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ICO: Interactive Coin Offerings (Vitalik Buterin & Jason Teutsch)

By Jason Teutsch (TrueBit Foundation) & Vitalik Buterin (Ethereum Foundation) - September 24, 2017.

Chris M Skinner
Chris M Skinner
Ethereum has emerged as a dynamic platform for exchanging cryptocurrency tokens. While token crowdsales cannot simultaneously guarantee buyers both certainty of valuation and certainty of participation, we show that if each token buyer specifies a desired purchase quantity at each valuation then everyone can successfully participate. Our implementation introduces smart contract techniques which recruit outside participants in order to circumvent computational complexity barriers.

1. A crowdsale dilemma

This year has witnessed the remarkable rise of token crowdsales. Token incentives enable new community structures by employing novel combinations of currency rewards, software use rights, protocol governance, and traditional equity. Excluding Bitcoin, the total market cap of the token market surged over 60 billion USD in June 2017 (1). Most tokens originate on the Ethereum network, and, at times, the network has struggled to keep up with purchase demands. On several occasions, single crowdsales have consumed the network's entire bandwidth for consecutive hours.

Token distributions can take many forms. Bitcoin, for example, continues to distribute tokens through a competitive, computational process known as mining. In this exposition, we shall concern ourselves exclusively with the now typical situation in which an anonymous class of buyers wishes to purchase yet-to-be-generated ERC20 tokens over the Ethereum network in exchange for Ethereum's native currency.

Unlike an equity distribution event in which prospective buyers can estimate share values based on existing and potential future revenue streams, tokens sales may not project any revenue at all. Since traditional analysis fails to estimate initial market valuation for new tokens, buyers must rely on new signals and methods for determining market prices. The token issuer, on the other hand, faces the unprecedented challenge of not knowing her buyers. In particular, she cannot tell whether or not two distinct purchasing addresses belong to the same person.

The Ethereum community has experimented with various sale configurations for ERC20 tokens. In a capped sale, for example, the project issuing the ERC20 token announces a fixed price for each new token as well as the maximum (and minimum) number of tokens to be sold. Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated. Uncapped sales, which run without such maximums, provide buyers little clue as to the fraction of total tokens their contribution will ultimately purchase. Other distribution experiments, including hidden caps and reverse Dutch auctions, have suffered similar fates. Indeed increasing purchase power and limited supply may cause buyers in a reverse Dutch auction to jump in too soon.

Recently, Buterin [1] distilled two desireable, mutually exclusive properties of crowdsales.

Proposition. No token crowdsale satisfies that both:
(i) a fixed amount of currency buys at least a fixed fraction of the total tokens, and
(ii) everyone can participate.

Proof. If one unit of currency purchases at least p fraction of the tokens, then the total sale revenue cannot exceed 1=p.

Clearly any fixed valuation scheme cannot guarantee universal participation, however, we shall construct a crowdsale protocol such that, if each participant specifies a desired purchase quantity at each valuation, then the ultimate token cost to percentage ratio satisfies all buyers (with respect to both valuation and participation).

Read more, download the whitepaper below (PDF 15 pages)

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