Understanding ICO token models. How to choose the best for your project?

The ICO market is growing rapidly and it’s a new avenue for startups to raise funds needed to launch their projects. Defining and communicating each facet of a token sale is very important for the successful funding as it mitigates risks and illustrates trust and transparency between founders and investors. One of the key aspects of an ICO is its token model which defines how the tokens are distributed and controlled in the market circulation. The structure of token sale has a big influence on the outcome of an ICO. Having a good understanding of the several token sale models will help you to decide on the best choice of model that makes the most sense for your project. In read forward, we’ll see the details of prominent token models,

Uncapped token model

In an uncapped model, the investors can exchange either cryptocurrency or fiat currency for the token at a fixed rate. The number of tokens received per fiat currency or cryptocurrency unit could decrease over time. This decrease will not concern the early investors since they will be provided with a better rate than the new buyers. This model usually has a specific period of contribution.

If your ICO token is a security or a license to use a network or platform, the distribution of an additional token essentially lowers the value of token in the market. Therefore, an uncapped token sale model could lead to dilution in the valuation of the token and uncertainty. However, an uncapped model provides everyone a fair chance to participate in the ICO without having to pay higher gas fees. This model also can discourage any participant from purchasing mass volume of tokens and controlling the network.

Many of the biggest ICOs were uncapped since it provides an option to take as much as fund as they can raise. Tezos, one of Biggest ICO pulled off a staggering $232 million using this model.

Capped Model

The capped model can be of three types: Soft capped model, Hard capped model, Mixed capped model. In soft cap model, a cap limit is set, after this is limit is achieved there is an extended time-based closure of the sale. In a hard cap model, when the token sale meets a predefined value the token sale window is closed. Moreover, the soft cap limit can be mixed with the hard cap where instead of having a time period before closing, if the contribution amount meets or exceeds, the token sale ends.

A capped model is beneficial to the limit founders’ greed. The founding team runs the token sale only to gain the necessary funds to develop the project. Generally, founding teams holds about 20% of the tokens. An example of the capped model is Assetreon Energy token, which had a soft cap of $170,000 and a hard cap of $3.35 million.

Hidden Caps

The hidden cap is an unknown limit to the amount of money a cryptocurrency can receive from investors in an ICO. This allows people to invest their money in these coins with the hope that later it will worth more than what was paid. Investors will not know when allocation is finalized. This will be known to them only by the time of the distribution. The developers of ICO’s sets a limit of a hidden cap which is known only by them. This limit is not presented to the investors. The purpose of suppressing the limit allows small investors to get a chance to put their money into a new cryptocurrency. This model discourages very wealthy investors from investing very large amounts, thus by promoting small investors. The hidden cap prevents this and puts a limit on how much they are willing to spend.

Dutch auction

This auction is a public offering auction in which the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold. In here, the investors place a bid for the amount they are willing to buy in terms of quantity and price. The bids are sorted from highest to the lowest, The highest bids are accepted until the sum of the desired quantities are enough to sell all of the offered tokens. Once the final proposal is approved, every bidder with mutual agreement gets the token at the price of the last bid. Transparency and price discovery provided by this model are the reasons why the dutch auction is good for token sale. Here each bidder has complete visibility to the total available supply, current price and changes in price over time and also achieves price discovery.

Reverse dutch auction

In reverse dutch auction the buyer puts up a request for a required service, the seller then bids for the amount they are willing to be paid for the service. At the end of the auction, the seller with the lowest amount wins. The portion of the token given to the purchaser depends on how long it took the sale to finish. If the sale finished on the first day then, X% of the token is distributed to purchasers. If it finishes on the second day then X=Y% of the token is distributed among the purchaser.

The reverse dutch auction model which is demonstrated by Gnosis had shown an orderly way of buying tokens. The failure of Gnosis was that it raised the $12mm funding cap by selling only 5% of the intended token cap. However, the good thing about the reverse dutch auction is its ability to eliminate the most irrational behavior about ICO’s, that is the conventional ICOs trade its own tokens at very competitive rates in a live market in order to raise funds.

Collect and Return

Another promising model is the collect and returns model. In here, the total contribution amount is fixed. A smartcontract will check the contributions and once the token sale is completed, the contributions are adjusted by a ratio value. The difference amount for any contribution exceeding the ratio value is returned back to the investor.

Dynamic Ceiling

The dynamic ceiling method is a mix of all the above methods. It aims at the benefits of Soft caps and Hidden caps and avoids all the downsides of them. The easiest way to think about dynamic ceilings is as a series of mini ‘Hidden Hard Caps’ at specific block intervals. This method basically limits the maximum amount that can be deposited on a ceiling. Larger transactions cannot be accepted in this model. The larger contributors will have to spit their transactions into small thereby incurring more costs per transactions. Transactions that goes beyond the ceiling will be rejected. The status.im ICO token platform uses dynamic ceiling for their token sale.

Bottomline,

ICO token sales models are still in their infancy and many more models will be tried and tested in the years ahead. Even though there’s nothing called as the ‘perfect token sale model’, the above given common approaches will have their own way to serve your project with multiple benefits.