Examining Funding & Token Allocation of Blockchain Foundations

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Tendermint Blog

21 min readJan 22, 2019

Blockchain projects have long struggled to determine the most effective means of funding their blockchain networks. There is confusion and disagreement not only about the best way to allocate resources, but also about the optimal time to do so. Consequently, projects have taken a range of different approaches, with some proving to be more successful than others.

In order to gain further understanding about this pertinent issue, this article will examine details about the crowdsales of well-known projects. We’ll take a look at how much each raised and how they spent it, as well as the creation and distribution of the native tokens of each network.

We will also highlight which projects have been the most transparent. Transparency, after all, is a key tenet of blockchain technology. However, while some projects have been fairly open about disclosing funding metrics, others have been more opaque when it comes to the distribution of funding to their founders and foundations.

Notably, our examination itself proved difficult to conduct, as blockchain funding is an entirely different beast compared to traditional forms of project funding — including other open-source networks. To explore this further, we will compare the Linux Foundation’s approach to that of blockchain foundations, as it is arguably the closest organization matching what blockchain foundations propose to achieve.

After reading this article, you will have a better understanding of what is working for blockchain foundations — and what isn’t. You will also gain useful insights into which projects have made questionable decisions so far, to empower you with the knowledge to make more informed decisions about blockchain projects moving forward. So without further ado, let’s jump in.

Ethereum

Crowdsale

Ethereum is the first successful blockchain project that ran a crowdsale and created a functioning blockchain foundation. They paved the way for many other projects to follow and iterate on. The high level results of their crowdsale are as follows: [1] [2]

A total of 31,591 BTC was raised
At the time, the funding received was worth around $18,400,000
The funders received 60,102,216 ETH in total for their contributions

Distribution of Ether

Upon launching the network, the genesis block contained the following [3]:

~60 million (83.5%) Ether distributed to crowdsale contributors
~6 million (8.3%) for the Ethereum Foundation [4]
~6 million (8.3%) for early contributors [4]

However, of the 6 million the Ethereum Foundation was meant to receive, it apparently only ever obtained around 3 million, as Vitalik recently stated in the following tweet:

If we were to speculate, this could be due to the Ethereum Foundation almost running out of money while producing its software back in 2015, and possibly selling off a large part of the Ether before it was created in the genesis block. However, it is ultimately still unclear how the amount received diverged so considerably from the originally stipulated amount.

Long term distribution

Ethereum’s economic design means that a substantial amount of Ether will end up being distributed into the hands of miners. As of today, 28.2% of all Ether has already been mined. This amount will continue to grow, and eventually, dwarf that of the crowdsale funders, as well as the Ethereum Foundation itself. As Vitalik stated in the tweet above, the Ethereum Foundation has around 660,000 Ether left. This amounts to about $75,000,000 today, and represents only ~0.64% of the total Ether pool. Notably, it does not include any assets being held in fiat or BTC.

Analysis

Overall, Ethereum has done an excellent job regarding Ether distribution, and now mining is beginning to take over as the dominant source of Ether in the market. It is now out of the hands of any centralized entity to decide how to distribute Ether. It is up to miners around to world to build nodes that can compete in the global hashing game, at least until Proof-of-Stake is implemented.

Ethereum has also managed to hold onto over $75,000,000 to support the foundation, while also owning only ~0.64% of the Ether, an amount which will continue to decrease. This gives the project a lot of runway, with very little control over the token supply — an ideal situation.

They are also the only project where we have multiple years to evaluate their performance. It is safe to say that they have accomplished a lot with the small amount of Ether that they allocated to themselves. At the crowdfund price, their 6 million Ether would have been worth less than $1 million dollars, which is a very modest allocation. The primary reason they have over $75 million to their name today is because they have built an incredibly successful community.

It has by far the most open-source developers building on its platform. In fact, it was reported that the Ethereum community has 30 times more developers than the next blockchain community.

