Interactive Coin Offering: a token distribution alternative model or the new face of the IPO’s bookbuilding?
The object of this analysis is the Interactive Coin Offering as designed by TrueBit and described in its white paper.
What it is not
First of all or, better, in primis et ante omnia — as some civil lawyer out of run would have said — Interactive Coin Offering is not the umpteenth upcoming ICO (Initial Coin Offering). Not at all. Interactive Coin Offering won’t be a new ICO between the hundreds nor a new crypto-token with an exotic name. But it is much more than that.
Probably, if and when there will be the conditions, it can be used as a model of ICO sales and applied by issuers of new digital tokens, but for now, it is not a new ICO for itself and Interactive Coin Offering will not give rise to its own new token emission.
What it is mainly in the dev’s intentions
As we know, some ICOs feature a hard cap or a smooth cap. Hard caps are a limit on the total contribution value that will be accepted, and the token issuer will refuse additional contributions as soon as it reaches the hard cap; while a soft cap is a total contribution quantity that, once exceeded, will trigger a time limit on the remaining offering period. Some ICOs may also have hidden caps that aren’t disclosed to the public or have uncapped sales where anyone who wishes to contribute to the deal can do it just make contributions within a specified time limit.
On these bases, different approaches to pricing and allocating tokens have been recently experienced (see the image below). Some organizations have implemented auction mechanisms so that the price of the token can be wholly or partially set by community demand. Those different auction mechanisms may feature various advantages in terms of (i) how efficiently the price of the token can reflect the token’s economic utility; (ii) certainty about what percentage of tokens would be received for a unit of contribution, and (iii) whether everyone who wishes to participate in the token sale will have the chance to do so efficiently.
Given the above, according to the its white paper and some TrueBit’s posts especially those by Jason Teutsch here and by Rob Bent here, and even according to what Vitalik Buterin has pointed out analyzing token sale models here, Interactive Coin Offering is a new auction mechanism implemented via smart contract able to automate the whole sale’s process and to overcome the failures of the other sales systems that have been adopted so far.
For instance: capped sales strategy although it can achieve substantial capital amounts of crowdfunding in a brief time by setting a fixed number for the single token’s price and for the maximum/minimum amount of tokens to be sold, is unfair and has the DDoS vulnerability. Instead, uncapped sales provide buyers with little clue as to the general valuation of the tokens they would want to purchase which is problematic when trying to understand whether the token price was fair or not.
About this, the Interactive protocol’s purposes are:
- to make the purchase of “yet-to-be-generated ERC20 tokens over the Ethereum network in exchange for Ethereum’s native currency” more efficient;
- to grant buyers widest possible participation avoiding congestions on the Ethereum network (preventing that “whales” or other mining-powered entity could benefit from congestion events during capped crowd sales forcing other buyers towards a very high single transaction fee affecting their wide participation);
- to treat “large purchases and small purchases uniformly”;
- to overcome buyers’ “intrinsic inertia against entering a new crowdsale” anticipating market liquidity; and
- to reach:
“equilibrium of purchase amounts whose sum is satisfactory to all buyers.”
Protocol’s general characteristics
Interactive Coin Offering is a smart contract sales implementation and an alternative auction method of a token sale aimed to identify the market value of each token, theoretically achieving a “fair valuation equilibrium.”
How? By allowing each buyer to submit a retractable and multiple purchases offers according to the behavior and offers of others during the first ICO’s period, in which to indicate a personal cap or every an amount of tokens he/she would like to purchase for each estimated price level (that is the specified individual limit of the total amount of Ethereum raised in the sale for a participant).
Because it is interactive? Because following the new protocol a token crowdsale becomes interactive in the sense that potential buyer — in a specified period of the ICO’s time — may enter and exit the crowd based on behaviors of others and in doing so tend the valuation towards a market equilibrium.
Differently than other mechanisms, Interactive’s new approach that favors the uncapped sales introducing some new important features:
- Along with the bid, investors also provides a maximum sale valuation at which they are willing to participate (personal cap).
- The participants are granted a specified period when they can withdraw their bids.
- The token crowdsale’s smart contract can operate a partial or total refund of the bids under certain conditions (the protocol advocates for 30 days crowd-sale with a withdrawal lock period to commence in the last days of the sale).
- There’s a mechanism for time decreasing discounts, i.e., an inflation ramp that incentives and encourages early participation and help to anticipate a liquid market.
- The fees for submitting transactions are kept flat based on Ethereum gas price.
So any potential investor may choose personal thresholds exceeding the total amount of currency in circulation to get a successful bid. The time before the withdrawal lock provides an opportunity for buyers to calibrate their purchase amounts, and the period after the withdrawal lock pushes the sale valuation to converge towards an equilibrium value. After the lock phase, if the total amount of Ethreum raised in the sale is more than the personal cap, the contributor will be automatically removed from the sale via smart contract.
