FAIR TOKEN LAUNCH

I. Introduction

During the 2018 crypto market cycle, Initial Coin Offerings (ICOs) have provided unprecedented fundraising opportunities for startups in digital assets. Yet, the market for ICOs was immature and used tools and processes that created and incentivized abuses by issuers and their affiliates, intermediaries, and other market participants. Even in the aftermath of the ICO boom of 2017/2018, many digital asset projects and token launches are designed with the primary focus on benefiting the founding group, which often finds creative ways to cash out of the project after a successful run. In 2022, many digital asset projects and token launches still harm the public users and token purchasers who are often, after an initial successful run, left with less liquidity or valueless tokens. These nefarious tactics by token issuers are not just a domain of crypto startups and their token economies but includes traditional companies whose goal is primarily to increase their profitability by entering the digital asset market and issuing tokens.

II. Shortcomings of Initial Coin Offerings

1. Core ICO Features

In 2017/18, ICOs practices morphed often monthly and continue to evolve. Typical ICO practices may be characterized by key elements, including but not limited to the following:

2. Risk Factors

The ICO process illustrated above often entails significant risk factors for the investors and the community at large. A large part of the potential abuses that come out of the ICO process and can be addressed by fair launches revolve around the following risk factors:

III. Fair Token Launch

1. Market Performance

One of the main reasons Fair Launches attract attention is their market performance. Fair Launch tokens are outperforming most projects released via “centralized” token distribution.[1] During the digital asset market rally in late 2020 and early 2021, the collective crypto average token launch over 90 days increased 112.41%, while Fair Launch projects gained over 296%.[2]

2. Fair Token Launches Defined

A “Fair Launch” is a term used to describe a token distribution procedure which focuses on the fair distribution of tokens. What constitutes fairness is mostly unclear has been subject to human debated since the dawn of civilization. In the context of fair token launches, however, certain foundational principles are generally recognized by the digital asset community to fall within the meaning of the term “fair launch.”

a) Length of Issuance and Price Equality

Key elements of fair token launches are 1. length of issuance, and 2. price equality.[6] In other words, fair token launches offer equal opportunity for market participants to acquire tokens over longer periods of time at a comparatively equal price. A longer issuance schedule is important for fair launch to give market participants sufficient opportunities to evaluate the respective fair launch project with its associate pricing. Additionally, price equality in fair launch means that no insider group or person can purchase the token at a significant discount.

b) Number of Wallets

Another definition of “fair” in the fair launch context is revolves around the number of individuals who have access to the token or asset at the time of launch of the project.[8] To determine the fairness of a launch for a traditional medium of exchange it is possible to consider the number of wallets holding the token asset. Moreover, it is possible to consider the combination of distribution of the asset in wallets plus the active participation of the wallet owner.

c) Fairness to Public

Fair launches address the issue of uncapped token raises without a product, at least in the beta version, that was common during the ICO years. In a fair launch, the supply of the token, e.g. the total number of tokens listed, and the distribution of the token supply to the public is a key feature.

d) Community Governance

The fairness to the public doctrine of fair launches can be ascertained and reinforced through transparent decentralized governance designs. The more decentralized the governance of a fair launch protocol, the less likely the project will be seen as not treating the public users unfairly. In this context, it may be advisable for fair launch projects to be launched in a decentralized autonomous organization (DAO) design.

3. Commonalities

Two notable characteristics can be discerned from the definitions above which may apply to all fair token launches:

IV. Fair Launch Protocols

Different technology solutions are being offered for fair launches. Such technology solutions try to accomplish key objectives of fair launches with technological guarantees.

1. Liquidity Mining

One of the dominant mechanisms used for fair launches is “liquidity mining.”[18] Liquidity mining describes a practice that entails users of a decentralized finance product earning additional tokens on top of the regularly expected yield for putting assets into a liquidity pool.[19] However, liquidity mining leads those who have more liquidity/assets to disproportionally benefit from the fair launch liquidity mining protocol.[20]

2. Subscription

Another unique solution for projects looking to fairly launch their digital assets is a subscription mechanism. This solution was created in response to a limited supply and huge demand for NFT drops.[22] Many anticipated NFT drops sell out in seconds, this leaves users who are interested in the project no choice but to wait until the initial owners decide to flip the NFTs for profit.[23]

3. Auction

An auction mechanism for fair launch tokens ensures avoids that tokens are priced cheaper than the underlying market value of the token. This, in turn, helps remedy the problems that derive from large whales token holders that can manipulate the market in the future.

4. Lottery

A lottery mechanism is another tool for fair launch platforms.[26] In lottery fair launch protocols a project sells tickets to their lottery which in effect allocates tradeable tokens to users. Such tokens are redeemable for an NFT at a community-crowdsourced price. All these lottery mechanisms are combined with anti-rug provisions for investors, the community, and projects.[27]

5. Counteract Centralization of Token Supply

Fair launch protocols may attempt to counteract the centralization of token supply. For example, both short- and long-term incentives may be offered as part of the rewards structure. Incentives should not only reward short term liquidity providers, but also long-term participants and community participation via proposals, voting, or other forms of work that help grow and sustain the network.

V. Conclusion

Fair launch protocols provide many beneficial features that help the market for digital assets mature and overcome its immaturity constrains. Fair launch protocols and fair launch practices will continue to evolve and improve the capital formation for digital asset startups. Bad practices and the lack of standards and a nomenclature in fair launch protocols will over time evolve via voluntary or mandated industry practices. Through fair launch evolution and continuous practice improvements, the fair launch industry and underlying digital asset businesses can become the foundation of the emerging decentralized digital asset economy.

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Professor, Emerging Technology Strategist

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