However, neither Ethereum 2.0 nor Proof-of-Stake have yet to be implemented. It is likely Ethereum 2.0 won’t come out for some substantial amount of time after the initial launch date. We therefore need to ask, is this appropriate for a decentralized, open-source network? We will have to compare other blockchain projects’ efforts to Ethereum’s over the next few years to see.

Stellar

Fundraising

Stellar is the only project that did not do a crowdfund on this list. Funds were raised by more traditional means, with $3 million provided in seed funding by Stripe. [5]

Distribution of Lumens

Stellar has a unique approach to distributing lumens (XLM). At the launch of the network, there were 100 billion lumens created. With no crowdfund, lumens are distributed as follows: [6]

50% given away to individuals who sign up to join the network.
25% given away to strategic business partners — businesses, governments, institutions, or nonprofit organizations that contribute to the growth of the Stellar ecosystem.
20% given away to bitcoin and XRP holders — this was completed in two rounds in October 2016 and August 2017.
5% reserved for the Stellar.org operational expenses.

The 20% distributed to bitcoin and XRP holders needed to be claimed. However, only ~2% ended up being claimed. The leftover unclaimed lumens were added to the Stellar Operational Fund (Stellar.org), and The Build Challenge. [7] [8]

There is no mining in the protocol, and the only way that new lumens are added to the network is through a 1% annual inflationary destination. This 1% inflation is reserved for any account that gets at least 0.05% of the “votes” from other accounts in the network. These lumens are distributed once a week to accounts that are above this threshold. [9]

Long Term Distribution

With just 1% inflation, lumens will slowly increase. As long as a lumens holders meet the vote threshold, they will always earn inflation every week. This lends itself to enrich anyone who owns a lot of lumens already, as there is no in-protocol mechanism, such as mining, that is open to anyone with capital.

Analysis

Stellar.org owns 5% of the lumens, but they are also currently in possession of ~85 billion lumens that have not been released. This brings about an odd scenario. With Stellar currently holding ~90% of the lumens, this means that they also claim ~90% of the annual inflation. In the 4 or so years the network has been live, this has accumulated to around 4 billion lumens. This almost doubles the 5% they reserved at the start — a fact that is hidden in plain sight. The distribution of lumens is broken down in the chart below, with all of numbers taken from the public API [10] :

Over the 10 year period that lumens are being released, Stellar.org will continue to receive high inflation rewards. In the next 10 years, they could easily end up owning at least ~6 billion lumens from inflation. The amount they obtain also depends on how much they keep from the 20% of the Bitcoin Program. The ratio between The Build Challenge (158M) and Stellar.org (837M) right now is ~86%, which would imply almost ~16.8 billion lumens. This would result in ~25% ownership in year 10, but this is a high estimate. A conservative estimate would be 15%, which is triple the 5% they usually cite.

Also, as shown in the table above, they currently own ~50% of the liquid lumens, unless they have already sold some. This is a precarious situation, similar to one that Ripple has faced scrutiny under, forcing their hand to put their XRP holdings into escrow. [11]

The real problem is that 85% of the tokens are completely in the power of a single organization, therein making ownership of lumens largely centralized. Although it makes sense that a decentralized organization wants to bootstrap their network with strategic handouts of their token, this is extremely lopsided compared to all other networks.

EOS

Crowdsale

EOS had the largest crowdfunding event to date. Some of the key points from there fundraiser are summarized below [12]:

The crowdfund lasted one year, which no other ICO has ever done.
They were able to withdraw the funds raised during the crowdsale, which is not typical of ICOs. They did so 93 times during the token sale. Being able to withdraw during the crowdsale can lead to transparency issues, which is explained in detail in this article.
They received 7.21 million Ether, which has been estimated to be worth ~$4.1 billion dollars around the end of the crowdsale.

Distribution of EOS Tokens

90% of the token sale was handed out directly to crowdsale contributors for EOS tokens. The other 10% is being held for block.one, which will be released over a period of 10 years at 1% per year.

