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Tokens, the evolution of the public offering | rhythm research about mechanism design three series

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The crypto community continues to explore more equitable token distribution mechanisms

How to distribute tokens in the most fair, efficient and optimal way for the long-term benefits of the protocol has always been a topic of constant exploration by the protocol founders and the community.

The underlying data structures and mechanisms of blockchain allow robots in the dark forest to wreak havoc on the ecological order. In the early hours of this morning, all 4,676 NFT boxes from TIMEPieces' collection were sold out in one minute, with Gas peaking at 10,000 Gwei, setting an all-time record.

If we cannot change the underlying mechanics, we need to consider optimizing the upper auction logic. From the simple and crude first-come-first-served highest price auction model to the sub-price auction model of bulk auction, the crypto community is constantly exploring a more equitable token distribution mechanism.

Deribit Insight provides a summary and analysis of today's token offerings. Translated by BlockBeats:

How to Correctly View Token Generation Activities (TGE) in DeFi Era

For cryptocurrency founders, their first priority should be to get tokens into the right hands in a fair, efficient and targeted way. Not only does this affect who will manage the agreements in the future, but what could have been a security could become decentralized over time, shielding its founders from regulatory scrutiny in an almost unprecedented way.

Since 2017, when EOS raised $4 billion through IC0 and carried out an undifferentiated airdrop of tokens, the way tokens are distributed has been maturing. Below, we will use cases to illustrate the following major distribution methods according to their fairness, capital efficiency and incentive consistency.

50:50 Liquidity pool

Popular places: & NBSP; Uniswap, Sushiswap

In the last two years, as decentralized exchanges (DEX) have become more active, many teams have also found that they can issue tokens by setting up an initial 50:50 liquidity pool on an AMM exchange such as Uniswap or Sushiswap.

In other words, teams can use their vaults to convert project tokens to the underlying blockchain native token (such as ETH) or some kind of stablecoin in US dollars and deposit the corresponding amount into the pool.

By doing so, they would no longer have to curry favour with centralised exchanges, but this would not be an effective way to issue tokens. They not only need to invest a lot of money to ensure liquidity, but also need to set the opening price of tokens by setting the weight of tokens.

More importantly, the introduction of liquidity pools will undoubtedly lead to a first-come, first-served phenomenon, and will further drive up the price of tokens and Gas, shifting the balance of benefits in favor of professional arbitragarists and making it unequal for those community members who are actually creating value.

For example, when DeFi exchange bZX launched their native token (bZX) via Uniswap Liquidity Pool, bots swarmed into the same block in the open pool and instantly raised the price of the token in the pool from $0.04 to $0.15.

It took five minutes for the team to release the Uniswap pool details to the community, by which time the token price had hit $0.60 and had generated $1 million in transactions. Bots that had bought tokens earlier sold them quickly, some of them making $500,000 in arbitrage profits within minutes of launch. After that, the PRICE of the BZX token fell back to $0.20 within 24 hours. UMA also used this method to issue tokens, and the price of tokens also skyrocketed from $0.26 to $2 within minutes of the pool's launch.

In essence, creating pools of liquidity to issue tokens is not only expensive, but the first-come, first-served mechanism does not guarantee consistency of incentives among different participants. While some might argue that in a fair market, professional arbitragarists are entitled to arbitrage profits, we believe there is a better way for those who are genuine participants to get their due.

Liquidity Bootstrapping Pools

Popular places: & NBSP; Balancer

To address some of the problems with 50:50 pools of liquidity, the Balancer team has launched a Liquidity Guide Pool (LBP).

The LBP is better than the 50:50 pool in terms of capital efficiency because the team can assign different weights to the two tokens in the pool. For example, they can set up an 80% project token +20%& NBSP; ETH capital pool. This allows them to spend less money than Uniswap pool and set higher token prices.

In the bootjacking stage, the weight of the two tokens in the pool will also change constantly. Among them, the weight of project tokens will show a downward trend, leading to a decline in the price of tokens. However, the price drop caused by weight changes will be offset by the buying pressure of investors. Whales and robots cannot advance trade in this mode because they can get better prices as the weight of project tokens decreases. The token price will gradually reach the market equilibrium point, with higher fairness and incentive consistency compared to Uniswap capital pool model.

Perpetual Protocol was one of the first protocols to use LBP to launch its tokens (PERPs). The team started by putting 7.5 million PERP tokens and 1,333,333 USdcs into the pool with a 9:1 weighting, which meant a price of about $1.60 per token. The capital guidance period lasted three days, the price discovery process of the token was very healthy (as shown in the figure below), and 1221 coin holders appeared. It is said that the Ming dynasty coin holder group also got differentiated development.

Radicle (RAD) also used Balancer's LBP model to raise money earlier this year, and they managed to raise $24.7 million worth of USdcs from an initial pool of only $3.5 million usDCS. During the lead period, the price discovery process tends to be normal after the initial push up by eager buyers.

Uncapped Batch Auctions

While LBP has significant advantages, its price discovery process remains inefficient as speculators rush to buy. Moreover, if the opening price is set too low, LBP will still face Gas wars and lead trading problems.

