When Can I Sell?
Evolution of ICOs: Part III
Many ICOs have taken place in 2017/18. While we’ve seen various mechanisms for price determination and various token models for the ICO, there hasn’t been much discussion on the release of the tokens after the ICO has ended. This is part III of a mini-series on the evolution of ICOs. It will look at the mechanisms that can be used to make sure that a token remains valuable beyond the actual ICO.
The mini-series is divided into three parts:
- The Token: What is it that I am actually buying?
- The Price: How much am I going to pay for it?
- The Release (this piece): Once I have bought a token, how (and when) can I sell it again?
The Release: When Can I (Or Someone Else) Sell It?
After an ICO has taken place all investors receive their tokens. Most of the time the seller retains a fraction of the tokens for various purposes. These normally include an allocation for the development team, any parts that have been sold during a pre-sale or some allocation for the founders. Investors usually each hold a small amount of tokens, while the team or founder allocation can make up a substantial part of the supply of the tokens. Thus, it is important for an investor to understand under what circumstances these tokens can hit the market.
The Past: Unrestricted Access
The early ICOs did not place any restrictions on the tokens after the ICO. A founder who had a substantial amount of tokens could thus have a significant influce on the market if he decided to sell his tokens. This in undesirable property for investors because it creates the risk of very sharp price fluctuations if a founder decides to sell any substantial amount of his tokens. Token markets are not liquid enough to absorb large sell orders quickly and thus the volatility increases. A large sell order could potentially drive the price much lower.
The Present: Time Based Locking
To mitigate the risk of high price fluctuations most ICOs currently use a time-based lock-up. The founders or early (read: presale) investors cannot sell their tokens before a certain date (typically one or two years after the ICO), so that investors are protected from large price swings because of large sell orders from the “whales” of that token. A good example is the Aragon ICO. They are increasing the circulating supply gently by allowing pre-sale investors and founders to sell more and more tokens.
The Future: Progress Based Locking
Instead of basing the release of funds just on time, it could be based on the progress of the project itself. The main idea would be to release new funds for the project from an escrow contract whenever a milestone has been reached. If a project progresses slower than anticipated, it would not received the funds for the next phase just because the time has passed, but rather whenever the milestone has been reached.
The main problem with the apprach is the determination of a successful milestone: In contrast to time it cannot be determined by a smart contract easily and must rely on human judgement. The DAICO proposal tries to solve this conundrum by introducing votes for the investors. Initially, a DAICO defines a tap and a rate for that tap. A rate of 1 ether/min would mean that the team can withdraw up to one ether per minute from the smart contract. The team does not need to withdraw the money, but the tap determines the upper limit for any given point in time. The tap would be set to a low value initially because the team still has to prove its merit.
So far, DAICOs have not been seen in practice, however, I expect them to appear in the future.
This part ends the mini series on the evolution of ICOs. Obviously there are many more aspects that one can analyse, but I will leave that to future articles.
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