Long Term Distribution

Every year, there will be 5% inflation. Of that 5%, 1% is allocated to block producers, and the other 4% is allocated to a worker’s fund to be spent by the community.

Analysis

Block.one receiving 1% a year for 10 years isn’t too unreasonable compared to other projects. However, they already have ~$4 billion dollars stocked up in Ether, which they can spend however they choose to. It is hard to imagine how they will efficiently spend such a large amount of money. With that much capital, an important task becomes figuring out how to use the capital wisely. It can become a distraction from building a robust and decentralized community, because real time has to be spent in figuring out how to invest and spend the money.

Having a lot of capital is a good problem to have, but they will need a large team of people just to try and smartly allocate their funds.

Cosmos

Crowdsale

The Cosmos Fundraiser was held in April 2017 and had the following results: [13]

Raised 4870 BTC and 247,000 Ether from 1090 addresses.
Released 168,475,963 ATOMS to these contributors (75% of the total).
Hit the hard cap of around ~$17 million in about 30 minutes.

Distribution of ATOMS

The initial distribution of the funds are as follows [14] :

75% Crowdfund
5% Early donors to the project
10% InterChain Foundation (ICF)
10% All In Bits, Inc.

All in Bits, Inc. is the for-profit company behind Tendermint. The ICF contracted All in Bits, Inc. to develop the initial Cosmos software implementations. [15] All in Bits, Inc. ATOMs will vest over a period of two years after Genesis. None of the funders’ ATOMs need to vest. [15]

Long Term Distribution

The ATOM supply will be inflated between 7–20% each year. This changes depending on how many total ATOMS are staked. If more than ⅔ ATOMS are staked, then it will remain at 7%. If less, it will gradually increase to 20%. Validators earn rewards based on how many ATOMs they have staked, as well as how many ATOMs have been delegated to them. This is a favorable system that allows any user to participate in the inflationary rewards. [16]

Analysis

Adding a cap to the crowdsale was a fiscally responsible move, as Cosmos had the potential to raise much more than it did. It was held during a time when crowdfunds were just beginning to get extremely competitive, and small donors were being pushed out by higher gas prices.

One of the downsides of the Cosmos fundraiser is that it is over a year behind scheduled launch. Contributors were led to believe that the network would launch in Q4 2017, but it is the beginning of 2019 and the network still does not have a launch date. Although there is no legal requirement for the Cosmos Network to launch at a specific date, it has locked up a lot of capital from contributors who may not have suspected it to have been locked up for so long.

Tezos

Crowdsale

The Tezos crowdsale was as follows [17]:

They collected 65,627 BTC and 361,122 ETH in July 2017.
At the time, this is roughly equivalent to $232 million dollars.

8.5% of the crowdsale was distributed directly to the company Dynamic Ledger Solutions (DLS), after the software was run successfully for 3 months live. DLS develops Tezos, and is owned by the founders of Tezos. [18]

Distribution of Tezzies

The distribution of tezzies, the Tezos native token, is as follows [19] :

~608 million tezzies (79.5%) to ~32,000 accounts
~3.15 million (0.5%) tezzies to early donors
~76.3 million (10%) to the Tezos Foundation
~76.3 million (10%) to DLS
The 20% of tezzies to the foundation and DLS will be released over four years in monthly increments

Long Term Distribution

Inflation of the protocol is at ~5.5% annual inflation, with a non-dilutive inflationary policy. [20] 10 billion tezzies is the max amount that can ever exist. [21] This is sound, as the majority of tokens should be earned by those operating the protocol.

Analysis

The distribution is fairly standard, with 20% going to the foundation and to the private company developing the software. The $232 million raised is high compared to other projects, and is a lot more than is needed to develop a blockchain.

