State of ICOs
Fueled by enthusiasm and FOMO, the list of ICOs closing within a few blocks of opening has grown week by week. Despite being widely panned as an unreasonable cash grab, the Gnosis ICO's structured reverse auction closed within a day. Closely following Aragon, BAT, Bancor, Status were just a few crowdsales that seemingly tapped into a firehose of willing participants to raise millions of dollars worth of Ethereum within minutes.
Not everyone ended up a winner in these ICOs. Like an inevitable stampede at Walmart on Black Friday, the feeding frenzy left many willing buyers frustrated and empty handed. The frustration seem to echo louder with each passing ICO. Though message boards like /r/ethtrader on reddit have filled up with vows to boycott future ICOs, demand for newly minted tokens do not seem to be dying down.
For many ICOs, demand is outstripping supply for very obvious reasons -- tokens are issued right away and generally hit markets at 2-5x ICO price within a few hours, demonstrating a return that would take years if not decades to achieve through traditional investments. The Gnosis crowdsale proved that even a token that valuated a network without a product at over $300m could be flipped for profit. With these returns, the ever increasing horde of speculators have crowded out many hopeful enthusiasts that are seeing to buy and hold for the long haul.
For startups, the strong demand for tokens is seemingly a good thing. However, a speculator-heavy distribution of token buyers signals increased fluctuation in token prices and possible displacement of enthusiast supporters. Since blockchains and distributed applications (dApps) rely heavily on the network effects generated by wide user base, the ability of large investors to scoop up large shares of the offered tokens can adversely impact adoption. Simply put, blockchains and dApps need a wide user base running nodes, generating transacting, and participating in governance. Since the initial investors (not speculators) are most likely to be the first adopters, a crowdsale that largely pushes out small investors will likely hamper efforts to gain critical mass on the project.
What can we do?
The best outcome for a startup is to raise as much money as needed without displacing potential early adopters or creating a token-holder oligopoly.
Vesting Periods
One significant way of reducing speculation would be to slow down the velocity of speculation. Whereas founding teams and institutional investors have often been subjected to lengthy vesting periods, public investors are often able to flip the newly minted tokens a few days or even hours after the conclusion of the sale. Creating short, multi-tiered vesting periods of a month or more, means that speculators must decide if they want to flip this particular token or a different token that may be releasing in a week or two.
Reserved ICO Spots/Options
Another way of increasing the enthusiast share of token holders is to create reserve tokens that can be exchanged for a reserved seat at the ICO. These tokens can be issued to supporters for tasks like running testnets or flagging bugs or promoting the visibility of the token across social media and other channels. Because a reserve token, unlike a bounty, is only a guarantee of a purchasing opportunity, they can be issued with little financial repercussion, like potential dilution, to the startup. In fact, a secondary market for reserve tokens prior to the ICO may even spur additional enthusiasts to help support the project.
Auction Models
Sadly the reverse auction carried out by Gnosis was a complete bust at delaying the ICO frenzy. The 95% of insider-held tokens did little to deter bidders from paying 0.6 ETH per GNO. This doesn't mean that creative auction models won't work. Had a larger share of GNO tokens been available for the public sale, the possibility of making it into later rounds of the auction would have been much greater. The deeper the auction proceeded, the less likely tokens sold in round 1 would've hit the market at a premium
Would love to hear more!
This is my first Steemit post. Would love to hear other ideas people have about how to generate more inclusive ICOs.