What it is according to a first legal interpretation layer
Now, trying to grasp the ultimate meaning behind the complicated concepts of Interactive Coin Offering’s basic idea, it is clear that it proposes a smart contract to run the purchase offers and the allocation of tokens automatically. Moreover it does so allow a prior dynamic negotiation between ICO’s participants to determine the price of the tokens put up for sale.
Therefore, it could be said that Interactive Coin Offering is a pricing method implemented by smart contract aimed to reach a digital tokens fair market value through online auction mechanisms only initially open and not-binding.
As an online auction (e-auction), Interactive Coin Offering’s scheme proposes sales transactions that result from a competitive bidding process conducted over the Internet. So its legal implications are enormous especially because it implements, as it seems, a B2C electronic commerce model to grant a broad base of participants without any differences between large purchases and small purchases or in buyers classes.
Therefore appropriate consumer protection has to be provided if an issuer wants to adopt Interactive Coin Offering to manage its token sale (i.e., correct and complete contractual information disclosure in the pre-sale phase, right of exit or to terminate the purchase otherwise, disputes resolution, privacy, AML/KYC, and so on).
But Interactive Coin Offering is not only a mere online auction prototype between the many (e.g., Vickrey auctions, Dutch and Yankee auctions, First-price sealed-bid auction, Reverse auction, Bidding fee auction) that some imaginative developer can design applying the code to the economic auction theory and game-theoretic models. So, unfortunately, there is not only to cope with the consumers’ legal protection that would already be a somewhat complicated challenge yet for itself.
Interactive Coin Offering as a token price bookbuilding process
Interactive Coin Offering’s core stands on:
“protocol’s main loop requires maintenance of a list
of addresses with various personal caps, a way of finding the set of addresses with minimal personal caps, and a mechanism for deleting this set from the list.”
It means that Initial Coing Offering basically is an offers recording system that proposes an open price mechanism of progressive bookbuilding in which the tokens issuer (or other third entity) acts online as book runner (or lead manager) and global coordinator appointed to manage the various adhesions of purchase given before knowing the price which it will be fixed thereafter at the end of a pricing process. In this sense, the new protocol helps leading a process where the crowd, i.e., anonymous consumers and not only qualified or previous shortlisted investors institutions, may present firstly non — binding expressions of interest and then, became retail investors, irrevocable purchase orders.
Through this mechanism, the digital tokens price arises from evaluations focused mainly on the outcome of bookbuilding’s process, that is a systematic process of generating, capturing, and recording investor demand.
The similarities with the bookbuilding process typical of an IPO are many can offer many different legal problems.
Significant legal problems
In this perspective, Interactive Coin Offering stands as a point of intersection between online auctions and bookbuilding mechanisms typical of IPOs, since in a context of an open price crypto-token offerings the protocol for itself uses an e-auction system and its results as an evaluation process to fix the tokens price.
In this perspective, Interactive Coin Offering stands as a point of intersection between online auctions and bookbuilding mechanisms typical of IPOs, since in a context of an open price crypto-token offerings the protocol for itself uses an e-auction system and its results as an evaluation process to fix the tokens price.
Firstly, as like any evaluation process, Interactive should be approached in a non-mechanical way and needs an adequate information base, typically represented by the issuer industrial plan, by information about its business model, the positioning and competitive advantages and the governance system of the tokenized entity. Moreover, since there is no distinction between retail and “institutional” buyers there could be a problem of how the information is offered to the public in terms of simplicity of access; in addition to the fact that generally the bookbuilding of the IPOs is carried out in two distinct phases because of the fact that the setting of the price is considered more reliable if it occurs through an evaluation of institutional investors and it could require a specific protection of retail investors. And much more than this.
Conclusively, this disintermediation that Interactive Coin Offering operates via smart contract in setting the prices of digital assets offered to the public to raise capital opens up a myriad of legal problems both as an auction system and as a price-setting process. These legal issues can be summarily anticipated in (i) the legal and professional skills of the book runner; (ii) the protection of retail investors; (iii) rules of conduct to avoid conflicts of interest between the token issuer role, and the book runner’s one; (iv) legal protection against unfair commercial behaviours; (v) consumer legal protection for online auctions; (vi) providing an adequate information base and pre-contractual details; (vii) regulation of the right of exit from the crowdsale contracts; (viii) information disclousure management about other offers distinguishing the off market phase of the book building from the real auction phase, and many many other very huge legal problems to deal with.
So this is it because smart contracts are just pieces of code and can never replace the general legality of a single commercial operation that requires a careful and very detailed legal evaluation to be carried out
