Liquidity fundraising
Blockchain fundraising in the past
ICOs / IEOs had two major problems.
The first and most important problem was that the incentive structure was completely broken. Projects that did an ICO were raising large amounts of money (tens and sometimes even hundreds of millions of dollars), despite the fact that often these projects were only at the idea / whitepaper stage.
Even well-intentioned teams, in most cases, have proven to be bad at managing the money they raised which they mostly wasted. There’s no need to mention what the badly intentioned teams did, it is well known that so many ICOs were literal scams.
The second problem was that almost all tokens created via ICOs were basically securities. That would not be a problem in itself, it is not bad/illegal to create securities, it’s just that US regulators have a big problem with anyone who wants to sell securities to US citizens that aren’t accredited investors.
Given that it is virtually impossible to control the flow of tokens created via an ICO, there is always the risk that they will get into the hands of an unqualified American investor and thus endanger the project.
But enough about ICOs, let’s get to what could become the future of fundraising on a blockchain.
I must mention that this is only possible on Ethereum at the moment because of what DeFi and composability allows us to build.
Enter liquidity fundraising
So what would this fundraising model look like? Suppose a project wants to launch a new token, and distribute it via liquidity fundraising. The process would look something like this:
A fictional project called Egara that wants to issue an ERC20 token. The people/investors who want to own EGA tokens will send ETH (or DAI) to a smart contract that will issue them a proportional amount of EGA tokens, based on the value of their contribution.
Here is a very important step, the ETH will not go to the project/team that launches the token (Egara in our case), but will be automatically transferred to a liquidity pool on Uniswap exchange, along with an equivalent value of ELA tokens.
The team will receive a portion of the newly issued EGA tokens too, but these will vest over a few years be issued via a streaming type contract (think of something similar to what Sablier is doing).
So under a 40–40–20 distribution model, this would work in the following way:
- 40% of the tokens along with the ETH that was raised go directly to a Uniswap pool (forever)
- Another 40% go to contributors.
3. The remaining 20% get streamed continuously to the team over 5 years.
The benefits of such a model are:
- Investors have instant and very high liquidity and can sell their tokens at any time.
- The value of the team’s income (what gets streamed) will depend on the value of the work performed. If they do their job well, then the tokens they receive will be valuable, otherwise they will not.
- The incentives of the team will be aligned with that of the contributors/investors.
- I’m not a lawyer, but I think this could also help make such fundraisers more regulator friendly. Basically in this scenario the ETH goes directly to Uniswap and can’t be touched by the team and the main beneficiaries of this are the contributors/investors which get liquidity.
- This would open the door for experimenting with under collateralized loans on Ethereum because projects can now borrow against the income stream.
Conclusion
We’re at the early stages of what is possible with DeFi. Innovations like Uniswap and token streaming smart contracts make it possible to create new ways of raising money, getting liquidity and aligning incentives between stakeholders in a project. I’m very excited to see what the future holds for our industry.
P.S. If you’re interested in experimenting with this model for your project, please let me know!
You can find me on twitter @davidiach and on Ethereum at davidiach.eth
