For the past few years just indicating that you were in the blockchain space was enough to raise funds. Vague promises of “X on the blockchain” or “a decentralized Y” were enough to raise millions via ICOs. Millions of dollars continue to be raised via ICOs, but the investor environment has become a lot tougher. There is an expectation of returns on investment and for proof of the liquidity of assets.
This article explores these new demands and spotlights Play2Live, a start-up in the eSports environment, that seems to have understood the need for liquidity.
MARKET UPDATE ON ICOs
There has been an explosion in the growth of blockchain-based start-ups and their concomitant fundraising ICOs (Initial Coin Offerings) or ITOs (Initial Token Offerings). There is no shortage of investors into these enterprises. Close to $6 billion was raised in 2017, with a record $1.2 billion in December alone.
ICOs are becoming the new normal for raising capital. In fact, according to Goldman Sachs, ICO’s and token sales are outpacing traditional venture funding.
The barriers to entry for this type of fundraising are very low. You don’t even have to prove that a company exists. You don’t need a minimum viable product (MVP) or a financial statement. There is little to no regulatory oversight. This has led to scams, tongue-in-cheek launches, as well as many launches with not much more than a vague blockchain idea and the hope of getting rich quickly. By the same token, many investors have not been interested in the underlying product or business — they have just been speculating in the hope of quick profits.
Many launches are followed by silence. According to an analysis of 48 ICOs launched between 2014 and 2017, only 6% had a working product to show by 2017. Of those launched before 2016, 61% still had nothing to show. Likewise, up to two thirds of companies have been quiet following their ICOs in 2017 — a possible indication that they failed to reach their soft cap targets, and may have had to return the investments
However, 2017 has also seen the ICO market maturing. There is now much more investor skepticism, the requirement for clearer technical and business plans, real teams that include financial and business aSendGridin the USA are concerned that coins or tokens are actually “securities”, with profits derived from “the efforts of others”.
Investors want to know how they are going to realise returns on their investments. Central to this is the question of how the enterprise is going to ensure the liquidity of its tokens.
UNDERSTANDING LIQUIDITY
The technical definition of liquidity is, “The degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price”. The higher the volume of activity in a market, the more an asset can be regarded as liquid.
This is exactly where many crypto start-ups fail. They do not consider how the value of their coin will sustain and grow while they work towards completing their project. Nor do they put in place mechanisms that will manage exchange rates.
New currencies or tokens are particularly susceptible to liquidity problems. They cannot directly link to other currencies — either fiat or crypto. They are dependent on active traders on exchanges to interlink currencies. However, a certain volume of trading activity is required to achieve market liquidity. This makes it extremely difficult for small-scale currencies to be convertible for other popular currencies, using a market-determined exchange rate. In effect, they are disconnected from the greater economy. This makes them less useful to their holders and limits their value and their adoption.
MECHANISMS FOR TOKEN LIQUIDITY
There are three primary sources of value in the trade of traditional stocks — and these are the same for crypto tokens:
- Price appreciation
- Buybacks
- Dividends
- Price appreciation
Price appreciation may come from speculation, often based on hype and speculative activity in the public exchanges prior to going live. There may be a disconnect between value and valuation.
Real price appreciation and liquidity come from usage of the token.
- This may be at the protocol level — the tokens are needed to access the system, and are transaction fees to write to the blockchain. Ether is a good example — it is the “gas” required to access the Ethereum blockchain.
- Some tokens are based on applications. Price appreciation comes from adoption of the underlying goods or services. The more people want the product or use the token as a trading mechanism for the goods and services, the more the value grows and the more liquid the token becomes.
2. Buybacks and burning
Companies can also ensure liquidity through token buybacks and burning.
A buyback, also known as a repurchase, is when a company buys back its own shares — or, for the crypto market, its own tokens. This may be viewed as an exit strategy for investors, but is also a way to maintain liquidity. It reduces the number of tokens on the public market, sometimes to avoid hostile takeovers, and sometimes to minimise dilution as more tokens are created.
