Bitcoin Mining to Token Launch Auction, and What’s Next?
TradFi’s stock market is 1) slow, 2) comparably illiquid, and 3) harsh for retail investors. Even though it’s somehow inefficient and unfair, most of the participants take it for granted. However, when it comes to crypto, it’s different. For the sake of a fully decentralized network, the holy grail of token distribution is finding an incentive balance between projects and investors.
Token issuance was once predicted to be doomed since tons of Ponzi-scheme projects damaged a lot of retail investors but flourished for more than a decade. Better ways to launch projects are keep showing up due to constant demand for fair token distribution. Opportunities for tens of times profit is still out there waiting for us.
“Fair” Bitcoin Mining to IEOs and Airdrops — Decade of Fixed Price
It was January of 2009 when Satoshi revealed Bitcoin along with its fair mining system. Hardware battles were foreseen, but getting as many stakeholders as possible was more to be considered. Indeed, there was no way than using computer power to fully distribute the newly born digital money worldwide.
In 2013, Mastercoin was coined as the very first project letting investors swap Bitcoin for their coin. Ethereum followed the same strategy next year. Various tokens came out to be built upon Ethereum or showed off that they would replace Ethereum and build a better ecosystem. Many of those ICOs turned out to be a fraud.
That’s how SAFT(Simple Agreement for Future Tokens) appeared. ICO scratched the philosophy of decentralization, so regulations were somehow needed. Still, a lot of projects tried to make a detour.
IEO rose to the surface in 2018. MATIC is one of the successful projects in this era, but it was contradictory that centralized institutions took the steering wheel again amid the decentralized projects. Exchanges like Binance absorbed hundreds of thousands of investors through Launchpad.
Collaborative Price Discovery and Distribution to Dedicated Users
Tokens were sold at a fixed price for a decade, but it was still hard to say that the distribution model was way much fair and efficient compared to the TradFi market. Whales still captured most of the profit, bots were gradually taking place. It was pretty easy to manipulate the market.
However, once the price was considered to be one of the parameters that could be fully determined by investors, things started to go differently. One of the well-known examples is Dutch Auction brought by Coinlist. It was a fair distribution mechanism since every successful participant buys tokens at the same price, and the price was collaboratively determined by their demand.
New ways for airdrops to active service users drew another axis. Stakedrop distributions to community sales, lots of alternatives turned out to be successful, and some of them even bypassed the early token sale. Projects like Uniswap delivered incentive directly to their dedicated participants. It created a strong bond and brought people to the table for governance.
Is Fair Launch Ever Possible?
The long history of token distribution results in the best distribution model. About 2–3 years ago, the idea of a fair launch came out as another alternative. After the ICO market crash in 2017, people realized that the whole ecosystem should be sustainable.
Accordingly, the idea of “fair launch” was introduced. Fair launch is the way of token distribution that doesn’t have capital provision before launch. Tokens could be equally distributed to people who contributed to a certain project.
YFI(yearn.finance) led by Andre Cronje is one of the well-known projects for fair launch. SushiSwap also could grow at an insane speed due to the fair incentives given to the people who migrated to their liquidity pools from other exchanges. Both of them created a virtuous cycle.
Token Distribution — New Liquidity— TVL Growth — Fundamental growth —Token Price Gain — More Token Compensation — More Liquidity
However, it meant that if something goes wrong, a vicious cycle could take place instead. Also, VCs, exchanges, and launchpads were supposed to distinguish whether the project would be successful or not, but they could not do anything in this case. Projects may not be audited because they would not procure resources for expensive audits. (Honestly said, projects like YFI didn’t need noted investors since the founder was already famous — Andre was the actual backer of the project)
As an alternative, Fair Launch Capital was established for financial audits for the early projects. Fair Launch Capital is not a VC fund; rather a community provides networks to bootstrap highly engaged communities for the projects. Founders can now skip traditional fundraises with improved distribution, and users create healthy, self-governing communities.
However, even if a project is gone through fair launch, they still have a risk of falling shortly after distribution. Bitcoin’s fair mining model is slightly different from token launch since only very few miners are the participants of the distribution of Bitcoin while tokens were given to comparably lots of people. Moreover, extreme price fluctuations would happen due to the scattered distribution. Fair launch was turned out to be imperfect.
Shortly, $TNS was in trouble due to its controversial airdrop tier system. Almost half of the users who paid for the TNS domain didn’t get airdrop since they didn’t meet a single qualification(# of total transactions made in Terra wallet). Domain holders were a lot disappointed that they weren’t recognized as contributors. This event shows that even though a single project claims fair launch, the criteria must be widely acceptable.
Copper Launch: Token Launch Auction for Fair Distribution
Nowadays, TLA(Token Launch Auction) by Copper Launch is chosen as the alternative with SushiSwap’s Miso. Copper Launch borrows the idea of LBP(Liquidity Bootstrapping Pool) of Balancer (but I would rather skip the underlying principle of it). These are four main characteristics that well describe Copper.
- Price discovery
- Open and permissionless participation
- Fair distribution
- Capital efficiency
TLA is originated from the famous x*y=k formula of CPMM(Constant Product Market Maker). But for this time, the weight between two tokens(or coins) is arranged differently. Let me bring the example of Avocado Guild. This is how it works:
$1.43(Start price of $AVG) * 40,000,000 EA = $57,000,000 (95% weights)
$1.00(Price of $USDC) * 3,000,000 EA = $3,000,000 (5% weights)
$0.08(End price of $AVG) * 40,000,000 EA = $3,000,000 (50% weights)
$1.00(Price of $USDC) * 3,000,000 EA = $3,000,000 (50% weights)
If nobody swaps $AVG out of $USDC, $AVG would be precisely $0.075 at the end of the auction. The graph would be like the one shown below.
However, if someone reckons the price is cheap enough, they would start to pull $AVG out of the pool. Simply said, it’s a hunch game between investors who are spending their time trying to capture the best price. Actually, the price of $AVG was about $1.64 in the end.
Since whales cannot manipulate the token price, retail and institutional investors are treated equally. However, it is still uncomfortable because it is hard to figure out the exact price one’s diving in, and investors must keep their eye on the graph till the end. Moreover, investors have to DYOR even more than token sales that are not fully decentralized.
Now What’s Next?
The essence of successful previous methods could be listed in three:
- Find the sweet spot of incentive between projects and investors.
- Set the best standard for the token receivers.
- Offer a reasonable way to hold tokens over the long term.
There’s still a lot to solve out there besides these. Better research materials must assist in investment decision making, aggregators and marketing tools should bring investors who fit the projects, and even NFTs need their own way of fair launch. It would be a never-ending journey towards ideal token distribution, but the abundance of problem-solving would be in a way the charm of decentralization.