Tokens are the most important aspect of your ICO. Often businesses running ICOs assume they can just create their tokens and begin fundraising, but that oversimplifies the matter. To avoid becoming another failed ICO statistic, you need a thorough and well-constructed token strategy before you begin your ICO.
In fact, thinking through your token strategy is such an important step, we include it as one of the key assessment criteria in our Sustainable ICO Protocol (SICOP) which we use to audit every project we run on our platform.
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So, what do we look for when auditing a project’s token strategy?
Token Utility Value
Utility tokens have utility within the platform or network you are creating. Investors will actually use the tokens to do something on your platform. Ether, for example, is the token used by developers to build projects on the Ethereum network. The network has proven useful and reliable, increasing the value of Ether over time.
So, the first thing you need to consider is: What value do my tokens have? What can investors use them to do?
If you don’t provide real value from the tokens then no one will want to buy them, even if they believe in your project. Tokens also need to have strong utility value within your network and not just exist to fund your ICO or as part of a cryptocurrency payment system. Without true utility, your tokens simply fund a speculative bubble that will eventually collapse, leaving you and your investors out of pocket. Make sure your tokens have clear utility from day one.
For example, VRA – the token offered by video hosting site Verasity.io – is paid to content creators by the platform for uploading their video, by sponsors for hosting advertising, and by viewers for watching the video. Viewers also get paid by advertisers and the platform. In fact, every interaction on the platform is mediated by VRA tokens. So as the platform grows, so does the demand for VRA, increasing their value and providing investment for the company.
The video gaming industry has employed utility-based tokens albeit in a limited format for some time now. Think of the various online multiplayer games that have their own coinage for making in-game purchases. While a gamer can win in-game currency by beating levels, the same can done by paying real money to acquire a chunk of them outright. It is not, therefore, surprising to hear of cases of borrowing cash to pay for games. However, the real use of utility-based tokens would be seen in metaverse games like Illuvium.
The price at which you set your tokens also affect their value within your network. If you price them too high or too low, they won’t represent real value. Take the VRA example, if creating content only gained you a few dollars in tokens, you probably wouldn’t bother. But if advertisers had to pay large dollar amounts of VRA for sponsorship, they would move to a cheaper platform.
Token prices must, therefore, be the result of a formula based on market facts and taking into account the anticipated supply and demand fluctuations. You need to represent genuine value while encouraging market liquidity in order for the tokens to be used.
Once your tokens are launched and you receive investment, the price of your tokens will begin to inflate. If this happens too quickly, it will create a bubble that will pop leaving you with nothing. If it raises too slowly, people will be far less enthusiastic to invest.
Our advice is to build-in a programmed inflation rate on the token. So, for example, the price of your tokens raises by 1% every day of your ICO. This encourages early investment and demonstrates for return on investment.
You can use your smart contracts to build this mechanism in from the get-go, making it clear and fair for investors. That also includes any bonus conditions or referral bonuses.
Supply & Demand
In order to control the liquidity of your tokens during your ICO, it’s important to define the number of tokens you will issue and the minimum and maximum tokens available to purchase per contributor. This helps define your initial market cap and maximum share ratio, ensuring that you have enough owners of the tokens to form a viable and liquid market.
To maintain the value of your tokens within your network, it’s also important to consider and clearly communicate the liquidity conditions and rules related to the tokens creation/destruction.
Tokens could be created solely by your company or they could be created through activities of network users, such as facilitating trades or adding nodes to your network. Clearly communicating rules around how and when tokens will be created or destroyed also helps reassure contributors that their tokens will retain value over the long term.
Finally, to allow for easy storage and trade, tokens should be compliant with standardised third-party protocols, such as ERC20. If users can’t easily store and trade their tokens, you limit their liquidity, discouraging investors.
Creating tokens can be a confusing and difficult process. You need to consider not just how many to create and what they are used for, but you need to balance supply, demand and liquidity to maintain a viable market and retain value.
You also need to have all of these aspects of your tokens planned out in advance of launching your ICO. Rules and agreements need to be coded in to your smart contracts from the outset, so realising an issue with your token economics after you’ve launched can prove fatal and impossible to rectify.
If you get everything right, however, you create a strong incentive for people to contribute to your ICO campaign and to use your platform or network once it’s live. And that’s what leads to a successful ICO.
As part of our SICOP auditing process, we ensure that all of our clients have a strong token offering, that the token economy will remain relatively stable over time, and that tokens represent real value.
Find out more about our Sustainable ICO Protocol or get in touch to arrange your audit.