In the batch auction model, the team does not have to set up a pool of liquidity, which is more capital-efficient than LBP. Moreover, because robots can no longer preempt transactions, bulk auctions further optimize the equity of capital allocation. Teams that choose to participate in the bulk auction simply set the number of tokens to sell, set up a deposit pool, and wait for buyers to deposit ETH or stablesoin into it. After the deposit, the depositor can get the corresponding share of tokens according to the deposit proportion. Therefore, the final sale price will be equal to the ratio of the total amount raised to the number of tokens on sale.

Bulk auctions put no cap on the price of tokens, which also allowed the team to raise a lot of money through hype. Since the allocation of tokens does not take place until the end of the deposit period, retail investors can participate fairly in the auction without the risk of bots and arbitrageurs getting ahead of themselves.

However, because there is no upper limit for the batch auction, buyers are not aware of the price of the token when they buy it, which may lead to a situation where the amount raised by the team (project valuation) is too high, which makes the token lose the space for subsequent rise, which is not conducive to the long-term development of the community.

The team can address some of these issues by making adjustments to bulk auctions (for example, they can set up a withdrawal period for buyers, allowing them to withdraw their deposits as soon as they learn about the price). However, as with any complicated allocation, the sophisticated insiders always have the means to extract money from outside investors.

Mango Market recently adopted a modified, uncapped bulk auction model to sell 5% of its Mango tokens. The auction is divided into two stages, respectively the no-limit stage and the withdrawal stage. In the first phase, users can deposit or withdraw USdcs from the pool as long as they feel the price is reasonable. In the second stage, even if the token price is no longer reasonable to the user, they have no choice but to withdraw their deposit and do nothing else.

This kind of auction allows game theory strategies to play out: in the first stage, some of the whales will deposit large amounts of money, bringing the total pool to $500m. That would make the expected price of the tokens too high, forcing retail investors to withdraw their deposits. However, minutes before the end of the second phase, Orca would withdraw large deposits, bringing the total down to $70.4 million, giving them access to tokens at an extremely favorable price.

Dutch auction

Hot spot: MISO at Sushi

Like bulk auction, robots and arbitragers do not take any advantage in Dutch auction, which ensures its incentive consistency and fairness. Unlike bulk auction, Dutch auction further optimizes the problem of information asymmetry in bulk auction, while ensuring better capital efficiency than 50:50 capital pool and LBP.

Although this kind of auction can guarantee some fairness (everyone gets the same price), the inclusion of allocation can still be flawed if initial conditions are not set well, which we will discuss later.

First, let's go over the Dutch auction process again: During a token auction, the team sets a high starting price for the token and then lowers it in subsequent auctions. For buyers, once they find the right price, they can always make a commitment. When the ratio of the total amount raised to the current price equals the number of tokens on sale, and the price paid by all investors matches the final committed price (the clearing price), the auction is automatically terminated. Dutch auctions are also widely used in traditional financial markets. For example, the U.S. Treasury uses Dutch auctions to issue debt in the primary market.

Dutch auctions allow buyers to express their views and views on the value of assets, and because the settlement price is determined by the final commitment price, buyers can buy the assets at a lower price than expected. The main risk for buyers is that if they bid too low, the tokens in the auction will be bought by someone else before they can bid.

In June 2019, Algorand (ALGO) successfully used Dutch auctions to sell 25 million ALGO tokens to retail investors at the same time it launched its main network. They set the starting bid at $10, and as the auction progressed, the final token went for $2.40 at the end of the three-and-a-half-hour auction. 690 addresses participated in the auction, which raised $60 million for the Algorand Foundation. In addition, Algorand has introduced a put option mechanism giving buyers the right to resell their tokens to the Algorand Foundation at a 10 per cent discount within one year of the auction closing.

Algorand's Dutch auction succeeded because the starting price was set high enough ($10 meant $100bn of FDV). However, if the team hadn't set the starting price high enough, it would have ended up in a Gas war, as we discussed earlier.

For a real example, Yield Guild Games (YGG) also ran a Dutch auction on MISO. Bidding started at $0.50, a price that was supposed to drop to $0.20 within 24 hours. Unlike Algorand, however, the auction ended in just two blocks and only 32 participants were able to buy tokens for $0.50. One of the participants subscribed for $258,000 and set the Gas price at 14000Gwei and ended up paying over $9,000 in Gas fees to close the deal, jumping the gun on all the underbid Gas buyers.

While YGG did raise as much money as they expected, the sale was also criticized by the community as it ultimately turned into a Gas price war between those well-funded bidders that did not differentiate the YGG holder community enough. If YGG had set a higher starting price, not only would the price discovery process have been more reasonable, but they could have raised more money. The price of the YGG token tripled within a day of the sale, and a month later, the price reached 16 times the transaction price.

conclusion

Over the past two years, we've been fortunate to see teams develop new forms of distribution, optimizing alignment of equity and incentives, and improving openness and capital efficiency, from what started as a blind direct token sale (IC0) to a centralized launch platform (Binance IE0).

The above approach is not the whole story of a coin offering. There is still plenty of room for design. Innovative new models continue to emerge, such as Crowdpool at Dodo this week. At the same time, we expect more models to emerge in the future.

As on-chain identity frameworks and NFT continue to evolve, projects will also adopt more targeted allocation methods based on how relevant qualifications interact with past agreements.

Finally, no method of token generation is perfect, and its success depends heavily on a well-understood approach and carefully set initial conditions (such as initial price, funding size, and funding duration). So, for founders, the focus is on the right approach and the right metrics, and we look forward to sharing our experience in the future.