Tokenomics
This has two parts: token ecosystem and token sale structure.
The ecosystem needs a balance. Normally, this can be analyzed by a strong assessment team. (That’s part of what we did on my team). However, design of the system is a different matter. Generally, it should be done by professionals with specific training in game theory and probabilistic maths. Also, a professional developer should be engaged to build the smart contract, naturally.
As the balance, strong incentives for hodling the token, possibly even time-enforced by escrow, must be balanced with a utility for the token - a reason to spend it. The other utility would be as a security, wherein the token itself is inseparably tied to an underlying value. Methods to combine these two are especially effective, but it’s best to avoid convoluted and senseless mechanisms to do so. Engaging in everything organically, finding value in the link between the business, the platform and the token will yield the strongest results. At any rate, investors will be looking for a high likelihood of steadily accumulating value. Speculators will be looking for a discount they can flip into the market when the coin hits exchanges. Setting tokens up for speculative bounties generally leads to long-term disappointment and eventually failure of the token.
This article leaves aside Security Tokens, which are generally simpler anyway, focusing on the trickier aspects of Utility tokens. Utility Tokens must take into account the Network Effect. Much ink has spilled on this concept, but in brief, networks are useless without sufficient public uptake. That amount depends entirely on the network. However, additional participants beyond the baseline of utility provide an exponential reward. That’s why Zuckerberg is widely considered one of the most powerful people on Earth.
Other concerns to analyze are the Velocity Problem (where strong uptake can actually cause loss of value without some ‘friction’ to token movement), value capture (is the system sending too much value to the company at investor expense?), building native protocol vs building on top of existing platform, proper platform choice, platform traction, leveraging existing strengths, and many more components go into this analysis.
Secondly, the token sale has its own set of key metrics. A sale with too much remaining in team control is significantly negative. Anything below 70% of tokens going to the sale is a potential red flag, and would require strong explanations for the rationale. Otherwise investors will see excessive dilution to their initial value. Part of a good analysis will ferret out potential justifications, if they actually exist. If withheld tokens will provide sufficient additional value downstream to investors, then it can be viable, but it must have a solid proof.
Other elements are style of sale (Dutch Auction, early discounts, etc), soft and hard caps, escrow guarantees, lockups, cliffs, and vesting (necessary components for investor trust), use of funds (dual structure based on differing sale results is better), reserve pools and other concerns that occur specific to different industries and target markets.
Often token sales are hastily put together, without accounting for the complexities and nuances of integrating these various metrics. Some are absolutely critical, but all need to be addressed at some level. Almost all ICO’s neglect some critical component in the area of token economics.
Competitive Analysis
All-too many projects simply omit this altogether. But without such an analysis, a team hardly knows where it fits or how to develop or explain its edge in the market. Do not leave this piece out. Conventional IPO’s include lengthy sections on competition.
Among the key points are market share, market dominance, thought leadership, image (a negative image can be used for strong effect), and the main overlooked factor - potential partnerships or being bought-out. Innumerable small companies are acquired, to investor benefit, by larger competitors. Baking an investor positive outcome into such a result can really help the perception of an ICO. As to the first, turning a competitor into a partner is the sine qua non of a great business.
Lastly, do not neglect the power of Risk Analysis. More on this topic in the whitepaper section. However, in terms of competition, Risk Analysis morphs naturally into Risk Mitigation, where Risk issues facing an industry can be forwardly engaged to provide an edge against competitors. This is surprisingly useful against very large competitors who cannot roll back entire systems, but must patch them together against problems. In fact, that could be the primary success of Bitcoin by going against the unwieldy and cumbersome conventional banking system.
Whitepaper
Whitepapers are a special item. They carry tremendous weight in terms of the project. A whitepaper should be an inclusive look at all non-technical aspects of the project. It should have a special focus on investor concerns. How will the token appreciate in price? What are the investor protections? What is the business model? All the previous concerns mentioned in this article apply in the whitepaper.
Whitepapers need compelling and meaningful titles. Use the hook and set model, meaning emotion plus logic and evidence. Also, PLEASE include a Table of Contents (with links). It’s astounding the number of 50+ page whitepapers I’ve reviewed that simply omit the Table of Contents. That creates significant frustration for investors doing research. It’s very challenging to find information without normative orientation. Carefully design the paper so that explanations are clear and meaningful without losing the average reader.
