The Evolution of Ownership Models: from IPOs to ICOs and Beyond

The evolution of models for raising capital has seen a significant transformation with the passage of time. Shifting from the traditional IPOs to more decentralized methods like crypto mining and ICOs, this article explores this transformation, explaining the historic precedents from Web2 to Web3 and explaining how each helped shape the landscape of funding and ownership over time.

The Historic Precedent

Web2: IPOs

Traditionally, an Initial Public Offering (IPO) is a route that companies can take to enter the public financial markets to democratize ownership of their company partly by selling shares of their company.

IPOs enable companies to fundraise capital by selling a stake in their company to the public. This process involves a long series of steps and requirements and it is also costly.

In order to improve the traditional fundraising method seen in IPOs, ICOs were created to offer a more direct and less centralized way to fundraise capital for projects. ICOs were created to democratize the funding process for innovative projects, but how do they actually work? And do they eliminate the shortcomings of IPOs?

Web3: Mining

Before jumping into ICO’s let’s go over another precedent of a type of initial offering event with some different traits. Bitcoin was the first crypto currency which marked a change in the financial landscape with the vision of creating a decentralized electronic peer-to-peer cash system. The nature of this decentralized digital system implied not needing the intervention of intermediaries like banks or governments.

Following that vision, the launch would require to also not rely on centralized entities to distribute BTC. For this reason, Bitcoin’s starting block, known as the genesis block, was mined in 2009. In this case, there was no initial token distribution but since Bitcoin operates on a Proof-of-Work (PoW) consensus mechanism, miners are able to join the network to validate transactions and contribute computing power to add new blocks to the blockchain.

Thus, while mining is not an actual event in which a company offers a stake in the company in exchange for investment, it represents an innovative but indirect method of fundraising where the computational power done to maintain the blockchain is rewarded with newly created coins, which in the end, is distributing a part of the ownership to contributors without carrying an initial offering event.

Now that we have a good understanding of two precedents, let’s jump into what an ICO is and why they were created.

ICOs

An ICO (Initial Coin Offering) is the crypto version of an IPO. ICOs enabled new companies to raise funds directly from investors by selling tokens that often provide some form of rights within the project ecosystem. These offered rights can go from solely ownership to voting rights or a share in future revenues. 

Covered in one of our previous articles, is the difference between an IPO and an ICO. There are two key differences between an IPO and ICO. Firstly, an ICO doesn’t create new tokens, it just sells a particular allocation (static or dynamic) to the public. Secondly, and more crucially, in an ICO a project can sell tokens directly to consumers, because the regulators haven’t caught up in time with the industry.

As explained in our previous article, one of ICOs’ shortcomings was the quick crackdown that some regulators in America, Europe, and Asia did. As a way to intervene in the process, exchanges stepped up to start iterating on the idea of an ICO.

There are two main iterations of ICOs: IEOs and IDOs. IEO stands for Initial Exchange Offering, which is a type of ICO where the token sale is conducted on a cryptocurrency exchange platform while an IDO (Initial DEX Offering), conducts a token sale on a decentralized exchange platform.

While IEOs tackled some of the regulatory barriers of ICOs, they were not fully exempt from them. And on the other hand, IDOs leverage smart contracts to enable more transparent trading without the need of an intermediary. At its core, an IDO is the optimal iteration of an ICO, however, it is not free of challenges hence new models like LBPs have been created. Any questions about what an LBP is and how they work? Continue reading.

Liquidity Bootstrapping Pools (LBPs)

In order to understand LBPs, we must first understand one of DeFi’s key components: AMMs. The creation of AMMs traces back to the origin of DeFi itself, where the need to create a system to replace traditional orderbooks and hence, improve the accessibility, efficiency, and decentralization in the DeFi space.

Setting the precedent: AMMs

AMMs are then born as a mechanism where users are able to deposit tokens in a pool to provide liquidity. Pools are smart contracts that hold different tokens to facilitate transactions in DeFi and they calculate the tokens’ prices based on the ratio of assets in that pool. Traditionally, AMMs use a constant product formula that ensures that the product of the quantities of two assets in a liquidity pool remains constant. The formula is xy = k, where x = the amount of token A in the pool and y = amount of token B in the pool.

