After the ICO boom and bust what is next for new crypto network token distributions? In this post we explore the Lockdrop, a radical new billion dollar idea for fairer token issuance, and the players involved in it.
The crypto markets are slowly coming out of the big recessive bear ‘post ICO’ market. However, new blockchain projects still have fairly good access to capital from hundreds of new crypto funds and whale investors. It’s just that now the value is concentrated into a few hands and not the many. The bigger question remains how are these new crypto networks tokens distributed fairly and how?
To dial back and take a step back, these new crypto projects are not doing public ICOs open to everyone but are being funded privately in the form of equity for tokens, pure equity, Reg A in the US like Blockstack’s offering, or mini- ICO via newer ‘Initial Exchange Offerings’ (IEOs). ICOs have bottomed out due to regulatory fears and liquidity concerns for wary investors. IEOs are a more centralised, less transparent form of an ICO and also do not have borderless and semi-anonymous investment access as an ICO does. But there is appetite. The Ampleforth (previously called Fragments) IEO on Bitfinex apparently sold out five million dollars in eleven seconds. IEOs are a mechanism for exchanges to drive volume by securing lower price tokens to early investors with the hope when they go live on the market they will trade higher. IEOs also give security risks in more hostile regimes as you have to go through a KYC (Know Your Customer) process to invest. The dream of crypto is ultimately to remove borders and barriers to allow you to become an active participant in these new free flowing economic models. This is why the ICO was so successful, an IEO just puts that barrier back up. The outcome is that an IEO is an answer for exchanges wanting volume, but not for users. So how to solve this distribution issue and guarantee fair network launches without pure speculators in the middle?
Blockchain companies are in effect network companies relying, like social media projects, on an active network of evangelists, users, developers and investors as their customers. Blockchain projects usually have a token attached and this token needs to be in the right hands. As these networks are decentralised, projects require quality teams or individuals to run nodes or improving and expanding the open source software codebase. ICOs, especially in the crazy years of 2017 and 2018, tended to put the token in the hands of people who wanted a quick buck and move on. There was no loyalty or interest in the longer term vision of the projects and only a few of these people actually wanted to write code or run nodes to the benefit of the project.
Early Experiments of Airdrops Failed
Figuring out fair token distribution without the same dynamics as the crazy ICO times is key. How do you get the token into these people’s hands who will write code and run nodes to create a healthy community run network? As once the network is launched the founding team hands over the platform to the community and they will run transactions and operate the network as an extended founding team who act as part of the project advisory team.
People tried Airdopping tokens to wallets. Unsolicited ‘Airdropping’ of tokens to user wallets were tried on Ethereum by many projects but the idea of receiving something for free devalued it. Iceland was an early experiment in airdropping coins to citizens which failed due to being too early. Airdrops quickly turned into a spam machine, with ‘spam tokens’ in all of our Ethereum wallets. You didn’t have to do anything for it or pay for it and they are a bit like junk mail, you didn’t ask for it and it’s there in your wallet. Did Airdrops work? No, and with plain Airdrops failing there is a need for newer token distribution models.
Merkle mining was used by Livepeer as one of the first, maybe the first ever, novel distribution mechanisms that set a relatively high technical bar to potential network participants versus the plain Airdrop. Once the details were out, everyone was able to participate and make efforts to take advantage of the situation.
A work type token mechanism was pioneered by Foam, the geospatial crypto project. With Foam you have to stake tokens against Points of Interest on maps using a crypto spatial coordinate concept, which opens up the centuries old closed and proprietary mapping model. If you use false data you will lose your Foam tokens. This ticks many of the boxes that makes the token not a security. Nucypher is another new crypto project taking this forward with an escrowed version of this called the WorkLock. The Nucypher Worklock feels like another incremental improvement of the ICO to weed out the speculators and have a better desired outcome in a stronger community led network.
One final example fair token distribution outside of the ICO model was the DAO. The DAO was a giant decentralised VC fund. Unfortunately it had a critical bug and blew up after a couple of months raising north of a hundred and fifty million dollars with fourteen percent of the total Ether supply pledged. ICOs have died (briefly) due to regulatory fears and scams. Around ninety percent of ICOs went negative only a handful provided stellar returns. Those were heady times. But where are we now with radical ideas to keep the flame of bordlessless anonymous investing, which lit a spark of financial inclusion for all?
