What makes a good Token Sale, Part II: The Revision

As I’ve mentioned a bunch of times, my heuristic for what makes a good token sale is an evolving one, and is based on a set of questions that I use to interrogate the white paper. My method is to write a narrative discussion about the white paper by using my set of questions as discussion points.

The questions that I have been using can be found here.

I want to consider each of these questions in turn and figure out whether they are good questions to ask. Further, I want to consider whether there are additional questions that I need to add. Following are my thoughts. Note that some of the questions are rephrased, and some have been eliminated.

What is the product, and why does it require a decentralized solution? This is the big one for me. A lot of the projects I see don’t seem to require a decentralized solution. Just because a decentralized solution can be proposed for a given idea or product or service or business doesn’t mean that a decentralized solution is an optimal one. The white papers that directly address this question are the ones that interest me.

Will the token increase in value from exponential growth of the underlying platform? As an investment opportunity, those networks poised for exponential growth are more attractive than ones that will grow only linearly. As an example of the latter, there are few projects being proposed that will act as market makers (liquidity providers), such as Bancor. It’s not clear to me that market makers grow exponentially. At least, in conventional finance, they don’t grow exponentially. No explanation is given as to why that would be different in cryptocurrency. Investing in a market maker isn’t necesarily a bad investment (you may profit), but it’s not a ‘Zero to One’ investment, to use Peter Thiel’s term.

Does the team have first mover advantage? This is a fairly binary question; the answer is either yes, the team has first mover advantage, or no, it does not. What matters is whether first mover advantage is important, about which, see below.

Does first mover advantage matter for this market? Being the first in a market often, but not always, confers significant advantage. But there are easy counterexamples: Facebook beat Friendster and MySpace, Microsoft beat IBM, Apple beat Nokia in smartphones. As with many things, this is context-dependent.

Is the underlying technology already built and running? Ideally, the team developing a given project would be lean and talented enough to complete the bulk of the development work before the token sale occurs. People who buy the tokens would benefit from the work of the platform and the value that the platform creates, rather than subsidize the developers’ time and labor. Of course, software development is complicated and time-consuming. But if there’s no indication of any work having been done, or the team is vague about work yet to be done, one has to wonder why people would buy the tokens.

How does someone buy, sell, use, and/or transfer the tokens? Opaque terms are, well, opaque. Buyers should know what they’re getting and what they’re not when they buy a token.

What are the terms of the token sale? What percent does the core team get? What lockup, if any, is the core team subject to? How do buyers of the tokens know that the core team is not going to simply abscond with the money?

Do the assumptions about token users make sense? Does the project team show any knowledge of its customers? In other words, implicit in every token sale is the assumption that there are people who are interested in the product or service being offered, and, further, that these people are willing to buy a cryptocurrency to be able to use the product or service. Do these assumptions make sense? Is the customer base there? Or is the project too bleeding-edge for its likely customers? This problem occurred repeatedly during the dot-com boom of the late ’90s; one need only read about boo.com’s troubles to understand this.

Does the team have the technical knowledge and management experience to complete the project? Obviously, a team that has extensive involvement in the blockchain and cryptocurrency space is more believable than a team with no relevant experience. For certain kinds of token sales, such as InsureX, which are industry-specific, industry-specific experience and knowledge are likely more important than is deep and extensive experience in blockchains and/or cryptocurrencies.