AMMs are a core element of liquidity pools which are used in IDOs. As mentioned above, liquidity pools are used in DeFi to allow trading of assets by creating liquidity. Users can participate in liquidity pools to supply assets that other users are willing to trade, this is known as liquidity provision. While they are a backbone in DeFi, they come with some disadvantages:

1. The funds in the pool are provided only by a small number of individuals.

2. High risk of scams and rugpulls.

3. Exposure to impermanent loss.

In short, while liquidity pools are vital for DeFi, they have some disadvantages, especially for newer projects who are trying to set themselves up a pool to raise funds. For this reason, another option was created, aimed at being friendlier for upcoming projects and more fair as well: Liquidity Bootstrapping Pools.

Enter LBPs

With this, we can understand that LBPs are another liquidity management solution that work as a contract that controls a pool of tokens (like the ones explained above) on a cryptocurrency exchange. The main advantage of using LBPs is that new crypto projects are able to launch their native tokens using a minimum amount of capital.

For a clear example of how an LBP works, let’s imagine a hypothetical new crypto project called “LaunchCoin”. They are aiming to raise funds through their LHCN token to finance development, but they want to do it in a way that ensures fair distribution and isn’t very expensive. They recur to an LBP and start setting up a pool that will enable their community to buy the LHCN token, and for that, they set up a pool that contains 90% LHCN and 10% of USDT.

Just as seen in the hypothetical example above, a project can launch a token seamlessly and with less capital than a traditional pool. You might’ve noticed the ratio between the project’s token and a stablecoin like USDT is set up with a much larger allocation of the project’s tokens. This initial weighting favoring the native token ensures that the initial offering price is controlled, making it unfavorable for large early buyouts and market manipulation.

LBPs gradually increase the stablecoin allocation over the sale period which is normally 3 days long. Over this period, the initial setup typically sets a higher price for the token, as the supply available for purchase is more limited relative to demand. As the 3 days pass by, the LBP automatically adjusts the ratio of LHCN to USDT, gradually decreasing the weight of LHCN and increasing the weight of USDC. With more LHCN tokens available and a constant or declining demand, the price of LHCN naturally decreases.

The price decline mentioned above is a key advantage of LBPs as this downward price movement is part of the price discovery process, allowing the market to find a natural equilibrium price for the token based on actual investor interest and market dynamics.

The Future of Token Launches

While establishing a golden standard that sets a rule of which token launch model is better is not viable, we can get an overview of the future of token launches by analyzing the core reasons of why Web3 projects launch their own tokens.

Crypto-native projects launch their tokens to leverage the benefits that it gets them, including:

• Using tokens as a fundraising vessel.

• Improving the experience within their project by enabling tokens to do certain use cases.

• Give their community a sense of ownership over the project.

• Integrate a community-driven approach through governance.

So, taking the reasons and benefits projects get for launching a token, we can understand that a key characteristic to drive a good token dynamic is fairness. If a token is distributed unfairly, it’s likely that the project’s long-term sustainability would be short as the token is concentrated within a few individuals, leading to price manipulation that affects the way community perceives a token and simultaneously affects the governance process, as major holders may promote decisions that favor their interests rather than the project’s survival.

Among many other effects of an unfair token launch, the importance of a fair launch is showcased easily by the downsides of an unbalanced initial token launch. With this idea, it is evident that the future of token launches will most likely be the token launch model that adheres more closely to a balanced distribution. This could obviously change depending on a project’s ideas, but it sets an easy-to-follow path for the future of the token launch dynamics.

In conclusion, fairness of a token’s initial distribution plays a pivotal role in the long-term success and sustainability of Web3 projects. A fair launch not only ensures a real decentralized model, but also enhances the project’s viability by preventing market manipulation and procuring a positive community perception.

As the crypto industry evolves, it’s likely that new token launch models may appear, but it’s clear that the trend is leaning towards fairer token launches which not only are unbiased, but are also more strategic for the project’s stability.