“Bounty” ICOs

There has been widespread criticism of recent ICOs or token-sale distributions. In a few recent cases, a small number of very crypto-wealthy individuals (“whales”) have been able to purchase a large share of the total tokens. This may be unfair to the broader market in the sense that they had an expectation that they would be able to participate. It may also have a negative impact on the project that is raising money, in cases where part of the purpose of the token-sale is to build a large base of individual consumers or users.

It’s clear that, even with the considerable planning that goes into these events, we still do not know how to design token sales to produce a certain kind of distribution. Many people have recently suggested different ways of avoiding the “whales take majority” problem, which might help solve this issue. But more generally, there will be many different kinds of ICOs with their own ideal distributions (and particular distributions they really want to avoid).

A “bounty ICO” is a way of testing these proposals before they are used for a live token-sale. You might think of these as analogous to a “bug bounty” contract. In a bug bounty contract, we create a live contract/dapp that holds crypto, and wait to see if anyone is able to find an unexpected flaw and take the funds. In other words, we are paying an attacker to reveal flaws in the code before those flaws can cause greater harm. We use an amount of money that is sufficient to incentivize attackers, but without ever endangering very large sums (and never user funds).

In a bounty ICO, we hold a token-sale that exists purely for the purpose of testing a specific design. By selling tokens that can be redeemed for a guaranteed return, we create an incentive for people to obtain as many tokens as possible. In other words, we are paying the crowd to reveal through their actions what kind of distribution will be produced by a certain design. This might be preferable to the current situation, where we are “testing” specific token-sale designs with live product launches, which can alienate users (unfairness) or limit the growth of the platform (only a few entities hold majority of tokens). Instead, project organizers could test their plan with a bounty ICO first, and then only use that same design in their real token-sale.

Here’s an example that illustrates the general idea: We create a bounty ICO and supply it with 100 ether. The bounty ether might be provided by an organization who is testing a design for their own token-sale (if they believe that the knowledge gained from this test is worth the ether they will pay into the bounty) or from other companies/organizations with a shared interest in testing different designs.

The ICO then sells 100 “bounty tokens” at a cost of 0.5 ether each. The sale is conducted according to whichever rules we are intending to test. The tokens can be redeemed at a later date through the bounty ICO contract for 1 ether. We’ve created an incentive for the public to obtain as many tokens as possible, because there is a guaranteed return of 2x for every token purchased. We then observe the result, and see whether our design actually produced the kind of distribution we intended to obtain.

There are a few notable limitations to this approach. Some may simply feel that paying money to the crowd (and often to whales) in this way is wasteful, or immoral. In some cases it will be, but in others the information gained may be worth the price. The software industry in general is certainly comfortable with paying attackers through bug bounties to reveal errors in code, because we understand that it can avert larger costs in the future. For some token-sales, it might be equally as critical to protect against certain kinds of distributions (e.g. highly inequal ones).

Another objection is that it may be too expensive to create a realistic simulation of a token-sale through our bounty ICO. Whales and other highly-organized ICO investors use sophisticated (and expensive) techniques to ensure that their transactions are mined first and that they obtain tokens before anyone else. This can include, for example, paying enormous transaction fees, but also includes maintaining their own node infrastructure and using automated scripts to initiate transactions. More generally, if we are primarily trying to test a given design’s ability to resist highly-motivated whales, then our bounty ICO must be sufficiently valuable for such persons to bother with sophisticated techniques. Would anyone go to this trouble for a mere 2x return on an investment of < 50 ether, as in our example above?

One possibility would be for companies with large amounts of cryptocurrency, who have an interest in improving the “state of the art” in token-sales, to sponsor a bounty ICO with a large value. These companies would then themselves compete to purchase as many tokens as possible, because they are highly incentivized to recapture their own money that they placed into the bounty contract.

This has an interesting property in that the “cost” to the sponsor is somewhat proportional to what is learned through the bounty ICO. If a given test-design fails and is susceptible to being dominated by sophisticated investors, the sponsoring company (who are employing sophisticated techniques) will regain a high % of their funds, meaning the cost of the bounty ICO is very low. If the design succeeds, and the design produces a fair distribution that avoids dominance by whales, then the sponsoring company will be unable to regain a majority of the bounty ICO’s ether, but they will have discovered a design that is resistant to sophisticated investors.