Launchpads are Broken
How do we fix them?
Launchpads have always existed, in my eyes, for one reason: to level the playing field. Since the inception of capitalism, the highest growth assets have been unavailable to the common investor. While venture capitalists get the optionality to take high risk, high reward bets on the future of technology, retail investors are limited to gaining exposure to already established companies in the public markets — whose best returns are behind them.
Launchpads were meant to change this.
Launchpads were supposed to expose retail investors to high risk-high reward assets. They were meant to topple the nepotism of the existing venture capital structure and to reward an individual who was prepared to do the work and take some risk, regardless of their financial situation or the strength of their network.
Unfortunately, so far we are failing. Most launchpads are not the paragon of hope we once envisioned. Most launchpads are merely old power laws, old ponzis, and old nepotistic systems dressed up as something new. Under the guise of ‘decentralisation’ and ‘democratisation’, launchpads are failing to make structural changes to how wealth is distributed. If anything, many launchpads are preying on the uninformed, novice retail investor, further shifting the balance of wealth to the elite.
This post is going to be a bit of a rant. I’m going to openly share some of the systemic problems underlying launchpads. The purpose of this post is not to complain, but to offer clear viewpoints into the problems developers, builders, and marketers in this space face, as well as to offer solutions that can be implemented to solve these problems.
Every launchpad that I am aware of has the same business model. This business model is token-as-entry. Token-as-entry kind of made sense at the inception of launchpads. Launchpads needed to make cash, the easiest way to do this was to launch a token, and they needed to provide value to their token holders, the easiest way to provide value was to give token holders access to projects that launch. Lithium was launched with this model.
The problem with token-as-entry is that as soon as a launchpad reaches critical size (a goal for any business) the model becomes extremely Ponzi. The height of this mania was when a few friends of mine got together to get an allocation in a project launching on BSCPad. We invested $30,000 of the native BSCPad token, in order to get a $20 allocation in the project.
$30,000 for a $20 allocation. What a fu***ng joke.
This case is not unique to BSCPad. Go and look at any of the top launchpads and you’ll find that the allocation you get for the amount of capital you have to put in is astounding (stake-to-allocation, as we like to put it). Some pads have even hat to resort to lottery-style systems, where you aren’t even guaranteed allocation in a project. It’s insane.
The sad reality is that there is no way to curve this problem. It’s a death spiral. As the launchpad gets more popular, more people buy the token, causing its price to go up, again increasing the barrier to entry to invest in projects. It’s difficult to imagine any countermeasures one could put in place to prevent this. Issuing more tokens in order to reduce the price would work, but this would upset token holders. Likewise, lowering the tokens required to participate in the launch would do the same.
In hindsight, the token-as-entry as a business model stemmed not from a place of malice, just one of ignorance. Launchpads never gave thought to the idea that a different business model than token-as-entry could exist. That’s why you now have 100 different launchpads with 100 different tokens, all essentially peddling the same thing — the ability to get in ahead of your peers.
No, the only way out of the token-as-entry ponzinomics is to innovate out of it through a change in business model. In the solution part of this article, I’ll suggest an option we are considering at Lithium, which should remove the undemocratic Ponzi-games tokenomics of token-as-entry while still providing huge value to token holders.
Predicated on Returns From The Off
Unfortunately, IDO mania of 2021 has set the following belief in investors' hearts. Projects will always list above the private sale price. It’s understandable that — while this belief is both naive and toxic — it's also widely held. There was a period during the first half of 2021 when all projects that launched via private sales did hit the DEX and saw a significant uptrend.
This upward price action was nothing to do with any inherent truth that prices must go up from private sales. There is nothing encoded in the blockchain that reduces supply just as a token hits the DEX causing upwards price action and returns for early investors. No, the upward price action was driven by pure speculation, by investors wanting to make returns because they thought a bigger fool would buy them out at a higher price.
Thankfully, we have passed this stage of euphoria in the cycle. Projects no longer always moon from launch, some projects tank, some do nothing, and some do well. The second-order effect of the varied success of launches is that many ‘investors’ have lost or are losing interest in the space. As soon as quick returns are not guaranteed they get bored and look at the next get-rich-quick scheme.
This is both a blessing and a curse for launchpads. For launchpads (like Lithium) that have always focused on fundamentals and explicitly shooed investors who are in it for pump and dumps, while trying to appeal to and educate those who have a longer-term outlook, will be fine. But many launchpads have played into mimetic, ponzinomics and the only thing the community know or understands in these pads is x returns at launch. These pads will face real issues in keeping communities engaged in bear markets — again a point we’ll discuss in the solution section.
DeFi Tokenomics (Ponzi)
The vast majority of tokenomics in DeFi are pure Ponzi. If the downfall of Terra has taught us anything, its that if something seems too good to be true (risk-free returns of 20%APY) they probably are.