Another important point to consider is that Tezos went through a debacle between the founders and the Tezos Foundation. The founders tried to remove the president of the Foundation, accusing him of “self dealing, self promotion, and conflicts of interest.” The president accused them of “character assassination with misleading statements and outright lies.” In the end, the founders won and the president stepped down. [18]

This brought up a lot of turmoil in the Tezos community, and slowed down the development of the project while also lowering trust in it. The saga goes to show that some of these foundations have more money than they can handle. But, it also highlights that there is an inherent weakness in many of these blockchain projects, in that foundations can be run by a few figure heads.

One other interesting part of Tezos’ history is that they retroactively set up KYC (know your customer) requirements for their crowdsale contributors. It was a decision that was met with dismay by some contributors. But overall, Tezos was simply following the general direction that blockchain projects were starting to go, which in the long term will end up being a good decision. [22] Ethereum was able to raise in 2014 without KYC, but those days are long gone.

Cardano

Crowdsale

Cardano raised the following :

25,927,070,538 ADA (80%) was sold to the public. This totaled $62,236,134. [23]
5,185,414,108 ADA (20%) was given to three different organizations, IOHK (development), Emurgo (business development), and The Cardano Foundation. [24]

Distribution of ADA

The distribution of Cardano is as follows [24] :

Capped at 45 billion
31,112,484,646 was released
13,887,515,354, additional ADA will be minted
So far, there has been no minting of Cardano yet, as it is currently in the bootstrapping phase

Long Term Distribution

Cardano owns 20% right now, and long term, this portion will dilute to 13%. It is not clear how the newly minted tokens will be spent, but they should be distributed to shareholders of the protocol. The rest of the tokens are already in the hands of the crowdfund contributors.

Analysis

One thing that is hidden in plain view is that IOHK, Emurgo, and the Cardano Foundation will own 13% of the total supply of ADA ever. This is high compared to other projects, and is due to the fact that Cardano has put an upper cap of ADA at 45 billion, of which they have own ~5.1 billion.

Positively, Cardano’s financial information is well-organized on their websites [23] [24]. Many other projects should look to do this, and make their own financial information as easily accessible to the public. Cardano also required their investors to undergo KYC, as is now expected with blockchain projects going forward. [23]

Similar to Tezos, Cardano had their own public debacle with their foundation, as described in an open letter from IOHK and Emurgo. [25] Both of these instances reinforce the idea that a complicated set of organizations needed to support a blockchain network have inherent weaknesses due to the fragility of human decision making and human egos.

Polkadot

Crowdsale

Polkadot’s 2017 crowdsale had the following results [26] [27] [28] :

All 5 million DOTS designated for the crowdsale were sold by the third day.
A total of 485,331 Ether was raised.
In November 2017, at least 306,276 Ether was lost and frozen due to a bug in the Parity multisig wallet.
Polkadot mentioned after the loss of funds that they have at least $45,000,000 between fiat and BTC, so they would be able to go forward and build the software.

Distribution of DOTS

The distribution is as follows [27]:

5 million for the original sale
2 million is reserved for one or more later sales
3 million to the Web3 Foundation (30%) to be retained or distributed upon their discretion

The Web3 Foundation was contracted out Parity Technologies to develop the first implementation of Polkadot. Currently, the network is not live, and the inflation rate has not been mentioned. The supply of DOTS has no upper limit. [27]

Analysis

Ironically, it goes to show that raising hundreds of millions of dollars isn’t needed to actually produce new blockchain software. Even with losing over 300,000 Ether, they are still well funded, and are on pace to launch the Polkadot Network in late 2019.

Raising hundreds of millions of dollars seems to be more about taking the biggest piece of pie, rather than actually needing it to develop your software and community. It is unfortunate that this has become the situation, but now these well funded networks will have to spend all of their money to compete with each other.

The Web3 Foundation is receiving 30% of the DOTS, which is a high amount compared to the other projects. This will fund them immensely well. This highlights again how important it is to look at the fine details of these public network fundings, as 30% of the DOTS is a significant stake, and is a big factor to consider with Polkadot being a Proof-of-Stake network. 30% is very high, and it makes the network more centralized than the other networks being analyzed.

