Cryptoeconomics for the Long-Term: Founder Lockups and Second ICOs — Part I

Back to the Future

Imagine: The year is 2021. Bitcoin has died over 800 times by now; reincarnated, of course, as Bitcoin. Vitalik is finally able to grow a beard. Filecoin is finally launching soon. Donald Trump narrowly lost re-election as president to Stephen Colbert. Ripple still has not been added to Coinbase. McAfee joins the church as a eunuch. Verge prepares for its 50th 51% attack ahead of its next major partnership announcement. I will be 25 (oh god).

A Fork in the Road: Misaligned Incentives and the Three Paths

There has been a great deal of recent discussion about how to classify ICOs from regulatory perspectives, in addition to discussion around the investment perspectives and frameworks necessary to evaluate ICOs: Are they startups? Are they ecosystems? Are they foundations? In fact, all may be true. In my article on Developing Frameworks for ICO Investing, I outline useful ways to structure thinking about ICOs, treating them from a startup perspective. While ICOs are their own set of businesses, the startup landscape is the closest analogy, and one that we can use to derive meaningful conclusions from a business type that remains in its infancy. I believe this is the most helpful approach in many cases, because ICOs are, in fact, startups with added challenges, considerations, and key stakeholders.

If This is Your Business’ Currency, It Might Be Time to Move On.

The First Scenario: Happily Ever After

The first scenario is the one that everyone dreams of: Everything is going well, the company/foundation is profitable, and the founders believe that their continued work is not only profitable, but the best usage of their time and resources. Even though the founders may have newfound liquidity, they do not sell because they believe their efforts will continue to cause the value of their tokens to appreciate. They may hedge by selling small amounts, but ultimately, nothing much will change from the current landscape.

The Second Scenario: The FUD Flood and Treading Water

The second scenario is the one everyone has nightmares about: The company is barely staying afloat, they are running out of funding, the founders want to move on, and they believe that the experiment has run its course. Here, in fact, the founders have strong incentives to sell their tokens (and minimal incentives not to!). Their work obeys the law of diminishing returns, and the network itself receives less utility from each developer-hour after several years than it did in its inception. Even if the project may be doing OK, it may not be thriving enough to justify sinking additional time, effort, and money.

BREAKING News: An Announcement of an Announcement of an Announcement

The Third Scenario: Promising Future, Bleak Present — Series B ICOs

The third and final scenario is an interesting juxtaposition of the prior two, and for many projects, may be the most likely outcome: Their “burn rate” — a startup’s spending in excess of their income — eats through the amount of capital raised via ICO, and leaves the project nearly broke after several years. If they are not yet out of money, they will begin to feel the pinch of several years of questionable funding, operational bloat, and inefficient budgeting — all side-effects of the ICO craze leading companies to begin overcapitalized rather than starting lean. Even if the network is set into motion, money and time are still required to acquire users, improve, and maintain the network.

$200 Million Can Roast a Lot of Marshmellows
  • Second ICO
  • Bootstrapping
  • Sell Equity (to VCs)
  • Inflation-Funding
  • Security Token Offering

A Better Way Forward

Now that we have established that the current models are flawed, and that there are a lot of possibilities we need to account for in the future, the question becomes, can we do better?

Pump and Dumps Have Existed Since the 1700s: Don’t Let Your ICO Look Like the “Night Singer of Shares” from the British South Sea Bubble



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Adam Kaplan

Adam Kaplan

Kindergarten dropout, Stanford '18 graduate. World champion bridge player, travel and aviation geek, and blockchain enthusiast.