Proper length, proper balance of information, and correct structure are essential components. 40-60 pages is a good length. Structure has to do with the order of information and how it’s presented. A Problem-Solution-Support structure is the best all-around structure. Lead in with an abstract / Executive Summary, then a Table of Contents, then a problem statement. What is the overriding concern? State up to 3 market issues not addressed in current solutions. Too many weakens the argument. Only one concern can work, but it needs to be a major one.
Then present the general solution, filtering down to the awesome specifics of your project’s solution. Why is it so much better? How does it integrate perfectly with investor value? Not too much detail yet, we’re still looking looking at the forest. Touch on major platform components with a hint of their added value. In later sections, break these out as fits the project.
Don’t forget to include relevant sections. Most critical are business model, financials with projections based on various scenarios, and tokenomics. Make NO promises. The following are typical and strongly suggested sections: Executive summary / abstract, detailed tokenomics, token sale structure, team, Business Model, Roadmap, financials (Income, Balance sheet, Cash flow, future projections), investor protections, Marketing plan, Competition, Risk Mitigation, industry overview, legal disclaimer, and private sales section. Other sections apply depending on the sector and the particular project. A skilled assessor will likely find opportunities for valuable additions to your whitepaper.
Lastly, does the project need a technical paper? Technical papers add considerable validity to a project, especially if done properly. Surprisingly, good writing and formatting can be a negative for a technical paper. (Not so for a whitepaper, which should be very well-written and well-designed, but not ostentatious). If the project is building a native blockchain or a complex platform with sophisticated game theory, a tech paper is likely called for. In any event, a technical paper will almost never be a negative unless it’s improperly created or demonstrates incompetence. If the technical needs are minimal, then a very brief paper, just a one-page memo of errata, will still create legitimacy.
When all this is done, edit and proofread ruthlessly. Don’t allow poor English to negatively impact sales. Some investors will overlook errors in this regard, but many will not. Editorial expenses are minor for an ICO, so the perception will rightly be that the project team is sloppy. Obviously, this will turn away most investors. Edit the paper until it is tight, flows well, reads clearly and enjoyably, and has no typos or other minor errors. Have it proofread by everyone on the team or hire a professional editor.
Online Presence
Unfortunately, the online presence is often a make or break part of an ICO’s success. Most ICO’s simply put up a basic templated website. It has one page, with just enough or not enough information to support the project. This leads to failure more often than not. Investors are looking for real projects and a thrown together website without deep information and a sense of excitement in the project will turn them off. Spend the time and resources to build a creative, thorough, and well-constructed website.
Generally, certain sections will be necessary, linked in the top bar. These links should not scroll away, but remain fixed. Most websites have some missing of the following critical sections: project overview (About us), whitepaper, team / advisors, partners, roadmap, token sale, FAQs, and optionally - investor focused sections.
The token sale information is especially important. The minimum explanation would be: ticker, basic utility, platform (eth, native, etc.) total supply, soft/hard caps, distributions (sale, team, etc.), use of funds, sale dates (if set), and whitelist / application procedures. Email collection and KYC funnel are also advisable components.
Lastly, projects must develop their social media platform. Telegram is essential as a channel. Other helpful channels can depend on industry and existing presence, but a blog with useful information for the reader is helpful. Too many blogs write about company updates, a topic which only the team cares about.
Conclusion
A successful ICO is still possible. Considering the serious decline in the markets, the demand side has all but dried up. However, the supply side has seen similar declines, so competition for investing dollars is much less. The best ICO’s clearly demonstrate a high probability of positive return, with some possibilities of high to extraordinary returns - 1000% or more. A strong attention to protecting investor interests and demonstrating top-notch business modeling, planning, team, integrity, past accomplishments, and investor interests is a great start. Think of the people putting their money on the line. What will make them move on to another option? What will motivate them to pull the trigger?
Author
With dozens of clients and completed analysis reports, Kelly Mitchell is an established expert in analysis of ICO’s / STO’s from a detailed and broad perspective. Analyses average 25 pages and cover business model and concept, team presentation and make-up, competitive environment, token ecosystem and sale structure, whitepaper (all aspects), and online presence. Actionable points are the focus, giving a team the best path to a successful token sale.