Comparing Blockchain Foundations to The Linux Foundation

The Linux Foundation is the oldest and most successful open-source software foundation in the world. [29] It should be examined for the potential to inspire strategies for existing blockchain foundations.

Linux is used extensively around the world. The Foundation has stated that the strength of open-source software can be measured by how many open-source developers contribute to the project. They have conducted some research on typical characteristics of open-source foundations, which are summarized below [30] :

Backed by at least one big corporation
Foundations end up doing a lot of “janitor functions” — answering questions for new users and developers, triaging bugs, licensing issues, etc.
Developers are interested in becoming involved in the largest projects. This results in bugs being fixed quicker, the project becoming more useful and able to draw in more developers, all of which in turn creates a progressive feedback loop of improving the software

The Linux Foundation is also often involved in the following endeavors [29]:

Taking care of public affairs
Supporting public and private initiatives
Contributing to growing the community
Dealing with large corporate memberships that are a significant source of revenue
Planning events for the community and supporting a developer travel fund for events
Training and certifying developers with in person classes and even MOOCs
Driving culture forward for the software

The key thing to realize is that a blockchain project’s software has to be interesting for open-source developers to work on. The single most important role of a foundation should be to increase open-source contributions and development related to a given project.

It’s also worth noting that the Linux Foundation had useful software that worked before it ever had a foundation. This is the opposite approach many blockchain foundations take, but that is not to say it is the right way to do it.

The Linux Foundation collects annual fees of around $6.25 million [29]. At this rate, many of the blockchain foundations have decades of runway. But The Linux Foundation’s low budget shows that you don’t need to have hundreds of millions of dollars in the bank to run a successful foundation.

Sadly, with all the extra money these blockchain foundations have, throwing money at developers will still not necessarily build a strong open-source community. Culture, community, events, and certification programs need to be built and cultivated. Most of these can’t be bought with money — building a unique and diverse community requires an investment in time.

Blockchain foundations should also look to create corporate partnerships that support them, like how the Linux Foundation has. Having well-known businesses build on top of a blockchain project and commit their own developers to open-source contributions is worth more than extra money in the bank. Just look at Google and Facebook’s open-source projects to see examples of projects that are thriving.

Comparing Blockchain Foundations to Each Other

Funding

Let’s summarize how the projects have funded themselves and then look at the data with a few charts:

Ethereum — They kept the smallest amount of tokens for themselves. Their holdings are now ~0.64% of the total supply, and are continually shrinking. They raised a modest $18.4 million with their crowdsale.
Stellar Foundation — They are in control of 85% of the lumens, and are deceivingly going to own 15% (conservative estimate) of the lumens in around 10 years. This is the largest amount amongst all projects. However, they didn’t stage a crowdfund, so it is hard to be upset about how they are spending it. That being said, the future token distribution is fully centralized, and is not written in stone. It is worrisome that the distribution of tokens is in the hands of just a few individuals.
EOS — They raised an excessive $4.1 billion dollars. They intend to keep 10% of the EOS tokens, which is a relatively modest amount, but it doesn’t get them much credit considering how much they raised. The protocol trends towards block.one slowly owning less tokens, which is good.
Cosmos — They capped their token sale at a modest $17 million. 20% of the ATOMs go to All in Bits, Inc. and ICF, which is fairly high. However, this amount will shrink over time due to high annual inflation.
Tezos — 20% is allocated to DLS and the Tezos Foundation, which is fairly high. However, this amount will shrink over time due to inflation. They raised $232 million, which is considerably more than what they needed.
Cardano — The three companies behind Cardano retained 20% at the start. This will shrink to about 13% long term, because they have capped the total tokens at 45 billion ADA. This is very high, just like Stellar. They raised about $62 million, which is an appropriate amount in comparison.
Polkadot — 30% is designated to the Web3 Foundation, which is the highest outright. This will shrink over time because of DOT inflation, but it is not clear by how much until the network gets closer to launch. They also raised $145 million, which is quite high, but they ended up losing about ⅔ of these funds in the Parity multisig bug.

