The Mechanics of the Token Launch
How to do an ICO? This article is a step-by-step overview of the modules of a token launch and a practical guide how to navigate the complex challenge of launching your own token.
This year seems set for Token Launches to become a mainstream funding mechanism. But despite the attention, there is surprisingly little pragmatic information on how to actually launch your own token.
This article gives a step-by-step overview of the modules involved in a successful Token Launch and some hands-on advice on what to do (and what to avoid).
Token Launches as a means of funding an open source blockchain project was introduced as an option of last resort: Most venture capitalist did not want to fund open source projects so the community funded itself. The first Token Launches were nothing more than a smart contract, which means they were both completely transparent and open to the tech savvy. Through their self-enforcing nature, its code-based governance, its tradability and the potential to actually use them for the service the protocol provides, token holders soon discovered the usefulness of their asset.
Today Token Launches could keep a professional PR agency, an international law office and a software development agency busy for a year.
The old days are over and Token Launches are definitely more complex. That has its pitfalls and is more demanding on startups going for a Token Launch. However, it does have its merits. But let’s start one step at a time:
There are seven modules including roughly four different disciplines: (1) The blockchain design is a core part of the project and is an essential part of the competitive advantage. The (2) Token Economics and Token Launch involves a holistic understanding of how Crowdfunding works and how the processes should look like to distribute the tokens. The (3) Security Measures fall in the same category, since it is highly specific to the launch process. The (4) Legal & Tax Setup as well as the (5) Regulatory Compliance are more technical but important parts. The last, but not least important aspect is the (6) Community Building and (7) the Marketing, PR & Roadshow.
Blockchain design is creating a simple mechanism that governs the interaction of the protocol participants while creating an incentive for its users to act in the interest of the collective. The blockchain design requires a deep understanding of the technology, game theoretic, economics and the underlying business targeted by the protocol. Even though this process can and should be enhanced by receiving feedback from advisors and industry veterans, it is the core task of the founding team. It should be them writing the Whitepaper.
It is important to understand that the mechanics governing the protocol and the Token Launch require a very different skillset. The latter is on economy territory combining knowledge about asset valuation and crowdfunding dynamics. A good place to start is with Chris Burniske’s method to value crypto assets.
The project will have to decide on the total token supply, the token being distributed during the Token Launch, the total amount of funds that should be raised, the type of funding rounds (seed round, pre launch, ICO), lock-up periods, max. and min. ticket sizes and the type of the token sale. The decision on the type of token sale is going to be implemented into the smart contract and can take the form of a ‘dutch auction’, fixed price sell-off or a ‘rising tide’. All of this information belong in the business whitepaper along with a roadmap on how to drive adoption of the protocol.
Ocean Protocol is a best-in-class example how to come up with the Token Economics and communicate it clearly and transparent:
The Token Launch requires an interface to guide users through the process of collecting the right documents and information to comply with regulation and let them contribute safely and as frictionless as possible. This interface is usually called a launchpad.
Launchpads onboard users and create user journeys to upload the required information to comply with regulatory demands. The launchpad is also the interface to the smart contract and supports the investment process. It usually supports different forms of funding events (like seedrounds, pre-launches and the actual token launch) and monitors the fund inflow. Launchpads process very sensitive data and process large sums which makes them a likely target for attacks. When deciding for a launchpad provider, it is important to see if the software has been heavily tested in the field already and what kind of guarantees the provider is willing to offer. The best interfaces also leverage external services like customer support software, sequential email marketing, or analytics.
It comes as no surprise that security is crucial in running a Token Launch. What might be surprising to some is that great security in a Token Launch is mostly dependent on great communication. The clearer you communicate with your community, the better they will be able to detect and fend off scams.
However, there are several other things that should also be done including:
- Server security and white-hat hacker audit
- Audit of the smart contract for the token distribution
- Fund security (multi-sig hardware wallets)
- Employee security training and two factor authentication
- Crisis scenarios and protocols
- Security protocol for the physical safety of the wallet holders
If server security is compromised, the receiving addresses can be changed and contributors will send their tokens to a third party wallet. This has happened. A counter strategy is to use standard well-tested infrastructure and pay white-hat hacker to try to penetrate the system.
When smart contracts are deployed to the ethereum mainnet they cannot be modified due to their immutable nature, which in turn acts as one of the underlying core principles in blockchain security. Therefore, it is vital to investigate the contracts code for bugs vulnerabilities and risks before the contract is deployed. The audit acts as a guarantee that the contracts’ code has been examined and tested by an expert and thus verified as secure.
To store the ICO proceedings safely and still be able to access the funds, there needs to be good preparation and a protocol to keep the people who have direct access to the funds safe. The best practise are multi-signature hardware wallets that are placed in a safe deposit box long before the launch starts. Multi-signature wallets address the fundamental problem that traditional single-sig wallets face when individuals sign and verify a transaction. By creating more than one key you heavily mitigate the risk of losing funds due to the loss or theft of your key. Make sure to kick of your search early as most safe deposit boxes, at least in Berlin, are in high demand nowadays. Also have a strategy for emergency scenarios like abduction and extortion of a key holder and make sure that all stakeholders are briefed.
You need to have an entity to conduct the token launch. Lisk for example chose a Swiss Foundation, some are based in Singapore or Gibraltar others use regular corporation entities for the launch. The decision is based on multiple factors, including the possibility to launch an ICO in the first place, (China doesn’t allow this at the moment). There are regulatory hurdles of being able to address investors which can affect the ease of the token launch. Even if some jurisdiction are very crypto friendly, they might not offer the political stability needed or have to relent to outside pressure to adopt tougher regulation. For example Gibraltar faces uncertainty due to Brexit.
