Incentive Theory in a Dynamic Coin Offering (DYCO)

There are five key market participants in a DYCO:

DYCO participants
FOMO-driven traders
Arbitrage Traders
Fundamentals-driven traders
Project’s Buyback Treasury

All five participants, by the design of the DYCO, are incentivized to generate on-going volume and liquidity for tokens issued through a DYCO.

It’s important to understand that the tokens issued through the DYCO framework are not stablecoins, but are instead utility tokens, and therefore have (A) speculative value prior to product launch and (B) utility value after product launch.

Utilizing its experience with some of the best performing token sales of 2019, DAO Maker will work with projects accepted into the DYCO framework to design robust token economies that take advantage of vital token value generation factors, including:

Revenue-driven cashflow to token
Secondary market buybacks
Operational burns
Staking game theory
Hodl incentives
Guaranteed integration into Social Mining

Not a Stablecoin

It’s important to understand that the buyback value is not the only value of tokens issued under a DYCO.

The token’s value is:

Buyback Value (Rv) + Speculative Value (Sv) + Utility Value (Uv)

Speculative value is the expected utility value of a token after product launch. Utility value is the value of the token’s live utility once the product has been launched.

Both speculative and utility value are greater than 0 as long as the community believes the project is heading in the right direction.

DYCO Participants (DPs)

In a DYCO, blockchain addresses that participate in the token sale are whitelisted for buyback claims. These are the only addresses allowed to claim a buyback.

They can buy tokens on an exchange and claim a buyback for those tokens too.

The whitelisting process gives DYCO participants the exclusive right to take advantage of arbitrage opportunities if market price ever falls by more than 20% below the ICO price.

They have the ability to buy such tokens and claim buybacks for a risk-free profit and thereby become price validators.

After each buyback, DPs pull new capital into the secondary market.

Secondary Market Impact: Volume; Liquidity; Price Competition

Arbitrage Traders

DYCOs create a price floor because DYCO participants (DPs) can claim a risk-free profit whenever price falls by more than 20% below ICO price.

However, anyone is allowed to buy a token on an exchange. This creates an opportunity for arbitrage traders to join the market.

Arbitrage traders can be expected to offer liquidity and generate volume at the same time as DPs because they have an incentive to beat DPs at scalping lower prices, and sell back to DPs at prices much closer to the buyback price.

Secondary Market Impact: Volume; Liquidity; Price Competition

Fundamentals-Driven Traders

As a project advances in its development, and as announcements of milestone fulfillment are made, traders who would have been interested in the project’s technology but were not aware of the development at the time of the token sale, start to assess the project.

Prior to product launch, these traders take speculative positions on the belief that the live utility would increase the token’s demand beyond its speculative demand.

Post-launch, these traders assess the project roadmap and the team’s biweekly updates to assess the growth potential of the token, and take positions if the growth has not been priced in.

Secondary Market Impact: Volume; Liquidity; Fresh Demand

FOMO-Driven Traders

By design, the DYCO model has a high frequency of major events that change the metrics of the issued token, at the will of its holders.

Tokens issued under a DYCO model are supported by guaranteed buybacks.

Tokens that are bought back are burned, thereby permanently reducing supply, while bringing fresh money into the hands of the community. Historically, all such factors have led to increased volume and speculative interest in a token from traders who FOMO into such events.

Based on their ability to bring speculative interest prior to buybacks, burns, and the reduction in token supply, the FOMO events create regular opportunities for generating news about the token, which can pull in new traders.

A portion of these traders may also be converted to holders if the project matches their interest.

Secondary Market Impact: Volume; Liquidity; Fresh Demand

Project’s Buyback Treasury

Under the DYCO framework, the buyback treasury has a significant role in the secondary market. By giving the tokens a USD-backing, the treasury creates a price floor that market participants can take advantage of.

The treasury also:

burns tokens, thereby reducing token supply and project valuation
introduces new money to the secondary market by placing fresh money, through buybacks, in the hands of DYCO participants

Secondary Market Impact: Token supply reduction; Liquidity; Fresh Demand; Price Floor

Secondary Market Summary

The DYCO framework is designed to create a healthy secondary market with a natural competition built-in for different market participants.

At any point, arbitrage traders and DYCO participants are expected to be competing for tokens below the price floor.
Prior to buyback dates, FOMO traders are expected to be speculating on the impact of token burns and buybacks.
As the project progresses, new traders, who accumulate on the basis of fundamentals but were not aware of the project at the time of the token sale, are pulled in
The project’s buyback treasury adds a price-floor, giving holders a downside protection while still enabling them to speculate on the token’s success