A guide to Token Sales Mechanics

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Creating tokens in an ICO was one thing, but figuring out how many to create, how much to sell, the early round bonuses, the inflation rate and everything else relating to the mechanics of the tokens was (and still is) a challenging task.  

Although there is no right or wrong way to create tokens and market it, a lot of parallels can be drawn from the issuance of regular shares in a company served with a side of economic incentives, a sprinkling of game theory, and a dust of creative marketing. In this article, we will look at the all-important supply and distribution of an ICO. 

This article is an excerpt from the book Tokenomics by Sean Au and Thomas Power. This book is a deep-dive into the economics and technology of tokens, and how this will lead to a new tokenized economy.  

Token Supply & Distribution 

Looking at the number of tokens created, there is generally no rhyme nor reason for the values chosen. The standard default in the early days seemed to be 100 million tokens which was a nice round number. Others preferred 1 billion as a round number. The supply ranged from 2.6 million to 2.7 quadrillion. 

Figure 1: Example of token supply from various ICOs 

The reason why some of the supply are not whole numbers is due to the sales model employed by various ICOs. For example, TenX did not select a fixed number of PAY tokens but instead chose a 200,000 ETH target and issued 350 PAY tokens for every 1 ETH. They also provided bonuses for earlier contributors so when the calculations are done, a non-round number eventuates.  

When deciding on a token supply, anything goes but there are a few things to keep in mind. If it is set too low, your users may have to start working with fractional amounts and humans prefer whole numbers. Also take into account that a proportion of tokens will be lost which will reduce the overall supply. This can occur due to users losing private keys or tokens being sent to wrong addresses which make them un-spendable forever. 

On the other hand, creating something like 2.7 quadrillion seems overly excessive. Firstly, large numbers become hard to read, say or comprehend. How many zero’s does a quadrillion have again? 

A quadrillion has 15 trailing zeroes. In other words, 1,000,000,000,000,000. 

Secondly, having too large a supply tends to reduce the perceived value of the token. It is also not a good signal to the market. Scarcity is what helps to create value, not abundance, and in some cases, it is used as a marketing tool when dealing with investors. 

As we can see above, several ICOs have used tokens in the billions, such as Civic (1 billion), Filecoin (2 billion) and Ripple (100 billion), which has been the upper range, if IOTA and Kin (10 trillion) are considered as outliers. 

Distribution 

Token distribution started with the majority being made available to the public. This is the ideal scenario as having the tokens held by as many avid supporters as possible is the goal. However, over time the number dropped from the 80% mark to 70%, then 60% and then lower.   

 Figure 2: Token distribution for ICOs from August 2015 to September 2016 

* Public is the portion that is sold to buyers. The others are allocated, given, or distributed. 

Figure 3: Token distribution for ICOs from April 2017 to June 2017 

Gnosis only made 5% available to the public but this was due to the mechanics of their reverse Dutch auction which will be explained later. Status distributed only 41% to the public but has reserved 29% for future stakeholders. 

Figure 4: Token distribution for ICOs from July 2017 to September 2017 

Kin provided only 10% to the public. This was very surprising and yet they still managed to raise just under $100 million USD. Their reasoning was outlined in their whitepaper. 

“In order to finance the Kin roadmap, Kik will conduct a token distribution event that will offer for sale one trillion units out of a 10 trillion unit total supply of kin. The proceeds of the token distribution event will be used to fund Kik operations and to deploy the Kin Foundation. A portion of the funds raised in the token distribution will be used to execute upon the roadmap of additional feature development planned for the Kin integration into Kik.” 

Kik pre-allocated another three trillion kin to the founding members and placed the remaining six trillion kin under the control of the Kin Foundation.

EOS distribution 

The EOS ICO was unique and deserves a special mention. The concept was that one billion EOS tokens were to be distributed over a period of 341 days. 200 million or 20% were distributed during the first five days from June 26, 2017, to July 1, 2017, and an additional 700 million EOS tokens were distributed in two million blocks every 23 hours thereafter. 100 million or 10% was reserved for Block.one, an ‘open-source software publisher specializing in high-performance blockchain technologies (https://block.one/about/). 

At the end of the five-day period and at the end of each 23-hour period, the number of tokens will be distributed proportionally amongst all the investors based on their contributions. Note that the vesting period of the 100 million for Block.one is 10% over 10 years. 

In other words, everyone in a specific period gets the same amount of EOS per ETH as everyone else. You only know for sure exactly how many EOS you are getting for your sent ETH once the period is over. The EOS Token purchase agreement provides a simple example: 

1. 20 EOS Tokens are available during a period.  

2. Bob contributes 4 ETH and Alice contributes 1 ETH during the period. The period ends. 

3. As a total of 5 ETH were contributed for 20 EOS Tokens during the period, 1 EOS Token will be distributed for every 0.25 ETH contributed. Therefore, Bob receives 16 EOS Tokens and Alice receives 4 EOS Tokens. 

What was interested was that all tokens from past periods were tradable and entered the public markets. This meant that there were two ways of getting EOS tokens: Directly from the ICO or from previous ICO participants. It provided some interesting trading and arbitraging opportunities. 

It didn’t make sense to contribute to the ICO if the price was cheaper on the exchange but it wasn’t possible to know the final price until the contribution period was over. What some traders did was exercise a function within the smart contract called buyWithLimit(). The idea was to allow investors specify the exact contribution period and a maximum limit of ether but traders used this function for the current contribution period and the amount of ether needed to make the purchase lower than the current market rate. The trader could then claim the tokens and then flip it on an exchange. The trader needed to make the transaction at the last possible moment because that is when the most amount of information is available to make the best possible decision.

Other traders took this one step further and not only contributed at the end but also sent bogus transactions to flood the Ethereum network to push out would-be contributors. The idea here was to contribute five or 10 minutes before the close of the period and then send bogus transactions with abnormally high gas fees. Transactions are usually processed in order of highest fees to lowest fees so regular EOS contributions would be temporarily squeezed out allowing the trader to make a profit by gaming the system.

EOS ended up raising $172 million in the first contribution period that took place over five days resulting in an EOS token price of $0.86 USD. ($172 million divided by 200 million tokens). The cheapest price was $0.48 USD at contribution period #123 which occurred on October 26, 2017. The most expensive was $19.29 USD per token at contribution period #315 which occurred on April 28, 2018. 

Summary 

The method of how tokens were created and sold in ICO during 2016 and 2017 was varied, experimental and creative. There were very little standards or patterns initially as each ICO team experimented with the number of tokens to create, how many to distribute to their community of supporters and how many to withhold for various other purposes. In this article, we explored an important part of token sales mechanics and looked at the token supply and distribution. For a complete introduction to tokenomics, from the phases of an initial coin offering to conceptual analysis of the market’s reaction, go through Sean Au and Thomas Power’s latest release Tokenomics. 

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