs that they’re not totally into draw inspiration from helping to fund ambitious technical ventures. There really is something engaging and transformative about giving skin in the game to the actual users of nascent tech products. Giving access to 10x returns to anyone savvy enough to find it regardless of their geographic location or financial standing. But if Brave’s decision making process was truly geared towards benefiting the smaller investors, then you have to square that with the fact that few of those investors could actually keep up with the changing terms of the deal. Maybe this actually is a good thing, because it means only the most committed followers ultimately got on board, I’m not sure, just something to think about.

On Tuesday night, Brave came out with a statement clarifying their thinking about the price peg.

On Wednesday, May 31st, around 10:45AM EST block number 3,780,640 was mined into the Ethereum blockchain and the token sale began. Two blocks later, at block 3,780,642 the Brave token sale was sold out. Brave had raised 156,250 Ether (or ~$36,000,000) in less than 30 seconds, without giving up a single basis point of equity to do it.

Only the savviest investors were able to buy BAT tokens in the 24 seconds the sale was live. This means you had to have planned out an intelligent approach for purchasing the tokens beforehand, or scripted a bot to get in once the sale went live. It was an extremely interesting technical knowledge arbitrage opportunity for savvy hackers.

It will be interesting to see where Brave and their new $36 million stash go from here. I think everyone is rooting for them to punch google in the mouth a little. There’s never a dull day in crypto.