The results have been summarized below for total funds kept by institutions related to the blockchain. This is because some blockchains have split their funds into separate entities for development work, foundation work, and business development work, while others have kept all three in a single entity.

The graph above shows that Ethereum raised the least amount of money, and yet is arguably the most successful of all of the projects. It also shows that Stellar is taking a very centralized approach to handing out their money. All of the other projects are fairly similar to each other. However, the most important factor is the future token ownership (as is indicated in yellow). It is vital that the token ownership dwindles over time. Cardano and Stellar, however, end up keeping the most tokens in the long term outlook. Polkadot kept the most tokens at the start that they can spend how they please.

This isn’t the whole story of funding, though. Let’s look at the total USD raised from each project’s respective crowdsale:

EOS sticks out like a sore thumb. It is ridiculous to consider they would need $4 billion dollars to launch their network. Cosmos and Ethereum show that you don’t need $100 million dollars to build an effective project. At the end of the day, Ethereum has created the most output with the money they received. However, we will have to give the other projects a few years to see what they can accomplish.

Community

Ethereum easily has the most mature open-source community. They managed to achieve this on ~8.3% of the initial tokens distributed, an amount which was diminished to half of that by the time the network launched. Now, this amount has dwindled down to ~0.64%.

Ethereum has demonstrated that you don’t need to own a double digit percentage of your project’s native tokens in order to create a successful blockchain network. Devcon, all the Eth Global hackathons, and all of the projects being built on top of Ethereum are proof of this. They did have a considerable head start on the other projects, so we will see what the others can accomplish in time.

Foundation Design

Having multiple separate entities seems to make matters complicated, as we have seen with Tezos and Cardano. However, this is a small sample size, so we should be weary of drawing definite conclusions.

One could also argue that the Ethereum Foundation alone has been unable to get Ethereum 2.0 out in four years, and that they might be better off with a completely separate team that focuses on development.

It is still very difficult to tell what kind of design works best here, as no project has it figured out completely yet.

Transparency

All of the projects have not been completely transparent about how they spend the funds they raised in the crowdsale. Often, the funds are raised in cryptocurrency, and the treasure chest of money that each foundation holds remains a secret. They also double dip by taking all the crowdsale money and a percentage of their own tokens. Although this is in plain sight, it is often ignored.

Realistically, these foundations could publish these facts, but most are unorganized and don’t have good documentation on this. Cardano does provide decent documentation, but they still don’t lay out how the crowdfund money was spent.

Considering these networks are supposed to be decentralized open-source projects, it makes sense that the spending of funds should be shared. Blockchains are about open information, and you would hope that the people behind an open-source blockchain project would be willing to share all their information to the public.

Conclusion

The most important objective for all of these blockchains is to get developers building open-source projects on top of their network. This means developing on the platform must be exciting, and must also promise opportunities to developers. Ethereum rode the ICO wave, which brought in a ton of developers to their platform. Since then, they have been able to build an impressive community behind it.

In contrast, it appears that giving away money for free doesn’t work too well. Stellar gives Lumens for free to join their network, and almost all of the projects have some form of grants to hand out. But developers want the opportunity to work on amazing software. Creating the next blockchain or dApp that gets millions of users will always be a more exciting story than accepting grant money from a dying network or getting $100 of free tokens.

We should also pay attention to some of the early signals we can see today to try to extrapolate how these networks will function in the future. For example, EOS raising billions and Stellar being in control of 85% of the lumens are unfavorable signals. Cosmos, Tezos, Cardano, and Polkadot all raised more money than Ethereum, which could be reasonable considering they are playing catch-up.

But even with all the money these projects have raised, the truth is that money can’t buy a thriving community. A community must be built. It requires a combination of transparency, raising and spending money responsibility, a helpful and patient developer community, a positive public image, and most importantly, many people who are passionate about the project.