Here are a few examples of Ponzi tokenomics that many launchpads exploit.
APY from reward pools. Many launchpads promise users APY if they stake the native token. There is no good reason for this apart from encouraging upward price action. This APY is nearly always generated from a rewards pool. Issuing APY from a rewards pool will always fail, rewards are only being generated because people believe the value of the ecosystem will go up, thus increasing the price, making the native token reward that is being given worth something. In very specific DeFi applications where liquidity pairs must be provided in order to bootstrap an application to reach critical mass, there may be some use in rewards pools. Launchpads are not one of these applications.
Staking-as-Access. Similar to the token-as-access model, staking-as-access requires users to stake in order to participate in IDOs. The only reason launchpads do this is to lock up tokens and prevent negative price action. Lithium currently runs this model. While I do think there is a place for staking on launchpads, the mechanism should augment your ability to participate in raises, not be a pre-requisite for it.
Token-as-bonus not token-as-entry
I’ve made it clear why I think token-as-entry is not a sustainable model for launchpads. The problem is — if you aren’t using the token as an access pass, how do you generate value for the holders? — Many launchpads rely on the value of their token in order to pay for development fees.
At Lithium, we are playing the idea of letting anyone invest in our project, but at a premium to the price that would be paid by token holders. This has the joint effect of removing the barrier to entry to invest in projects, while still giving the holders of the token significant value (discounts on raises). This model pivots the value prop of the token from an access pass, to something more akin to a loyalty card.
There are also further ways that you could add value to token holders, by giving them a share of the premium that non-token holders pay. If you sell Project WAGMI for $1.00 to token holders and $1.05 to non-token holders and then redistribute this 5% to token holders, not only are the holders getting a discount, but they are also getting a share of the upside.
Launchpads could also learn something from GameFi, who have the exact problem of needing to raise capital through a token while maintaining a flat price to not affect in-game transactions. GameFi projects solve this by having two tokens. The governance token, which is in effect a representation of the value of the ecosystem and generates revenue rewards, and the in-game token, which inflates at a rate to ensure no one ever holds onto it — it is designed to be spent. Perhaps launchpads could find an intelligent way to use this two-token system to ensure holders gain value from the governance while new investors are easily able to access the ecosystem.
Provide Value Outside of Rapid Returns
Of course, we’d be naive to assume that financial gain is not the main motivator for people investing in launchpad projects. This is also not really a problem, the problem arises when people expect a rapid return.
The main solution to this problem is, of course, education. As launchpads we need to do a better job in getting investors to understand the nature of risk/reward to understand that investments (over the long-term) go up due to people using the ecosystem for utility (not just speculation) and the importance of having a strong exit and entry strategy. One question though, is whether launchpads themselves should be creating the content on this topic.
At Lithium, we think there are better people to educate our investors out there, if we were to, for example, create a ‘fundamentals of crypto investing’ series we’d simply be rehashing ideas that already exist — there’s no use to that. Instead, we need to get better at curating content for our investors, and having ad-hoc spaces to discuss news and key market movements that are relevant to our community — more on this soon.
Another way launchpads can provide value to investors, and keep them engaged in the long-term is through how they design their user experience. We started by giving out rewards to holders via the medium of reflections. From a user experience point of view, this is a terrible idea. Sure, reflections are effortless, but they in no way invite the user to interact with the application giving the reflections, they also never hold any ‘real’ value. With our version 2 token we are removing reflections and instead of giving out time-based rewards that must be claimed through the dashboard, ensuring users come back and collect their tokens, increasing the amount they interact with Lithium, and hopefully, therefore, their loyalty to the project.
If DeFi reward-pool ponzinomics are the enemy, then tokenomics that are predicated on delivering value to investors as the system grows through actual adoption are the gold standard to aim for.
At Lithium, we won’t be using reward pools. Any tokens that are given to our holders as rewards will be generated through real activity in the ecosystem (aside from maybe the odd competition for awareness). There are two types of economic activity launchpads can use — one is trading fees from tokens (if these are utilised) the other (and arguably more preferable) is to pay out fees as revenue is realised. The reason this latter method is so unpopular is that it is so much harder to generate real revenue through a DApp than it is to just create an arbitrary reward pool and payout tokens to the early adopters.
You should never see an APY on a launchpad, it just doesn't make sense.
I fundamentally believe in the power of crypto equity crowdfunding to redistribute wealth. I fundamentally believe that launchpads can be a huge source of good: to allocate capital efficiently to great teams and provide great returns to those willing to do the work — I just don’t think launchpads are fit for purpose in their current form.
At Lithium, we are acutely aware of these problems and are doing everything in our power to build the future we want to see, to build the simplest, fairest launchpad in the world.