ICO/IDO & Funds: A Deep Dive

There is always a simultaneous connection and conflict of interests between investors and founders.

This is most evident in the project’s tokenomics. This text is our proposal for a possible correction of the mistakes of the past years, which takes into account the achievements of V. Buterin, an analysis of unsuccessful projects and our own vision.

A few words about the figures. Facts

The ICO market has received a sufficient amount of criticism, but ultimately, it has given a powerful boost to the development of various trends, spheres, industries, and even new markets: DeFis & NFTs like, Ethereum, Bancor, Tezos, and Tron; distributed storages, such as, Filecoin, SiaCoin, Storj, and MaidSafe; and multi-blockchains like, Cosmos, Polkadot, ETH2, etc.

But with all the undoubted advantages of ICOs: speed, minimal bureaucracy (SAFT - and go ahead!), high-tech (smart contracts, the freezing of tokens, etc.), excellent ROI indicators (1000% and even 100,000% - far from the limit) - but there are also dark sides. Mainly from those who collected money, but not much I.e., third class projects and lower.

However, many aspects relate to crypto projects in general, not just to the ICO industry. Here is Example #1:

From $1,497 to $27 - a rapid plunge? Yes, but not the only one.

Here's another one - from $1,565 to $144:

But still, in these cases, you can make adjustments for PoW (Proof of Work), mistakes with the mining strategy and long-term resistance to currencies such as BTC, ETH, etc. (talking about Zcash & Dash). In addition, Dash's strategy and brand have changed multiple times, and this is not the best case for any market, especially one that is going through the formation stage.

But let's take a look at those same 3rd level ICOs. Look:

Output. The fast pump & dump, and perpetually flat, "well below the primary placement level" (PFWBtPL). Here’s another example, so that it doesn't seem like an exception:

And now, for another one - SONM: a project that was scolded for a long time, but eventually did what it had promised to (ok, perhaps not everything according to the original roadmap, but definitely everything that it could), and, furthermore, it was also higher in terms of ATH (all time high), even if we take the peak from the ICO:

And yet, the mysterious creature, PFWBtPL, who lived on the SONM chart for 3 whole years, was difficult for all investors. But why?

There are many reasons, but one of the main ones is that most start-ups believe that “no matter who they are, they definitely” should get to the TOP right away. Meanwhile, Cardano took more than 5 years to do this, Polkadot more than three, and those who declared themselves as an ether killer, still cannot fulfill all of these promises and only collect money from new hype. And what about LTC & DogeCoin, which were born long before many of today’s TOP-10, and were mainly in the shadows until 2021?

In general, as the coin market showed, and the ICO market, the DeFi market, and even the NFT market to some extent, the whole problem is ... liquidity.

Rewriting smart contracts based on short-term interests is a bad idea. It’s strange to change the investment conditions for each new investor. But at the same time, business is flexible, not absolute. What to do?

Any experienced player, athlete, entrepreneur, inventor, or any other, always saves their best for the most crucial moments, but at the same time they always try. Simply put: without a reserve fund, any business isn’t worth much. The 2018-2022 crisis has been proving it in the best way possible.

Therefore, our vision is as follows ...

Two partial reserves are better than a full one

If the United States does not have enough money, they print it, if Russia does not have any money, it searches in the reserve fund, if Venezuela does not have money, it publicly announces this, without shame. Proudly.

That is to say, that the poorer a country is, the fewer tools it has to influence the economy from within. But even Venezuela tried to hedge itself through crypto (whether it was successful or not is not the question of this material). So what is worse than crypto projects that have a lot of innovative tools in their hands?

Nothing.

Therefore, the first thing to do if a startup launches an IDO (or whatever new form of ICO there will be), is to remove some of the funds to the reserve fund. Most of it should be left for the closed rounds, and a small part for the token's entry into the public market.

Why?

The first part will resolve the eternal dilemma between "start-ups and early investors": Are new rounds needed for a start-up? Who can participate in them? What receipt? What will determine the freezing period?

Such issues have long been resolved through DAO, but DAO requires the writing of smart contracts, well-thought-out decision-making strategies (majority voting is common practice but it’s outdated), etc. The main thing is that DAO takes time, and projects do not have it during the early stages of development. Hence the emergence of this mechanic:

On the one hand, it allows you to ask questions about unlocking the required amount of tokens for new investors, and “old” investors, i.e., the early ones.

On the other hand, using the best market practices and freezing tokens, if a demand for them may later appear (for example, a startup conducts parallel negotiations with several funds at once), or burn them if the sufficient funds are raised, etc.

And last but not least, such a process allows you to work out the mechanics of the DAO even before it’s created: to see all the nuances of making a decision, estimate the average time for such a decision, learn from the feedback of others, and so on.

Something similar was proposed by the first crypto billionaire from the Ethereum sphere, V. Buterin, while he was researching the interactive token sales and the DAICO scheme. But in both cases, he wanted to rework the entire ICO mechanics, which would have deprived it of its undoubted advantages (see above), whereas the approach proposed here (let's call it “partial double reservation through a virtual DAO”) which conversely allows these positive aspects to be strengthened.

But why do we need a second fund?

It's even simpler: pure liquidity. It is needed by the P2P pools if we go towards DeFi (and who won’t go there after 2020?). It’s necessary if speculators decide to play around and reserve too many utility tokens. And finally, it fits well with the concept of DAO/DEX markets, where it’s always important to have reserves for new directions.

If we continue with this way of thinking, it turns out that the funds accepted by the start-up (both fiat and cryptocurrencies) provided in exchange for tokens or also need to be partially reserved. And this is why: it’s possible to write a roadmap for 1-3 months, or even for 1-3 years.

This is proven by the experience of Cardano, Ethereum, Polkadot and other sensible projects. But planning for longer periods (5-10 years) is tricky, especially for such innovative areas as blockchain & cryptocurrency.

What to do?

We distribute the funds raised for the first 3-10 stages BEFORE the creation of the DAO, and then we’ll distribute, say ⅓ or ⅔ of the funds received the moment the DAO is launched. Fair? Yes, certainly: both the startup team and the investors of different stages have tokens, which means that they all have a voice.

As a result, instead of archaic mechanics, like “I said you have to”, you can use more flexible ones, based on categories such as ‘decentralized management’, ‘synergy’, etc.

As for downsides, it is worth pointing out the difficulty of this approach for early investors.

Not only do they need to understand the main idea of the project, but they also need to evaluate its tokenomics. However, let's be honest here: if you sign a SAFT and the project is not just a speculation for you, then in whose interests is its development and promotion? That's right - in yours.

Therefore, this method is aimed not just at those who have money, but particularly at investors with an active position, who want to help the project develop from its genesis to its release at a specific, definite time. Plus, using P2P mechanics, since that’s what a decentralized autonomous organization is about.

Nevertheless, perfection has no limit and, perhaps, tomorrow it will be recommended to apply the Taoist practices of ikigai and kaizen. There are other solutions to the situation described, but we won’t dwell on it for now. 

So long!

P. S. This piece was written by Vladimir Popov aka Menaskop, legal advisor for the SharpShark project. These ideas were first communicated during our collaboration while shaping Shark’s tokenomics, and we all decided that they can exist as a standalone material. Enjoy!