For crypto companies, such buybacks are sometimes accompanied by “burning” or destroying all or some of the tokens bought back. This reduces the total number of tokens in existence, increasing scarcity value, theoretically increasing the value of each of the tokens that remain, and giving investors a greater percentage share than they originally had. Investors have the option of selling some tokens and still maintaining their original percentage share.
Some enterprises promise buy-backs and burndown as part of the ICO offering. Time frames and specified rates are usually associated with this promise.
3. Dividends
Dividends are a cash distribution of profits paid to all shareholders. While this can be done for cryptocurrencies, there are regulatory and logistical difficulties in doing so, as well as high transaction costs. Buybacks are the more usual way of returning value to shareholders.
4. Other mechanisms: The Bancor Protocol
Some start-ups make use of the Bancor Protocol to create liquidity for their tokens, and to determine price, rather than relying on an exchange as an intermediary and a buyer as a second party. In essence, the Protocol replaces them through the use of smart contract technology.
It allows for liquidation of new tokens — i.e., exchanging a less liquid asset for a more liquid one. The price is determined by a mathematical algorithm that balances buys and sells, and every token in the network maintains a formulaic relationship to others. This creates continuous liquidity and price discovery for each token, regardless of trade volume and without the need for exchange listing.
Using this Protocol requires that a certain number of your coins are held in a reserve. This can be seen as a temporary deposit, and in some cases, as a future source of additional funds.
PLAY2LIVE CASE STUDY: ENSURING LIQUIDITY AND TOKEN VALUE
- Introducing Play2Live
Play2Live is a start-up that has given very detailed attention to ensuring the robustness of its business model — and a major part of this is in ensuring liquidity of its token, the LUC. The goal is to establish a system that is transparent, user-friendly and has investment value.
Play2Live is the first decentralized streaming platform for streamers, gamers and eSports fans. It integrates blockchain functionality into a comprehensive ecosystem with unique interactive features and monetizing tools.
The Play2Live platform (Level Up Chain) provides a completely new level of virtual interaction for all participants — and provides a mechanism for monetization of every aspect of it. It has a token called Level Up Coin (LUC) which is the currency within the system. The project is planned for launch at the start of 2018. An alpha version will be launched in Q2, 2018 and a beta version in Q3, 2018. The Play2Live token sale is scheduled for February 2018, with pre-sales starting at the end of January.
The business is well positioned in the gaming and eSports arena, that is anticipated to have a turnover of $115 billion in 2018 and an audience growing from 400 million to 600 million by 2020. Play2Live can benefit from numerous sources of revenue generation:
- eSports and gaming
- Internal items exchange
- Betting
- Live and VOD broadcasting of game content
- Virtual Reality.
Please read more about how the Play2Live system works here.
Play2Live mechanisms for liquidity
The following is a summary of the mechanisms that Play2Live has in place to ensure liquidity.
- Price appreciation
Price appreciation will be stimulated in 3 ways:
- Speculation
After the token sale, Level Up Coins will be allocated to investors. Play2Live plans to make it’s ERC-20 compliant LUC tokens freely tradable on crypto exchanges prior to the launch of the MVP. After the release of Level Up Chain, Play2Live anticipates exchanging Level Up Coin for Level Up Chain tokens at the rate of 1 to 1.
- Building trust in easy conversion across currencies
As noted earlier, trust is built when users know that they can move into and out of a network easily. The first source of trust in Play2Live is its gateway/API. This gateway allows users to buy LUC tokens using cryptocurrencies or fiat. It also allows them to sell back their LUC, in exchange for either fiat or cryptocurrency.
Beyond building trust, this gateway is the mechanism that facilitates liquidity — i.e. the actual buying and selling of tokens.
- Maximum adoption and usage of the LUC token
Play2Live is aiming at maximum usage of the LUC token. It has set up an interactive platform and established a fair and trustworthy economy for all participants of the system. The LUC is the medium of payment and reward for all activities.
