An Overview Of ICO Sale Models

In Oddup’s ICO 101 Guide, we discussed ICO tokens, which are essentially what investors receive when they buy into an Initial Coin Offering (ICO). Tokens can be broadly classified into two types.

Equity tokens, or securities tokens as they are sometimes called, offer stake in a startup when purchased. In many countries, they fall under Securities Laws and, consequently, are rarely the preferred choice for founders or funders. The second type of token is a utility token, which gives the investor the right to use the product or service offered by the startup that is issuing the ICO. Most startups sell utility tokens through their ICOs.

Determining The Sale Model

First, a startup founder needs to determine whether an ICO is the best fundraising option for his startup. Then, certain steps need to be taken in order to ensure that the ICO is planned and implemented as well as possible. While there are many elements in the planning stage, one important factor is the determination of the token sale model.

The token sale model is nothing but the model through which tokens are sold in an ICO. This is affected by the location in which the startup is headquartered, the countries to which the ICO is made accessible and their laws regarding ICOs, the amount of funds to be raised, and various other factors. Token sale models are broadly classified into eight different types.

Token Sale Models

Uncapped, With A Fixed Rate

In this model, investors receive tokens in exchange for fiat currency or cryptocurrencies at a specified ratio. The rate may be more attractive for early contributors and, at a later stage of the ICO, the number of tokens received per contribution amount can decrease. This token sale model generally also includes a specific contribution period.

Soft Cap

A soft cap is set before the commencement of the ICO in this model. This generally indicates the minimum amount that the startup founders want to raise. If reached, the soft cap model is often continued until the ICO reaches an extended, set closing period. On the other hand, a soft cap model can also come to an end if the amount raised reaches or exceeds the hard cap previously set.

Hard Cap

A hard cap is the maximum amount expected to be raised in an ICO. Often including a contribution period, a hard cap token sale model comes to an end either when the hard cap is achieved, or at the end of the period.

Hidden Caps

Contributors remain unaware of the allocation in a hidden cap token sale model. The details of allocation are revealed only during the ICO.

Dutch Auction

In a Dutch auction token sale, all bids are taken in before the offering price is set. After all bids have been received, the highest price at which the lowest offering can be sold is determined, and bids are sorted in descending value. Highest bids are accepted until all offered tokens are sold. Post the last bid, all contributors whose bids have been accepted receive tokens at the last bid price.

Reverse Dutch Auction

In a reverse Dutch auction model, a capped sale is defined, and the portion of tokens finally given to buyers is determined by the number of days in which the sale ends. For each day that the sale runs, a percentage of the tokens are distributed amongst purchasers.

Collect And Return

In this model, a total contribution amount is determined, but the smart contract of the ICO allows for contributions that can exceed the fixed limit. Once the sale is completed, contributions are adjusted and tokens are allocated by ratio. Differences that arise in contributions are returned to owners.

Dynamic Ceiling

The dynamic ceiling model includes features from all the different models. It includes hidden, mini hard caps, which are set at intervals. Contributors can only deposit a pre-determined maximum amount, thereby having to break up larger transactions into smaller ones. Any transaction that is larger than a set ceiling is rejected. One disadvantage of this model is that it includes a higher cost due to the increased number of transactions made necessary.

The type of token sale model utilised can have an impact on the contributions and interest received. Although ICOs have become extremely popular, the risks involved have made investors cautious. Hence, founders should choose the token sale model that best meets their requirements, and those of their potential audience. Furthermore, the token sale model needs to be clearly described in detail to ensure increased transparency. The White Paper is one such document in which startup founders can detail their selected token sale model, and funders and investors can analyse everything about the ICO to determine if it meets their investment preferences.

This article was originally published on Oddup.com and can be accessed here. To read more articles on the latest movements and complete concepts of cryptocurrency, blockchain, and ICOs, visit Oddup’s website by clicking here.