How an ICO project can issue and manage dual tokens
A dual token is a technology which the project uses to create cryptographic assets for the ICO on two blockchain platforms.
Let’s consider the basic idea behind the technology in more detail with the example of two decentralized platforms that are suitable for the issue of cryptographic assets: Waves and Ethereum.
The dual token technology is required for marketing purposes. The project that publicly announces the issue of assets simultaneously on Waves and Ethereum increases the number of participants in the ICO. This is how the company draws the attention of both categories of investors — those loyal to Waves and Ethereum.
Say the ICO project issues 40% of tokens on Waves and 60% on Ethereum upon the crowdsale completion. In this case, the total number of tokens the project promised to release before the ICO remains unchanged upon the crowdsale completion.
ICO projects use 3 models of dual token coining and circulation
The ICO participants choose a blockchain platform for assets when contributing funds. Each investor retains the right to purchase the assets of both blockchain platforms.
Upon the crowdsale completion, the ICO project draws up the balance, fixes the number of investors and the share of tokens on Waves and Ethereum. In distribution, each ICO investor receives tokens in proportion to the amount invested. The ICO projects use one of three models of emission and circulation of dual tokens: hard set issue, manageable circulation and Atomic Swap.
Hard set issue
The ICO project using this model coins tokens on two blockchains at the same time — upon the ICO completion in proportion to the amount invested. Direct exchange of one platform’s tokens to another one’s tokens at an equivalent rate is not provided.
Upon the token distribution, holders can first sell Ethereum assets on the exchange and purchase Waves assets for the proceeds in the BTC.
Direct exchange through the exchange is possible only if the following currency pair is available on the trading site: the project token on Ethereum — the project token on Waves, and vice versa.
The holders exchanging tokens lose on spreads — the difference between the purchase price and sale price.
Besides, as the experience of the Mt.Gox and Bitfinex exchanges has shown, centralized trading sites are vulnerable to intruders. A successful hacking attack is fraught with irreplaceable embezzlement of assets, which the holders keep on their exchange accounts. Therefore, hacking trading sites entails a drop in demand for tokens and a fall in their rates.
Since the hard set issue model assumes a long chain “token-cryptocurrency-token” and is also associated with the risk of centralized placement of funds on exchanges, some ICO projects offer holders a direct token exchange.
This approach assumes that the project itself exchanges tokens issued on Ethereum for Waves tokens, and vice versa. The organizers of the ICO implement the model of manageable exchange in two ways:
The first way is to form an internal reserve of cryptocurrencies, where, for instance, 40% of Waves tokens accounts for 40% of backup Ethereum tokens, and 60% of Ethereum tokens accounts for 60% of backup Waves tokens. The drawback of this way lies in the risk of attackers hacking the storage of backup tokens, and the withdrawal and sale of cryptographic assets of the ICO project through exchanges. This situation threatens to collapse the token rate.
EncryptoTel, a developer of secure telecommunication solutions for corporate clients, faced such problems. Between April and May 2017, the startup raised $4.4 mln through the ICO. EncryptoTel used the “blockswap” service from Incent to distribute and exchange Waves assets for Ethereum and back. An attacker took advantage of the vulnerability in the Incent security and stole tokens in the amount of ~$1 mln. Of these, 60% were Ethereum-based tokens.
Once the hack was revealed, Roman Nekrasov, the EncryptoTel CEO, informed the community about the immediate readiness to recoin part of the stolen tokens on Ethereum. Such an approach would devalue the stolen assets, since they had not yet been floated on the stock exchange. Perhaps this is why the hacker returned the stolen funds to the company’s backup purse.
EncryptoTel developers made conclusions about Incent vulnerabilities and are currently developing their own mechanism for exchanging ETT tokens between two blockchains. The team is going to roll out Swap.Encryptotel solution this month.
The second way is to destroy tokens issued on one blockchain platform and immediately coin additional assets on another one. This approach is safer, since it does not require a centralized storage of funds.
However, this method has another flaw: tokens on Waves blockchain can only be destroyed with the participation of Waves developers. In this case, the token issuer can “burn” only the assets that remained on its balance sheet after being coined in the Waves online client and not transferred to other addresses. The user interface for “burning” tokens on Waves is not yet provided.
The asset issuer on Ethereum stipulates the logic of destroying tokens in a smart contract. There is no default function for destroying tokens on Ethereum.
Atomic Swap technology offers the ICO projects a solution for direct transfer of tokens from one blockchain platform into tokens of another without recourse to third parties or the formation of centralized reserves.
The concept is under development and has already passed several successful tests on Bitcoin, Litecoin and some other blockchains. However, despite the fact that there are no ready-made solutions based on this approach, its implementation enables a number of innovations and improvements in the cryptocurrency industry — in particular, in the field of the ICO.
The idea is that the ICO participants select tokens on any blockchain platform in advance and exchange them for project tokens on another platform after distribution. To do so, the holders use multi-signature wallets that operate on the basis of a smart contract Hash-Time Lock Contract (temporary hash contract or HTLC).
Let’s consider a hypothetical scenario of its application with the example of Waves and Ethereum blockchains.
One user has Ethereum tokens, and they want to get them on the Waves platform. They find another user who needs a reverse exchange. Using multi-signature wallets, asset holders reserve the required number of tokens for exchange and launch the HTLC contract. A smart contract “freezes” tokens on users’ accounts until the assets are transferred between the users.
To enable a transaction that goes between two different blockchains, both distributed registries must use the same hash algorithm, such as SHA-256. It is required to allow the temporary hash contracts to correctly perform the operation. If one part does not transfer tokens within the specified time, the transaction is automatically canceled and the tokens are returned to the platforms they were coined on.
Komodo is an example of a platform that offers an Atomic Swap-based solution. The project team is already working on an improvement called “Electrum Atomic Swap”. Users will no longer need to install a full blockchain for trading assets thanks to this technology. Direct exchange operations via Atomic Swap will be available to users of light clients. For example, the user will not have to download 100GB+ of Bitcoin core to their computer but will use a light Electrum wallet for direct cryptocurrency exchange.
A promising model
Atomic Swap solves the main problems of dual token coining models:
- Relieves the ICO project from the necessity to additionally tune blockchain platforms to coin tokens.
- Excludes extra intermediaries from the chain: exchanges and exchangers.
- Relieves traders from spreads that are inherent in traditional cryptocurrency exchanges.
- Offers investors a tool for direct exchange of the ICO project tokens
For these reasons, Atomic Swap is close to becoming the main solution for exchanging dual tokens.
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