Streamers and eSports tournament organizers have 11 different ways to earn money from the site. Viewers have 5. Bets can be placed with a variety of bookmakers and games can be purchased from outside suppliers, using LUC earned on the site. There is a totalizator, and systems for crowdfunding, escrow and donations. A rewards system pays LUCs to users who are very active on the site or who participate in voting and consensus mechanisms. All of these streams are only possible because of blockchain technology.
Long-term plans include launching new gaming and eSports services to attract existing centralized market players — this will be achieved because the Play2Live platform offers so much more than other streaming platforms.
The value of the token will grow with the number of users, and the sheer volume of transactions on the platform. Based on the incentives of streamers and users to participate and to earn income on the platform, the projected target of 10M monthly active users (MAU) by Q2 2019 seems achievable. Each user registered in the system will have a cryptocurrency wallet powered by the Level Up Coin (LUC) token, which facilitates monetization opportunities for all users.
Read more about how Play2Live leverages interactivity to attract the millennial market.
2. Buyback and burning
The business plan is that 62.5% of LUC issued will be sold into the open market. These LUC tokens will eventually be required within the platform for user transactions. (It is for this reason that the Play2Live token sale is also aimed at attracting the seed user-base of the project, who will then already own tokens.)
When a new user wants to acquire LUC, tokens will be supplied immediately from an Operations Fund. However, the LUC will then have to be replaced, through buying tokens back from the open market. This is the first step in ensuring liquidity of the tokens: buyback from the open market.
The second form of liquidity happens within the platform. Users start to transact with each other and with services on the platform, with LUC as the medium of exchange.
The third form of liquidity is developed through distribution of revenue received by the platform itself. A certain number of the LUC that users have purchased will revert to Play2Live as payment for services. This revenue will be distributed in the following way (using 40 LUC as an example):
- 5% (2 LUC) are reserved for user rewards (through the Daily Reward Pool). This pool rewards high levels of activity on the platform — encouraging users to spend more time there.
- 5% (2 LUC) are allocated to sustain the Level Up Chain platform via the Level Up Chain Foundation.
- 10% (4 LUC) flow to the Operations Fund to ensure the proper functioning of the external exchange within the platform
- 80% (32 LUC) are eliminated, thus reducing the overall number of tokens in circulation and increasing the value of all those that remain.
This mechanism of buyback, distribution of revenue and token elimination is illustrated in the following diagram:
By the time breakeven on the project is reached — projected to be at the beginning of the second year after the public launch — a total of 25% of all tokens will have been eliminated. This concept is similar to the concept of “profit tax”, which the platform pays in the form of eliminating tokens for the benefit of the project and investors.
This will significantly increase the value of the remaining tokens — and also the percentage held by investors who have elected to hold their tokens rather than sell them.
3. Other mechanisms
Other mechanisms for liquidity are planned:
- To boost liquidity by investing LUC in systems such as the Bancor Protocol.
- A certain amount of internal liquidity on the platform itself will be important to ensure that tokens are immediately available for processing and transfer to platform users. For this purpose, an Operations Fund will be established, comprising 11.1% of the total supply of LUC. These tokens will be stored on the blockchain until the release of the beta version of the platform.
Long-term plans include:
- Implementing several solutions similar to the Bancor Protocol, all of them designed to encourage retention of the tokens on the platform.
- Improved internal economy that will further fuel the project.
- Reducing costs for the delivery of content to end users through decentralized CDN (see our article here for more detail on this).
- Further development of the decentralized advertising market.
- Using decentralized cloud services to reduce the cost of heavy content storage (VOD records).
- Transcoding technologies thanks to improved computer performance.
- Adding modules. The platform is anticipated to host more than 25 functional modules — 15 of them generating revenue for users and providing opportunities for spending earned LUC on the platform.
- LUC to be used not only within Play2Live ecosystem but also in other projects created on the open source Level Up Chain.
CONCLUSION
The bar has been lifted for start-ups and ICOs in 2018. It is no longer acceptable to have “2 geeks and a whitepaper” as the basis for investment. Detailed business plans — which include very specific plans to ensure liquidity — are the new requirement.
Play2Live more than meets this new requirement and is poised to become a market leader not just in the gaming world, but also in the blockchain and token world.
Stay tuned!