Digital Autonomous Organisations (DAOs) have continued in the form of projects such as MakerDAO, which has the highly successful decentralized stablecoin Dai. But the Maker token distribution was very closed to a small sophisticated community in some forums in the early days of crypto. MolochDAO is another type of DAO, which has a couple of hundred members participating in deploying funds into purely Ethereum focused projects. DAOs feel like a governance experiment that hasn’t run its course.
In fact the DAO is having a renaissance in part due to the Aragon DAO framework, which makes it easier to implement a DAO. Ryan Zurrer (formerly with Polychain and the Web3 Foundation) is planning on launching a DAO fund. The original DAO which spectacularly failed was also highlighted by the US SEC. Ryan’s new DAO fund is making clear that it is legally compliant although its probable that US citizens won’t be allowed to participate. Ryan quoted Coindesk:
“At the time of conceptualizing the DAO, most of the authors of this specification are optimistic that work can be done by a well-intentioned competent Compliance League to achieve reasonable compliance without sacrificing the principles above, namely that the DAO remains a ‘clean capital’ pool that participants can freely enter into and leave from reasonably without discrimination.”
Entrustment — A new way?
Restriction is a great engine of invention. You want to keep it borderless and permissionless, ideally keeping KYC out, not touching any difficult fundraising regulation, and you want to involve the right people. So how do you achieve this? Step forward Polkadot. We have two examples of a new token distribution model. Two nascent Polkadot projects have attracted more than half a billion dollars worth of crypto without KYC, without being friends of project founders or advisors. This huge amount has been committed in a very short time, with a new token distribution method. Without any marketing hype, no ICO or IEO, or shilling. So far, it’s unique to the experimental Polkadot ecosystem and as we’ll discuss in this article, the method used could be a new radical way to build a better token distribution model through entrustment.
One of these projects trying a radical new token distribution method is called Edgware and it has pioneered what is called a Lockdrop. It’ll be a parachain and smart contract platform tied into the Polkadot blockchain. The Lockdrop is explained by Dillon Chen, Co-Founder of Edgware:
“The Lockdrop is an idea that we work shopped internally. When we were thinking about an ideal way to seed a new network and looking at the existing options in the space, this felt like the Lockdrop would get the right set of experimenters that an airdrop or an ICO would not.”
Edgware is also the first project to decloak on the eagerly anticipated Polkadot blockchain later this year. However, Edgeware is a smart contracts platform on the Polkadot platform and could this be seen competition to Ethereum? Dillon again:
“From projects that might build on Edgeware it is less of an ‘either/or’ versus a ‘both/and’. I think we’re just moving to a more interoperable space in general. We can always share innovations on the core level or applications.”
The Lockdrop is a token distribution mechanism whereby some Ether is sent to an Ethereum smart contract so it’s ‘locked’ in that contract for a fixed period of time either three, six or twelve months. In return you receive Edgeware tokens when the Edgeware network launches. Alternatively, for people afraid of malfunctioning smart contracts, you can just ‘signal’ your interest by logging your Ether address and not sending the Ether tokens. In return you will get a lower reward of Edgeware tokens than ‘locking’ them but you’re still a participant without any risks associated with your activities. To be clear, Edgeware does not have access to these funds. It’s just a signalling of intent you want to support the project either as a validator, hodler or developer. Lockdropping and Signalling are, in essence, a way of entrusting the network with your assets. You don’t get access to your pledged collateral until the network is launched and operating, thus you have skin the game and are now involved, with little downside or risk.
What’s the value in that you say? This is somewhat of a mind stretch to those outside of crypto but in cryptoland it makes sense as you are essentially giving those assets as some form of untouchable collateral to the Edgeware project. There is value in that. You cannot use those assets to invest in other things or earn staking yields in the asset you sent in any other project. For now. Maybe locked addresses can still be used as further collateral in the future?
Lockdropping and Signalling are, in essence, a way of entrusting the network with your assets. You don’t get access to the your pledged collateral until the network is launched and operating, thus you have skin the game and are now involved, with little downside or risk.
Edgware’s mastermind entity, Commonwealth Labs, have already raised money through traditional means, a SAFE round, so these tokens are all about distribution. All projects like Edgeware want a good distribution of tokens to a quality cross section of code writers, node operators, experimentalists and evangelists. Why could this work? A Lockdrop has these characteristics that gets around the main issues of previous ICOs:
- increases the chance of regulatory compliance to avoid being shut down.
