The Goal…
Allow me to introduce you to what I consider the most important part of any successful ICO: the Token Metrics. This article strictly covers the implementation of a utility token economy, one vastly different than that creating security tokens. If you’re looking for best practices on a security token economy, this is not the article for you.
The Token Metrics, also known as ‘Token Economy’, are your projections on how you feel the distribution, trade and eventual stretch of demand over the supply of those tokens will work in the short, medium and long term, with the objective of growing the value of the token for the benefit of its holder. Some may argue that the tech, application, whitepaper and team are the most important part a successful ICO. However, in my view, this step is so crucial it goes beyond just being one part of the whitepaper, and is a step in itself due its own article. If you don’t thoroughly calculate a sophisticated Token Metrics, resulting in a healthy token economy, it is likely that post-ICO the value of your token could drop and you’ll have a project with unhappy participants, and a setback in your the progress going to market fully.
You must consider the right token algorithm of supply and demand that will deliver the returns needed for your token holders, and that also satisfies the financial requirements of the blockchain project. Think of this as cash flow forecasts with action stimulants built in designed to increase demand and throttle supply. Not easy. You are basically doing the same thing on a micro scale that governments do when creating budgets, and fiscal and monetary policies to ensure the correct levels of growth, inflation and value of currency in an economy.
To help, I’ve created a list of do’s and don’ts so you don’t screw up your entire project only months after your ICO raise:
Pointless Pie Charts:
Don’t just create an oversimplified breakdown of your entire Token Metrics, like so many do, which inadequately shows a basic pie chart with a portion of tokens for the raise, some for the treasury and a whopping allocation towards founders and team. I’ve spoken to too many ICO’s who believe that this is suitable enough to justify the token metrics and basics for distribution. That is not metrics. It’s a vague overview riddled with problems, which may have worked in 2017, but is not, nor should this may have be enough to get away with now.
Large Founder Allocations:
No one wants to deny you the reward of creating a brilliant idea and taking the spoils of it, however, the time is over for the ridiculous terms of the past where a founder team would hold giant token allocations (20%), and got to release on the ICO and monthly tokens then on after. If you want to see a token value drop out of the sky like a lead balloon, do this. Ask yourself, “what does it say about the team if they reached the financial finish line and are already looking to exit so quickly, whether the project has been a success or not?” No one is going to back you, that is a fact.
Details, Details:
Your Token Metrics must be laid out as though they were a detailed set of accounts, with all the necessary forecasts regarding the demand on the token, its release into the market, and how the company aims to keep a healthy level of supply and demand in the near and far future.
Future Anticipated use of the Token:
Don’t create a project that is a ‘one trick pony’ when it comes to the use of your token within your platform. If the market is to see any form growth, it needs to be stretched and used for multiple purposes in the future. It’s fine if at first launch there’s only a single use on the platform, but you need to have and communicate vision and forecasted metrics that identify and quantify the potential multiple uses and demands on your token.
Token Lock-ins:
Whilst you go through the process of your ICO, many parties will join the journey such as advisors, partners and, of course, the core team. These individuals and entities might possibly be allocated a portion of the total token economy as an incentive for their efforts during and after the raise. While standard practice, be aware that providing such incentives must come with clear Terms and Conditions, namely that they must have the correct level of token allocation and ‘lock-in’. The reason being is that these individuals could sink the value of the token in one foul sale, leaving the rest of the holders hugely disgruntled. The art of keeping a sustainable and ever-growing token value is to maintain control of the release of tokens and the amount of demand created for them by the actual practical use of the utility.
Forecast of Token Demand:
If you have built or run a business before, you’re aware of cash flow forecasts. Creating token demand forecasts are no different. Once the token allocation is complete and you are able to allow the utility use of the token, you should have within your control (beyond secondary market transactions), the ability to forecast the level of demand that on your token on nearly a daily basis. This is a mandatory exercise, as you should not look towards secondary markets to increase the requirement on your token. The project alone should be treated as if it is completely self-sustaining. If it isn’t, you look like an extremely high risk as at the hands of the market (which, if it’s anything like the current, August 2018 slump winter, your project will be dead).
Dividing up the Token Pot:
Consider how much of the total token economy you wish to present into the market from the total token economy. There is no exact science here, but commonly 30–40% seems right to sell within the ICO raise. You must be aware that you have to be clear in your whitepaper and to other token holders if and when you plan to release more tokens into the secondary market from your token treasury/reserve.
The Right Level of Treasury:
There should always be a treasury left within the entire token economy there to support the token metrics after you launch the ICO. Again, percentages can vary, but it seems common that 30% is left in the treasury to support the business activities and manage a healthy token metrics from then on.
Valuing the Price of your Token:
This one always gets people. Honestly, where do you start when it comes to setting a market price for your token? Reality is, it’s much more straightforward and logical than you think. Reverse engineer what you are looking to achieve and the volume of business you think you are going to do.
An example:
Take the full and justified amount required to raise in order to complete your project, let’s say that number is $20,000,000 (A)
Choose an entire token creation number, something up to 1 billion, for example, reason being there is an element of realism that comes when putting new tokens to market at the ‘cents’ value.
Then take between 30–40% of that token amount to offer in the sale. For this example I will say 40% — 400,000,000 (B)
Do the calculation of A/B=C
20,000,000/400,000,000 = $0.05 per token go to market price.
Discounts During the ICO:
It is very common to offer bonuses, discounts or additional tokens to early purchasers in your ICO, whether that’s on a whitelist or in private rounds, to entice them to participate. The only thing to be very aware of is modeling what impact this actually has to the long term Token Metrics of the project. Giving away tokens and bonuses is a great way to attract funds, but it’s also a great way of throwing the metrics out of sync and having a crashing token economy.
In summary, all of the above points need careful consideration and to be applied in context to your project, but I believe this framework sets a solid guideline and consideration as to what is needed to deliver a successful ICO. Once your Token Metrics baseline is formulated, it should be regularly reviewed and updated in all your marketing materials and collateral during the raise.
I’ve said it before and will say it again- a successful ICO isn’t one that raised money, that’s only 20% of the story. The truly successful ones not only make their raise but also deliver a healthy token economy that grows and sustains the project. If we are going to see the world of blockchain mainstream, we must focus of creating sustainable Dapps and protocols with less volatility and greater adoption. Viable Token Metrics is the backbone of a project using crypto, and in my opinion, the most important part of doing any ICO.