What is the best token sale model for your ICO?
So, you are thinking of starting your own ICO? Well, let’s go one step at a time. You should have written up a white paper that describes your goals, what you aim to achieve, how the project got to where it is now and what can the investors expect from it.
Now you have to decide on what type of token sales model you should adopt for your ICO.
Before we go any further, let’s consider something. The space of cryptocurrencies is constantly evolving and changing. It was only a few years ago that sales models were limited to just uncapped and capped. Capped sales could facilitate quick sell out due to the feature of fixed valuation it promises whereas, uncapped sales would allow you to sell as many tokens as people were ready to buy. While these are far from perfect, there are new techniques that have evolved from it that can leverage the advantages of both.
Let’s take a look at how you can get the most out of your token sales.
Price Schedule: Dutch Auction
With this technique, you have the option of scheduling how the price of your token will vary during the sale of your token; you could start high and end low. This way investors can choose to wait till they feel the valuation is fairer and you can keep the prices dropping until those holding back buy-in. Investors gain more information from observing the trading. They would get an idea of what amount of money the sale will raise and have an incentive to buy in when the prices go down.
Gnosis used the Dutch auction model but with a significant twist. They placed an upper limit to the total money raised and not on the total coins that were sold. The share of tokens that would be offered to investors would depend on how long the sale went on. The investors could decide on the highest valuation at which they would want to buy the tokens and wait until the valuation drops to that level and initiate the buy-in. But interestingly enough, that was not what happened. Instead of waiting to make an informed decision, investors for the fear of missing out just went ahead and bought the tokens without considering the valuation.
Price Schedule: Start Low and Go High
You can also start low and go high towards the end. That’s the best option in case of an uncapped sale when the investors cannot be sure of the number and valuation of the tokens until the sale has ended. In such cases, the best strategy is to wait until the end before making any purchase. This way investors can observe the sales and determine the valuation of the network and participate when they feel the price is fair. The trouble with this model is if everyone waits until the end, then you run the risk of not selling so many tokens.
The Ethereum ICO illustrates this best. From the start, there was a lot of interest in the tokens and a large number of investors bought in much before the price was set to start going up. It wasn’t entirely successful in limiting the flow of investors into an uncapped sale of token towards the end. Instead, it managed to shift the timing a bit. Investors managed to purchase in towards the end of the discount period.
Proportional Refund
Capped and uncapped sales are not perfect. Capped sales get people to buy in as soon as the sale starts. To give everyone a chance to purchase, you could run an uncapped sale but then there’s the problem of not having a clear valuation of the network and as a result, investors will not have any information about the implied value of the token. So, what if we could leverage the benefits from the sale of both types of token? That’s where proportional refund comes in.
Here, details about the total number of tokens and the total amount of money being raised are released at the starting itself. The catch is that the total money raised is allowed to exceed this cap. The sale goes on for as long as investors keep committing to like an uncapped sale. In the end, tokens are distributed in proportion to the money invested by each participant and anything in excess is refunded.
Proportional refunds allow everyone a chance to participate even if they do not know how many tokens they’ll get at the end. But if big players step in, it is doubtful if everyone gets a chance. This technique is not perfect but with some modification, it could still work. For instance, you could cap the fraction of token for an investor; that could level the playing field for all.
Ask yourself this — Are you looking to raise a lot of money? Do you want a fair distribution of coins among your investors? Do you want both? Your token sales model would depend on what you expect from your ICO. Give it some serious thought and contact us if you would like some advice.