- filters the right participants most likely to use their token.
- avoids speculators and dumpers by locking them in.
- is decentralised and permissionless to avoid security issues
- gets a wide distribution as possible, regardless if the market is in bull or bear mode.
To recap, a Lockdrop is like a loan you get paid back with the extra tokens that were distributed and has the pseudonymous element of an ICO, which worked so well. So once you have locked you ETH you are ‘in’ the Edgeware community.
The whole Lockdrop and Signal process feels much more in line with the radical experiment which was the ICO.
As of writing a staggering $219,550,224 worth of Ether the equivalent of 1,199,728 Ether had been ‘locked’ to the Edgware Lockdrop. Equally important, 2,876 distinct Ether addresses that participated. A jaw dropping $795,417,552 worth of Ether has been ‘ signalled’ the equivalent of 4,346,544 of Ether from over 1,925 Ether addresses. Thats a combined entrustment of over 5% of the total Ether supply. That is a lot of the Ethereum community support for a completely new project! The whole Lockdrop and Signal process feels much more in line with the radical experiment which was the ICO. Was Edgeware expecting this amount of support? Dillon comments:
“Definitely not, this has blown our expectations out of the water, we were thinking max 200k ETH.”
And does the huge amount of Ether committed make it feel like some form of burden? Dillon again:
“Yes! But also an opportunity to build a really amazing community from scratch, people came in with an experimental mindset.”
To put that number of Ether into context, that’s more than halt the total value of all Ethereum DeFi projects in Edgeware.
There are several clever ideas at play here. One is it gets the Ethereum community onto another blockchain and locks them in. Once Polkadot launches Edgeware will be in effect an alternative smart contract platform to Ethereum. New blockchain, new radical distribution experiment. This is clever re-distribution of fairly die-hard Ether heads being lured to a new blockchain for free tokens and it will be fascinating to see how this plays out. Dillon comments:
“It seems like the Ethereum community have embraced it, we have had participation from early Ethereum projects such as Aragon as well as founders and contributors. Edgeware differs from Ethereum in several ways the lockdrop, the on-chain governance (and DAO), and the Web Assembly ‘WASM’ Smart Contracts.”
As mentioned before validators will have a big part to play in the Edgeware network so how have they approached this? Dillon again,
“We have generally gotten high quality referrals for Validators, and then it seems a lot of the validator community has grown organically with inbound interest to us.”
Edgeware is not the only Lockdrop project. Another Polkadot project called ChainX is also using a sort-of Lockdrop method to distribute some of its tokens. ChainX have already ‘locked’ a staggering $100,000,000 plus worth of Bitcoin value in less than four weeks. ChainX is an interoperable asset management platform project based in China allowing crypto to be ‘managed’ in and out of Polkadot, in their own words. Any crypto asset in the ChainX platform is interoperable in the Polkadot ecosystem and therefore has great value once Polkadot gets up and running. The amount of ‘signaled’ Polkadot DOT wallet addresses towards the ChainX mining has been a huge success. A spokesperson for ChainX commented:
“The amount of Polkadot (S)DOT staked is not the reason I considered this approach. What I care about is how many DOT holders start to believe in PCX.”
Currently you can lockdrop Bitcoin in ChainX and earn its native ‘Polkadot ChainX’ (PCX) token with either depositing into a ChainX validators’ controlled multisig account to create a X-BTC asset that can be used in the ChainX ecosystem or custody the BTC yourself by ‘locking’ some BTC with a OP_RETURN transaction thus creating a L-BTC. In fact, in the ChainX Locking BTC tutorial they mention the fact it’s ‘similar to an Edgeware lockdrop’. A ChainX spokesperson again:
“The Edgeware Lockdrop inspired me. It’s a great way to expand the community and make sure of the safety of the custody of the assets. We changed the one time airdrop model to the consistent airdrop which needs users’ operation at the same time to implement an equitable token distribution. The ‘ONE ASSET. ONE VOTE’ principle was adopted.”
ChainX is predominantly a Chinese community but looking to expand the message to the West:
“Most of our users and validators are Chinese but we are exploring our overseas users. Now we have two overseas validators and we are expecting more. We need more support from media and other good partners to deliver our value to the world.”
Where is the future of ChainX beyond this locking / staking phase?
