Token sale basic models for an ICO
The choice of the optimal model to distribute blockchain project tokens has become over time a competitive and quality factor.
First of all, it should be recalled that a token is a digital asset having basically an exchange-value and utility-value, necessary for its survival.
Exchange-value refers to the value of its transferability. It is attributed to the token holding, becoming something like a shareholder of the project.
Utility-value refers to its usefulness and function, both within the project itself and with its derivatives. It is attributed, not only on the token holding but, above all, on its real use.
Said that, it is also important to know the basic token sales models, considering however that projects are constantly looking for new ways to improve the distribution and fairness of the process.
TOKEN SALE BASIC MODELS:
As well as explicated here, it is possible to describe basic token sales models as follow:
1. Uncapped Auction
An unlimited number of tokens is sold at a fixed price over a period of time (even extended). Any contributor can buy as many tokens as it wishes, without quantity limits, as there is no limit even on the maximum amount declared to be collected.
- Uncapped with fixed rate: contributors exchange cryptocurrency or fiat coins for token at a fixed ratio. Initial contributors can receive a better rate, and the number of tokens received for the same amount may decrease later in the sales period. This model has a specific contribution period.
2. Capped Auction
A limited and variable number of tokens is sold at the lowest bid price, in proportion to the total cost committed by each contributors. Investors indicate the desired price and total expenditure, with a limit on the maximum amount to be collected.
- Dutch Auction: starts at a fixed price, sufficiently high to dissuade all participants, and is progressively reduced. The highest bids are accepted until the sum of the desired quantities is sufficient to sell all offered tokens. After the last bid has been accepted, all bidders with an accepted bid get the price of the last bid for each token. This method is often used when a quick sale is desired.
- Reverse Dutch auction: in this case the significant element is the sales time used to reach the tokens sold out. It is used to encourage investors to hesitate and spend more time buying tokens. It is defined as a limited sale. If the sale ends on the first day, only X% of the total tokens are distributed among the participants. If the second day ends, X + Y% of the total tokens is distributed among participants, and so on.
- Collection and Return: the total contribution amount is fixed, but the Smart Contract is open to contributions that may exceed the fixed amount. At the time of finalization, the contributions are adjusted according to the ratio and the difference of the contributions are returned to the legitimate owners. This structure ensures that everyone can participate to a certain extent. However, if the sale is in excess, purchasers will receive fewer tokens than the one they wish to purchase and a partial repayment of the payment.
- Dynamic Ceiling: a mixed system of the above methods with a series of mini hidden hard caps set at specific block intervals. This method limits the maximum amount that can be deposited for each given ceiling, which means that the major contributors should split their transactions into much smaller ones, thereby incurring more transaction costs. If a transaction exceeds the limit, it is rejected.
Finally, depending on the type of cap (maximum declared roof) we can find other nuances:
Soft caps:a limit is set, and after being reached, there is an extended time-based closing until the sale is completely closed. This can be mixed with a hard cap, so, instead of having a period of time before closing, if the contribution amount meets or exceeds the hard cap, the token sale ends.
Hard Caps:there is only one fixed cap, and the sale stops when this number gets reached. it usually also has a specific contribution period.
Hidden Caps: Participants do not know when the assignment is finalized. This is revealed during the event.
In essence, what initially was the token distribution goal for a project, which was to collect funds using the blockchain, avoiding the more traditional financing methods, has literally transformed.
During these years, the number of ICOs and new Blockchain-based projects have radically increased, making the situation much more detailed with more factors to be necessarily considered, both for a competition reasons and for a qualitative solution that maintains the token-value in its total usefulness.
Being a Blockchain-based startup becomes something like a project vision that already, during its ICO phase, begins to show itself globally, receiving funds for the project development, but also creating the token first (with a vision value-exchange and utility-value) and then choose the optimal token distribution model.
This article was originally written in Italian and translated in English by Stefania Stimolo for NovaMining.
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