Considerations on ICO Campaign Design

For the last few years the crypto world has been trying to find the right fundraising tactic to support startups built on Blockchain technology. From the failed experiment with the DAO it moved on to Initial Coin Offerings, which according to CoinDesk data, from January to the end of May, 2017 attracted $327m in capital — a figure that surpasses the amount raised in VC deals for the same period.

As I mentioned in a previous article, two months in Blockchain equal two years in classic finance now. Things are moving so fast that quite a lot of aspects of ICO remain insufficiently considered, including its design. The problem is rooted in economic theory, and the key concern is how to distribute valuable assets in such a way that is fair, yet also would allow for maximizing profit.

According to Vitalik Buterin’s observations, so far there hasn’t been a killer ICO scheme which could ensure the following:

1. Certainty of valuation, meaning that those who decide to participate in a crowdsale should have certainty over the bounds of the token’s value;
2. Certainty of participation, meaning that those wishing to participate in a crowdsale should be able to count on success in joining the campaign;
3. Capping the amount raised, to make sure you are not publicly perceived as greedy or unfair, the crowdsale design should imply having a certain threshold, i.e. the maximum amount of funds that can be collected;
4. No central banking, implies that a token issuer does not end up with an unproportionally large share of the tokens that would give it a position to enforce some monetary policy;
5. Efficiency: the crowdsale should not lead to substantial economic inefficiencies.

Limitations and challenges

When we were planning the Primalbase ICO, it turned out that the most obvious ICO designs would imply limiting the amount of issued tokens (and funds that could potentially be raised), or limiting the duration of the ICO campaign. However, these two conditions contradict the requirements defined above.

Limiting the amount of tokens might lead to very tight competition between investors. For instance, BAT crowdsale managed to secure USD 35 million in just 30 seconds, where only 185 transactions were successful, while over 10000 failed. Such an ICO design allows a small number of participants to purchase all available tokens through a combination of extremely high transaction fees and abusing ‘first come — first served’ policy.

As for limiting the duration of an ICO campaign, this design is not flawless either. Investors are not presented with a clear estimation of the profitability of their investments, since the actual token price largely depends on the overall supply of these tokens (for instance, possessing one token out of 100 is more valuable than possessing one token out of 1000000). While a more detailed analysis is available here, I suggest looking into how the Primalbase ICO Campaign has been designed.

Three different blockchains

We faced a few challenges. Transactions are processed through three different blockchains — Bitcoin, Ethereum, and Waves, and the time of block generation in every blockchain differs significantly. This means that while transactions in the blockchain with the lower block generation time are not confirmed yet, the maximum amount of tokens that could be sold might be already reached in other, faster blockchains.

As a result, a substantial number of potential investors might not even get a chance to participate in the campaign due to their preference of a particular payment option/cryptocurrency.

Even if all transactions only came to one blockchain, there would still be a problem with defining the maximum amount of tokens to be issued. How do we know for sure that 1000 tokens is enough to meet the demand?

This simple extrapolation of averaging out the results of past ICO campaigns cannot be considered sufficient. Aiming for limiting the duration of the ICO campaign instead of limiting the amount of tokens to be issued does not solve the problem either, as was explained above.

‘Soft threshold’ technique

Therefore we have developed the following strategy — the ‘soft threshold’ technique. During the crowdsale, the amount of tokens being sold is going to be monitored. However, all transactions that reach corresponding blockchains approximately 10 minutes after all 1000 tokens are sold, will be also considered as valid.

For instance, if at the moment of realization of the 1000th token, Ethereum blockchain contains X blocks, Waves — Y blocks, and Bitcoin — Z blocks, apart from transactions that have already been registered, transactions from block Z+1 as well as transactions registered above X and Y will be considered as valid. The average time of block generation in Ethereum blockchain is 16 seconds, in Waves blockchain — 1 minute, and Bitcoin blockchain — 10 minutes.

In this case, it would mean that the total amount of sold tokens (as well as allocated funds) exceeded the limit of 1000 tokens. Surplus funds will be redistributed in a fair and transparent way using the reserve of 250 tokens, or additional portion of tokens will be issued at the price corresponding to the moment of ICO campaign closing. The additional issuing of tokens is a measure used for the proper realization of the campaign from a technical standpoint. We will use this measure only if the amount of purchased exceeds the defined limit. Otherwise, there is no need for a release of additional tokens.

If the ICO campaign attracts additional investments, they will be utilized for further development and the improvement of infrastructure.