“Bitcoin is like Gold, which is valuable but has bad liquidity, and the (ChainX) X-BTC is like the ticket that represents Gold. ChainX makes the X-BTC transferred in two seconds and cost only a few cents. This is the future of the Blockchain. The ChainX PCX token when relayed to the Polkadot ecosystem the X-BTC could used in every chain that links to it. Everything that happens on other chains could be relayed to our chain ChainX. PCX will be like the BTC in the future, which has the most consensus in the world.”
Other assets mentioned on the ChainX website include ETH and EOS, which no doubt will be used to lockup value, which could balloon the asset value of ChainX to more hundreds of millions of dollars of value:
“We will make ETH and EOS possible in the future.”
Also interestingly, we could see a situation where a new Polkadot project can allow locked Edgeware and ChainX address to be used as staking collateral to earn tokens. It sounds crazy but why not?
As a side comment to make some connections that has not been discussed publicly if Edgeware and ChainX Polkadot projects have already attracted north of half a billion dollars worth of crypto after a couple of months, there will be twenty plus Polkadot parachains at the genesis block ready to migrate over so what could the Lockdrop value held in them be by then? A billion or more of crypto? We’d be very excited to see more projects adopting similar ways to distribute tokens taking their intended community ecosystem into account (Looking at you, Dothereum and Plasm maybe!). Time will tell.
The New IPO?
At the recent Berlin Blockchain week Jack Platts, Head of Collaborations at Web3 Foundation, proposed a new way to fund Polkadot projects or parachains and referred to them as ‘Initial Parachain Offerings’ (also called a DOT crowdsource):
Polkadot’s token is called a DOT and you will need them to run a project (called a Parachain) on Polkadot. In fact you will need quite a lot so the community can pledge DOTs to a project to get its parachain live (although there is a proposal for a pay as you go model called a parathread). Those DOTs are locked up in a similar way to Edgeware and then returned after the lease of the Paracahin is expired. In return you will get the native token in that project. So again it’s a very neat, secure and legally compliant way of distributing tokens. This will be fascinating to see how this goes. Will the IPO become the new ICO? Time will tell again.
The Key Token Holders: Validators
Any new Proof of Stake token network will need a healthy set of the validators or node runners in the network. Currently, with almost every major team launching a slightly different Proof of Stake (PoS) flavoured network, node operators or validators are becoming more and more essential in the earliest stages of development and are a great starting point in building a strong community. Validators are perhaps the most powerful yet ‘in the background’ type of participant in these nascent networks. It’s really where all the action is as you become part of the governance and technical execution of the network. Validators have a lot of ‘skin in the game’ to be able to provide shared security of the network, vote and decide on future actions. This is already happening in Tezos, Cosmos, ChainX with their ChainX Parliament, and several other PoS networks pretty much governed by validators. Over time, validators will gain more and more influence and power in new staking crypto networks as they provide a resource to the shared security and in the governance of a network. We are already seeing validators on networks such as Cosmos get inundated with requests to get involved in new, slightly other PoS networks. It’s the people behind the validators that are key and as mentioned in a public forum post by Meher Roy about Cosmos validator commissions;
“Shared security is as much about looking after your people, than making some fancy technical computer science innovation. I would say the human element is way more material than the technology — the technology is indefinitely forkable, the human element is not.”
Is being a validator a new VC model? More so. VC marketing is full with ‘adding value’ after investing but this is rarely seen in the real world post-investment. Validators will become well funded from the success of staking and be able to properly participate and drive a new staking network’s security, governance and growth. Validators, if fairly incentivised to participate in the genesis of a new network, will be the backbone of these networks — if poorly remunerated the network will fail. Meher Roy again:
“Selling security first requires decently good wages for the security guards … If the protocol pays its validators peanuts, it will attract monkeys. And few zones will buy a set of monkeys for their security”.
The Lockdrop has been a complete runaway success and taken many by surprise, much like the ICO. With over a billion dollars of value already secured into to it, tremendous value and attention for the Edgeware project and for Polkadot has already been created. The crypto community is willing to show support for highly experimental ideas. We will see more of these novel token distribution models, which continues the legacy of the ICO, in the future to ensure a fairer launch and more robust long term network health. This evolution ensures tokens are in the right hands as a network starts its long journey in the wild.
by Keld van Schreven, co-founder and Managing Director of KR1 plc, a London listed crypto and blockchain investment company. KR1 are investors in Polkadot, Cosmos, Foam and participated in the Edgeware and ChainX Lockdrops.