Er mah gawd, y u no cap!

Exciting times in the ethereum (and wider crypto) space. It seems just about every project decided it would be a great idea to launch their platform tokens at pretty much the same time, so the past and next few months have and will be filled with a non-stop stream of projects trying to convince you to part with your hard earned ether in exchange for the app-token of the hour.

And with The DAO still fresh on everyone’s mind, the question that will inevitably pop up within a couple of lines of conversation in just about every ethereum related Slack team right now is “will there be a cap?”. This is a fair enough question given Vitalik’s recommendation in the aftermath of The DAO, hard-fork, ethereum classic, and all. However, the situation is not as cut and dry as to simply enforce a blanket ban on uncapped token launches. There is a huge variation in the type, scale, and scope of the current projects vying for your ether, and realistically there is no reason their token launches shouldn’t exhibit as much variation.

Cruising through various Slack teams, three arguments seem to make up the bulk of those advocating for a cap:

Er mah gawd mah profits! — This argument boils down to “I want to flip my tokens and capitalise on the FOMO from a sale that ended prematurely.” OK that’s a bit of a gross simplification. It is actually a rational thing for a buyer to want to know how big of a piece of the pie they are getting in advance. However, capping a token launch denies the market the opportunity to value the project. Contrast this to VC funding, in which startups decide they want to sell x% of their equity and the market then determines the valuation. Furthermore, a cap creates a race to get in (FirstBlood and SingularDTV) which rewards those with the luck and tech savvy to buy-in in the first few blocks/minutes after the sale goes live. In this situation, any additional value beyond the cap that the market deems the project worthy goes to those with the quickest trigger fingers, as they sell to the those who were to slow, rather than supporting the project. As such there is a significant financial incentive, for those who are quick enough, to advocate strongly for a cap, even though it does not necessarily benefit the project. Speculate on the success of the project, not on the FOMO of participants that were too slow and unlucky to get in initially.

While there are several potential alternatives to a simple uncapped token launch (such as avsa’s suggestion of a reverse auction), putting a cap on a launch seems to be a less than ideal solution at best, and at worst a gross misalignment of incentives and constraint on the free market.

Er mah gawd complexity! — In the wake of The DAO, Vitalik made the recommendation that smart contracts be limited to ~$10M worth of ether, so as to limit the potential for damage to the ecosystem from buggy contracts. This is a reasonable restriction, however it really only applies to those token launches which are holding funds in an contracts that have had limited real world exposure. For projects looking to store their value in a DAO-like contract, this restriction seems perfectly fine until the tools and ecosystem mature to a point where contracts can be more effectively verified and audited. Having said that, many projects have (or are planning to) store their funds in a simple multi-sig wallet identical to the one the ethereum foundation stores their ether. Should a vulnerability be found in the standard Ethereum multi-sig wallet implementation, the community would almost certainly react with a fairly non-contentious hard-fork as the fallout in the alternative case would be catastrophic.

Er mah gawd overfunding! — It’s been observed repeatedly that startups who are over-funded, have a tendency to be wasteful; renting fancy office space next door to google, stocking the fridge with exotic single-serve fair-trade coffees, hiring massive sales teams, and building excessive arrays of monitors, with costs far exceeding profits or revenues.

This is actually a reasonable argument. However, in this case it’s also reasonable to argue that the likelihood of the project to be wasteful with contributed funds should factor heavily into your long-term outlook and risk assessment on the project, along with your level of commitment. If the project has the right team, is structured correctly, and is well advised, then hopefully wastefulness should be well mitigated.

Of these three most common arguments, none are truly convincing that a cap is a necessary feature for a token launch. In fact, I would dare to say that the majority of the strongest advocates for a cap are merely advocating for their short term financial self-interest, rather than the long-term success of the project. Having said all this, I see no problem with a project electing for to cap their token launch, there are plenty of good reasons for this (knowing your runway, limiting liability, etc), so long as they are aware of the potential pitfalls. However, I see no real benefit in expecting every project to conform to the same set of constraints for their individual token launches. Ultimately, it’s still early days and much of this is a trial and error process. I’m sure we’ll see some convergence in token launch structures over the coming months and years. Until then, expect to see some wild variation in formats.

THIS IS NOT INVESTMENT ADVICE — taking part in experimental token launches is extremely risky, you will more than likely lose your money.