Crypto Files: ICO Paradox


Last week I wrote about Regulation D and Regulation A+. In that post I outlined an approach for companies to fund their project from non-accredited investors. I came across Zach Herbert’s, VP of Operations at SiaFunds, blog post on how to remedy the incentives paradox between token holders and project creators.

Let’s break down the paradox before we can solve it

An ICO will present its private and public investors with token metrics that might look something like this:

  • Symbol: TKN
  • Total Supply: 100,000,000 TKN (ERC20)
  • Accepts: ETH
  • Hard Cap: $20M
  • Token allocation:
    • Public sale: 40% (40,000,000 TKN)
    • Private sale: 20% (20,000,000 TKN)
    • Reserve: 20% (20,000,000 TKN) – lockup of 6 months
    • Team: 15% (15,000,000 TKN) – lockup notes below
    • Advisors: 5% (5,000,000 TKN) – lockup of 6 months
  • Team lockup: team tokens lockup 6 months. First 1/6 of tokens released after 6 months then 1/36 released monthly for next 30 months.

This paints the picture that the primary funding mechanism for the company is the ICO. After the ICO is complete the company’s balance sheet will include the following:


  • Human capital – 10 team members
  • Cash – $20M USD
  • 25,000,000 TKN


  • Payroll
  • Other operational expenditures (OpEx)

Assumptions (I’m making this up) :

  • Salaries: $50K annually each
  • Burden: 30% (health benefits)
  • Total annual burn ($0.65M): ($50K x 10) * (130%) = $650K annually
  • Additional overhead (office space, computers, etc.): $11K per month (or $121K annually). Let’s assume the team is in San Francisco and decides to get space for 20 (because they will hire) at WeWork in the heart of the SOMA (my old stomping grounds) neighborhood.
  • Payment for services related to ICO ($1M): $1M USD (there are companies such as AllCode who offer “white glove” ICO services)
  • Payment to advisors ($2M): I assume $250K per advisor on top of tokens they receive. Let’s say there is one all star advisor ($1M) and three marquee advisors (3 x $250K).
  • Cost to list on exchanges ($7M): $1M per exchange, $5M on Binance (I don’t know the actual figures but this is an example after all). The target is to get listed on Binance ($5M), Kucoin ($1M), and Okex ($1M). See here for top traded exchange volume for our deal friend Bitcoin.

So what do these expenses look like?

Year 1

  • Exchanges: $7M
  • Advisors: $2M
  • ICO whitelisting service: $1M
  • Rent: $0.12M
  • Original team members: $0.65M
  • New hires (10, staggered through the year): $0.33M (1/2 of original team for argument sake)
  • Total: $11M
  • Remaining cash reserve: $9M

Year 2

  • 20 team members: $1.3M
  • 5 new hires (hired on Jan 1): $0.33M
  • WeWork rent: $0.12M (no inflation just because this is “make believe San Francisco”)
  • Total: $1.75M
  • Remaining cash reserve: $7.25M

Year 3 through N

Assuming no new hires and no inflation the burn rate would last 4.14 years.

So the ICO need a business model?

The team will need to bring in fresh new capital throughout the course of its life in order to cover its expenses and fund growth initiatives. It can sell services or it can sell its token reserves of 20,000,000 TKN to fund growth.

I won’t speculate on business models for our fictitious crypto project here but feel free to extend my argument. Since the TKN token is traded on exchanges the team can simply liquidate their tokens to fund initiatives. The downside of selling tokens is it applies downward pressure on the price by increasing circulating supply.

At the point of ICO, the average token price was $0.33 USD. I wash the private and public tokens together with the hard cap to arrive at that figure. Once it hits exchanges we might see this pattern:

  • First 30 minutes: jump 5x
  • Minute 31 to day 3: crash to 1.5x
  • Trades and settles in at $0.50 USD.

With 6 months left before the team can start selling its reserves it might focus on pumping the price. It’ll hire social media and marketing professionals. It’ll announce partnerships. It’ll do road shows and go to every conference to announce X, unveil Y, and tease secret Z.

Shouldn’t they be working on mashing out code?

Spending time on increasing the value of their token extrinsically through marketing and distracting from enabling real impact from a killer product is the “ICO Paradox”. In Zach’s article he points out that if the token was designed for utility, the network will require participants to trade TKN in order to access the network benefits. This increases token spend velocity.

As an undergraduate economics major I learned about the money supply equation. Here it is:

MV = PY… revising this to MV = PQ

  • M = Money supply, or coin supply
  • V = velocity of circulation (the number of times that an average coin transacts daily)
  • P = Price level
  • Y = transactions, some versions have I for income. I’ve revised Q for quantity.
  • P x Q = market size

James Kilroe wrote another Medium article outlining the inverse relationship between price and velocity. In his words:

the velocity of the coin is inversely proportional to the value of the token i.e the longer people hold the token for, the higher the price of each token. This is intuitive, because if the transactional activity of an economy is $100 billion (for the year) and coins circulate 10 times each over the course of the year, then the collective value of the coins is $10 billion. If they circulate 100 times, then the collective coins are worth $1 billion. Thus, understanding and calculating the velocity in any token economy is extremely important.

~James Kilroe

The project team wants price high

In order to acquire the most fiat it can to fund growth the team needs to find the right balance between coin supply and velocity. Kilroe outlines the case for what happens when velocity is too low and too high. The ideal situation is a balanced velocity. As for coin supply, it will encourage token holders to HODL, thus reducing coin supply. Token economics and incentives where utility tokens also serve as the funding vehicle for the company are clearly misaligned. Leaders and team members start to focus on driving price up instead of focusing on what’s really important: delivering impact through great products and services.

Stay tuned

I’ll continue on this path and explore solutions, including the two token solution presented by Zach at Sia.

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