As some of you may remember, following the feedback we received from the community about the Bancor TGE terms (specifically the uncapped minimum time) we decided to use 80% of the proceeds above the 250,000 ETH cap to create a price floor that would offer to “buy back” BNT at the TGE price (0.01 ETH) for two years, after which any remaining funds would be allocated to the foundation’s long term budget. Any BNT bought by the price floor would also be allocated to this long term budget, which is locked for 2 years as well. This was positively received by the community as it aligned interests well — the more contributions to the TGE, the greater the price protection for all in the early and fragile stages of the token’s lifecycle.
The reason we selected a 250k ETH cap was that after subtracting the 50K allocation to BNT’s ETH reserve (20% of all contributions would create a 10% CRR for BNT, because only 50% of BNT were allocated in the TGE), the foundation would have a budget of 200K ETH, which a mere 30 days before the TGE was worth $18m (ETH was at $90 on May 12th). We couldn’t rely on the assumption that no price drop would take place after the rally, and in retrospect, we’re confident in our decision’s underlying logic. Leaving the cap at 250,000 ETH, despite Ethereum’s price rise, allowed us to remain relatively confident about Bancor’s future funding source, without having to resort to liquidating ETH in such a downturn which would have worsened its price further for all.
As total TGE proceeds were 396, 720 ETH, 80% of the extra 146,720 ETH above the cap, 117,376 ETH, were allocated to a price floor smart contract which is locked until June 12, 2019. During the market’s recent dip, and perhaps due to additional factors causing BNT holders to sell in the first 72 hours of live trading, we saw BNT’s price approach .01 and some of the price floor being used (about 8,500 ETH). As expected, this kept the price of BNT above its TGE price through arbitrage between BNT and the price floor contract. We’ve since added real time data about the price floor to our website, including links to how to access it and its remaining balance.
Back in April, we published the story “Coins are Networks and Crowdsales are their First Killer App”. The tl;dr is that token crowdsales are the first real killer app in the blockchain space — just like email was one of the first killer apps in the Internet space. However, we didn’t mean that crowdsales would actually “kill” the blockchain, which many have recently begun to fear due to large and debated events such as, and including, ours. We think the unhealthy dynamics have more to do with how these crowdsales are structured, rather than how much they raise or even for what or from whom. Instead of letting the market dictate how much support is available to a project, crowdsales have been artificially limiting participation (through caps and time), in order not to seem “greedy” to the public, AND in order to generate after market demand for a token that will then seem to immediately rise when traded, regardless of progress in underlying fundamentals. The current limited-room model often leaves substantial unsatisfied demand for the token in the market, including from those who may have been researching and championing a project for months. This situation intentionally creates competition to outsmart (or in the case of unlimited gas sales, outpay) others in order to get tokens in a crowdsale — where the winners get to liquidate these tokens immediately, for huge profit, to those who didn’t manage to get in or heard about the excitement. Any positive announcements about real partnerships or advisers to a project are viewed as FOMO engines to encourage this stampede.
At Bancor, we are making every effort to redefine existing best-practices, which often includes exploration of new ideas, some of which work better than others. We are sincere in our effort to innovate thoughtfully, and the minimum hour, the price floor, preventing line skipping and in fact the entire protocol, are part of this attempt to leave the world better than we found it, in our way, and with as much (constructive) input from others as possible. While the 1 hour minimum solution faced challenges (network constraints, unanticipated demand) and was intended to let all transfers who broadcast in that time period get in, to solve a genuine problem (many authentic supporters being left out of token generation events), the price floor mechanism has proven to be a resilient solution to a related problem (cap limits to avoid over-budgeting projects and diluting token holders) that creates a win-win for all value-adding participants. This solution allows crowdsales to set a contribution cap they believe is appropriate in order to execute the vision (ideally with good explanations and plans), and yet still allow any who wish to participate to do so, where proceeds raised above the cap are simply allocated to a price floor contract which serves all token holders for an initial, often volatile period. The price floor contract buys back tokens at the crowdsale price, and after a predefined period, remaining funds and bought-back tokens can be released to the project as a second round of funding avoiding the need to liquidate any tokens.
Some advantages of the price-floor model are:
- Completely reducing congestion on Ethereum, allowing their foundation’s dev team to build better scaling solutions over time.
- Allowing anyone to participate with any amount they so wish.
- Achieving better initial distribution among more contributors who feel connected to the project from its beginning, and may be helpful in spreading the word, trouble shooting, or other types of support.
- Discouraging quick flippers from participating, as there is less of a spike (and protection from crash) when demand is satisfied in crowdsale.
- Reducing risk to contributors as the more funds are raised, the less risk of the price dropping below its initial price, especially during the early fragile period when the project roadmap has yet to be deployed.
- Increasing flexibility of the time window to contribute, thus reducing pressure on all actors.
- Locking-up large amounts of ETH in price-floors takes it out of circulation, putting upward pressure on the value of ETH for all.
- Pre-securing secondary funding, which becomes available at a later time to the extent that the team gained enough public confidence to keep the price above the initial price and not drain the price floor through buy backs. Alternatively, if the price floor was used and the token returned to the long term budget, the project has even more incentive to make these valuable for holders over the long run.
- Creating more confidence, less panic and lowering volatility of the token in its early days, increasing external confidence in the industry and allowing crowdsales to gain positive popularity, for positive reasons, over time.
One of the repeating criticism we hear about cryptocurrency is that there is no “real use” for the technology, and thus it is only used for speculation, giving it the pretense of a scheme to many outsiders (and even insiders!). Crowdsales, however, are a novel use-case, enabling crypto-holders to directly fund teams dedicating themselves to building blockchain based solutions, while sharing in the upside if those solutions are effective and gain popularity. Ironically, current industry practices create a situation where substantial unsatisfied user demand for crowdsale participation (tokens) — is redirected to the secondary speculative market, where most of the value is captured by quick flippers, and exchanges, rather than used to fund innovation, technology entrepreneurs, and solutions.
We encourage those who are planning a crowdsales to consider this solution, which we believe addresses some of the main challenges we face as an industry, and we would love to hear your feedback and thoughts. Vitalik Buterin suggest this and other options in his post as well, and we sincerely appreciate the mention. Of course, in a separate post we will continue to detail other lessons learned and resulting best-practice suggestions, which are compliments to a price floor, such as how to think about caps, time limits, vesting, entity structure, token activation/trade, and project/token design in general. Ultimately, every crowdsale, like every startup, is a complex and creative collective of these (and other) elements, and must be well designed (and intentioned) by its team, and well understood by its contributors, in order to truly succeed.
To strong floors and high ceilings,
The Bancor Team