Lawyer fees, official charges, travel and opportunity cost for board meetings, professional board members services and auditing cost can add up. Make sure to calculate them before making a decision. Also the power structure of the governing bodies vary widely, as Swiss-based Tezos had to find out the hard way. The difference in the taxes on the token launch proceedings can be all the way from few percent gift tax or capital income tax to the full amount of value added tax, corporate tax and personal income tax.
The legal team will support the setup of the entity, but also drive the classification of the token. They will likely prepare the investment documents like the SAFTE or similar pre launch legal documents, the terms and conditions and the data privacy statement. The legal team should also audit the investment documents and marketing material to make sure that there are no implications and promises that might open up the project to lawsuits.
Regulatory requirements usually aim to protect investors and prevent criminal activity. Having the SEC send a subpoena after the launch, being delisted from exchanges or not being able to convert the proceedings into fiat can turn a successful launch into a nightmare. Regulatory compliance creates friction and is really tough in an international environment, but I am sure you don’t want terrorist funds in your ICO either.
Compliance is mostly associated with a Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) process. Based on the issuing country, there are requirements how to identify a contributor and make sure you have the right address (proof-of-address). If you are dealing with an institution, you will have to find out the beneficial owner and vet the person accordingly. Some jurisdiction require contributors to prove an accredited or qualified investor status to be able to invest. The KYC process might not be legally required, but it is a necessity for the AML process required by exchanges and banks alike.
The AML process includes running the contributors against multiple data bases including political embargo entries, political exposed person (PEP) lists, criminal registers and terrorist lists. However, once there is a match, the process only begins as people might share the same name but might otherwise not be affiliated.
The whitelisting process is a tedious task. The process of checking these requirements needs staff that can read the language of your contributors (including Russian, Japanese, South-Korean, etc.) but also know how the local ID documents look like, which utility company bill is acceptable and which might be fake. You will need log files to be able to see who approved which customer and a quality assurance process to make sure that your staff keep you safe.
In additional the regulatory aspect also includes things like capital market and data privacy laws (think GDPR). There might be jurisdiction specific regulatory demands like the eCommerce law in the EU (for utility tokens).
There are companies specialist in rendering the service including Fractal. If you chose a provider, make sure to check if AML is included, how much liability they take up and actually shield you as well as if they are actually compliant with the jurisdictions you want to offer the token in (again, ask for external legal audits, GDPR compliance and guarantees that they are able to give you).
Let’s get back to one of the core parts of the launch and the team: Building an excited community around the protocol. Even though it is dreaded, the whitelisting can actually give you a great idea about who these people in your community are. The best launchpads leverage this information and let’s you utilise your user base through third party API access.
Before you start however, nail down your message and make it repeatable. There are PR agencies to help you with that. Make sure you and your team stays on-message. You then need to decide who your audience is and which medium to use. An open source community will likely be on tools like Reddit, GitHub, Telegram and the likes.
It is advisable to start early with the outreach to the community. It serves as a great feedback loop, is a great recruiting pool and a multiplier. Your community will enable you to deliver on the promise of launching network.
The best projects engage with their community in an authentic and open way. Get to know your community in person through meetups. Take up suggestions and allow your most loyal contributors in an inner circle. Have the capacity to manage your channels 24h three weeks before and after the launch. Engage even with fierce critics, as you may be able to turn them into your greatest supporters.
Community is not only individual investors, but depending on the project can be large industry corporations as well. They require a business development approach, but are equally important to the success.
The aim of your pre launch marketing is to increase the visibility of the project and communicate value to increase the likelihood of investing and the amount invested.
Depending on the project there my be three kind of contributors: (1) product driven, (2) idealistic and (3) profit-oriented investors. However, all look for signals that your project can be realised and future adoption of the network.
This phase should be token launch specific and will be very intense on the founders. It is advisable to work with external partners for press outreach, preparing marketing material like the promotional video, and the homepage setup. Setup a content strategy with rich in-depth material to enable experts to vet you. Even though Google and Facebook banned ICO advertisement, word on the street is that selective agencies are still able to help you out here.
Plan your announcements carefully as they are the most important drivers of your launch. Make sure you did business development to be able to communicate a collaboration with a complementary protocol, a backing of a well-known investor, your popular board members or a collaboration with an industry giant. These are announcements that should be carefully planned and communicated.
Token Launches are global and so should be your road tour. Have speaking engagements planned months in advance and plan a meetup tour to gain local support. Contact crypto media (podcast, online magazines) and make sure to have interesting news to get their attention. Leverage great content with paid media.
Have a crisis and communication plan. Have lawyers check your marketing material and content to reduce litigation risk.
Some use bounty programs or multi-level-marketing approaches to rally support. There is nothing wrong with air-dropping your loyal supporter coins for their support, but the former take a lot of effort to implement and always smell like fraud — don’t do it.
There are many agencies and investment plays that offer their help. While few add tremendous value and drive the success, most are overpriced, clueless or at worst fraudulent. If you do want to work with one, carry out due diligence, ask for references and align incentives. A different approach is to get one of the experienced crypto VCs like Outlier Ventures or Fabric Ventures involved early on. They have experience who has done a good job before and offer hands-on help during the launch.
Most of all — leverage the natural skills of the founders and get them out there to engage with the audience.
About the Author:
Julian Leitloff is Co-Founder & CEO of Fractal. Fractal is an end-to-end token launch service provider and offers user-friendly experience with a compliant onboarding process. Julian has researched equity crowdfunding at Zeppelin University before co-founding Stilnest and Trustharper. Julian was one of Forbes Magazines 30 under 30. Find him on LinkedIn and Twitter.