Initial Coin Offerings (or ICOs) are token generation events, distributing tokens that will eventually be used to access the functionality and features of decentralized products. Today, the primary way tokens are distribution is a fund raising raising event ($/ETH/BTC for tokens). Because of this, most tokens are designed to optimize capital raised, at the expense of other potential resources.
This can be seen with how teams discuss their token structure. Much of this debate is focused on details like:
- How the tokens will be distributed before the ICO
- How the tokens will be priced out
- What percentage of tokens will be given to private funders vs public funders
- How will users be incentivized to be purchase at various stages of the sales
There is nothing wrong with trying to raise funds for your project. We’ve seen organizations use this mechanism to great effect (the Ethereum ICO being one example). But as more projects launch, the only token model being utilized is Fundraising model. This has led to some flaws and, I believe, a corruption of what token generating events could be.
How The Fundraising Model Works (and Fails)
The Fundraising model for token generation is modeled after how early stage firms raise funds from Venture Capital firms*. Many of the companies building decentralized applications today started as traditional Venture Backed startups and are familar with this process. Once these organizations pivot, they turned token generation into another round of funding for their startup.
This model clearly has some benefits, as many early stage projects need a concerted effort to survive. Before Bitcoin was an international phenomenon, it needed the efforts of Satoshi Nakamoto to develop the product into something useful. Before Ethereum could become the defacto platform of decentralized applications, it needed the work of the Ethereum team (and eventually the foundation) to bring it to fruition. Early patronage is one way to get these products off the ground, and having money to do so does not take away from these efforts.
However, the fund raising model fails for decentralized applications in the next stage of scaling: the growth and maintenance of the the network through the support of a large community. This is where the Fundraising model not only doesn’t have a great answer, but may actually be detrimental to community projects scaling. Raising a modest amount of funds to get your projects to post-launch is fine, but when projects begin to raise hundreds of millions of dollars, it seems a bit disingenuous to then ask the community to help.
For a traditional venture backed organization, this is not a concern, as all the development is expected to come internally. Blockchain startups are a bit different because as the project progresses, less and less of the effort is expected to come from the founding organization and more is expected to be shouldered by the community. This is a basic assumption of projects like Filecoin (from Protocol Labs) which proudly displays their open source contributors on their ‘team’ page. They expect help to come from the outside community. But with a funding round that rivals series D venture capital firms… it seems hard to get people to give their time when they clearly now have the means.
The Fundraising model as it is today leaves very little room to reward open source contributors and even disincentivizes it to an extent. If you knew that the company you were donating your time to had $200 million ready to hire developers, would you be as generous with your time? Because the Fundraising model has been the prevalent model, more organizations are going to believe this is the only way to generate tokens.
The Contribution Model for Token Generation
Contribution tokens work to promote a different type of activity necessary to making community software projects work. As opposed to Fundraising model, which focuses on raising capital, the Contribution model focuses on community involvement to building the project’s resources.
The Contribution Model adds another layer to the ICO process: encouraging the sorts of activities that ultimately make open source projects successful in the long run. The point of the model is that the tokens are designed to encourage activities in growing and scaling an open source project. While there can be a financial reward tied to helping the organization, the Contribution Model favors rewarding effort with tokens of praise as opposed to cash.
The Contribution Model incentivizes the sort of activity that does make an open source project ‘work’. The freetime given by a developer to fix a bug, the community organizer introducing a new product to a fresh audience, the blogger looking to promote a worthwhile idea. These are the thousands of small efforts that make open source and decentralized application projects ultimately thrive and survive.
The Token Generation model incentivizes people in a way that is in line with the ethos of community projects. The managing organization may have funds to manage the heavy lifting, but they still need help from outside contributors. These contributors are incentivized with a token that acts as show of good faith, an understanding that their work has been noted. Some tokens may eventually lead to functionality or future capital, but at the time they are distributed, they act more as a ‘thank you’. They encourage people to give their time in a way that the Fundraising model never could.
How VariabL has used the Contribution Model for their token
One such company that is choosing use the Contribution model is VariabL**, a blockchain derivatives market launching their open beta this week. Their team had the option of running at traditional ICO, but instead decided to adopt the Contribution Model for token generation.
There are a myriad of activities that can earn users Contribution Tokens, such as:
- Audit and Debugging
- UX test
- Translation services
- And Content Creation
The contribution token generation period for VariabL lasts for a predetermined set of time. After the full version of the product is launched, Contribution Tokens earned are then transfer to the token that will be used on the platform and, yes, traded on exchanges. In the same way that ICO funders have a lock out period, users will only be able to get value from their tokens once the platform launches.
VariabL’s platform is acting as one of the first blockchain organizations to adopt Contribution tokens. Their list of activities defined above are the sort of activities that they want to see their community members engage in. While it’s very likely that there will be changes in the way their token generation events, VariabL is focused first and foremost on engaging their community. And ultimately, a strong community will build greater value down the line than capital alone.
The Contribution mode incentivizes the set of activities that make community projects successful: cultivating a strong community of supports to help improve and build on the platform. The Fundraising model has it’s value, but fails to cultivate a community in the same way the Contribution model promises. In the future, I hope to see projects incorporating elements of the Fundraising model and the Contribution model into their token generating events.
*It’s important to note that most ICOs are structured in such a way that they avoid being seen as a ‘fundraising’ event. Tokens being sold carefully word their sales in such a way as to avoid being viewed as a security. This, among other things, means that what is being sold is future utility in a platform, not an investment vehicle. While we are drawing parallels to startup fund raising, the technical details of the sale avoid being seen as a fund raising event. However, we still believe it’s useful to draw the comparison due to the nature of ICO’s today.
**Hivergent is not officially apart of the VariabL team. However, I (Brian) was apart of the first two beta launches of the VariabL product and have been on friendly terms with the team.