The economic model team hopes to study the overall process related to tokens. This encompasses several aspects: the design of the economic model, the issuance of tokens, and the management of token circulation. This article primarily discusses content related to token issuance. With the growth of blockchain and Web3 projects, projects have begun to incorporate both FT (Fungible Tokens) and NFT (Non-Fungible Tokens). Currently, the academic and application fields are focusing more on the issuance of FTs. The research and accumulated case studies on the role and issuance of NFTs are still limited. Dr. Xiaofeng from Wanxiang Blockchain released “The Three Token Models of Web3 Applications”, which touches on NFT-related knowledge. In the final section of this article, we also briefly analyze the issuance of NFTs. The team will continue to conduct in-depth research in this niche area in the future.
(1)In 2018, FINMA categorized tokens based on their potential economic functions. This classification has been widely recognized internationally. According to this more official and professional definition, tokens can be divided into the following three types:
Payment Tokens: These are used as a means of transferring money or value to obtain a certain item or service either now or in the future. They resemble what we typically refer to as currency.
Utility Tokens: These exist in digital form and are primarily used for applications or services developed on the foundation of blockchain technology, such as for covering gas fees.
Asset Tokens: These tokens are backed by specific assets, such as debts or equity that the token holder can claim from the issuer, or a share in a company’s future profits or a certain portion of asset liquidity. Economically, these tokens resemble stocks, bonds, or derivatives. Stablecoins, when viewed as an asset, could be considered this type of token.
There are overlaps in these classifications. Some tokens can have attributes of two or even all three categories.
This classification is more aligned with viewing tokens from a financial and monetary perspective. Tokens in projects generally undergo a process: they initially have utility attributes. As the utility thrives, these tokens then take on the nature of a general equivalent (currency) and tend to be used more for payments. Widely-used tokens have excellent liquidity and value endorsement, making them more asset-like.
(2)Regulation-Centric Classification: Utility and Security (also known as: Application and Equity)
Tokens fundamentally serve as carriers of value. Using blockchain technology, values, rights, and physical assets are tokenized. Their essence can represent rights, like dividend rights, ownership, or debts; assets, like the blockchain representation of physical assets, corresponding to asset tokens; currency, like BTC or USDT, corresponding to payment tokens; or tokens issued for use within applications or services. Many dApps issue their own tokens, which corresponds to utility tokens. They can also represent anything of value, like creativity or attention.
However, some tokens are hybrids of multiple types. For example, tokens issued by exchanges are backed by a portion of the exchange’s profits and have strong financial attributes. Still, the exchange also creates numerous use-cases for them, giving them utility value.
The concept of “token economy” emerges from these tokens and is believed to have boundless potential. The main feature is utilizing the inherent properties of tokens to foster superior ecosystems, better value models, a wider user base, and achieving massive distributed value creation—a touch reminiscent of open-source collaboration.
This regulatory-focused classification divides tokens into two main categories and four subcategories:
Utility Tokens:
Use of Product Tokens: Represent the right to use a company’s product or service.
Reward Tokens: Users earn these through their actions.
Security Tokens:
Equity Tokens: Similar to a company’s shares or bonds.
Asset Tokens: Correspond to real-world assets like real estate or gold.
This categorization aligns more with a regulatory perspective. While utility tokens can develop freely, security tokens are subject to regulation. However, if a utility token engages in financial activities and acquires security attributes, it will also be regulated.
Note: Our previous article titled “Quadrant Token Economy Model (Part 1): Dual FT Model“ provided a detailed discussion on this topic.
Purpose of Token Issuance
From existing cases, there are two main purposes for token issuance:
(1)Distributing tokens to users (encouraging user engagement with the application)
(2)Raising funds
Two Types of Tokens: FT & NFT:
(1)FT aligns more closely with the characteristics of currency. Its two aforementioned purposes are most evident. For FT issuance, it’s vital to find a group of individuals who recognize its value. The value of FT lies in the depiction of the project’s future potential.
(2)Although NFT can also achieve the above objectives, due to its unique features and development history, there’s limited content available for analysis. (We will dedicate a separate section to discuss the issuance of NFT later on).
Given the purpose of token issuance, we’ve summarized a few criteria. While compliance should ordinarily take precedence, the early phase of blockchain industry development means regulatory and compliance issues are still being explored. Some scenarios remain ambiguous, so for now, we’ve placed compliance issues second.
(1)Coverage of Token Issuance: Targeting high-value Web3 users is a common strategy. Depending on the application’s characteristics, other selection methods may be required. The aim is to plan and execute to achieve the maximum coverage of target users. The domains that a token should cover vary based on each application’s unique calculations.
(2)Compliance Issues: Depending on the nature of the token and the policies of major countries, adopt compliant issuance methods or undergo compliant verifications.
(3)Fundraising Metrics: Once compliance and coverage are ensured, whether the funds raised meet the predetermined goal is a primary metric. This metric is viewed from two dimensions: the total amount and granularity.
As for the lock-in period of the issued tokens, we consider it a task for the design phase and the subsequent liquidity management phase, and not a criterion for the issuance phase.
In the case studies of token issuance, there are a few standard research categories:
(1)Initial total issuance (two types: an initial quantity of zero and a non-zero initial quantity).
(2)Fixed total amount vs. variable total amount (this dimension only affects liquidity analysis later on and will not be discussed in this article).
The model represented in the figure below is for a fixed total amount with an initial circulation quantity of zero. Bitcoin serves as a representative example of this economic model design. There’s no early token issuance concern with this model. As for the later issuance based on a difficulty system, it will not be covered in this article but will be categorized under subsequent liquidity management for study and research.
Fixed Total Token Model (Initial Circulation of Zero)
The model depicted in the following figure starts with a non-zero initial quantity. It relies on token issuance methods to raise funds or reach users more precisely. Ethereum serves as the representative token for our study on token issuance methods like ICO, IEO, IDO, etc. The scope of these methods is shown in the red circle in the figure. For token quantities that exceed actual application, economic measures are needed to freeze liquidity.
Fixed Total Token Model (Initial Circulation not Zero)
For tokens issued during the project’s operation through methods like PoW or PoS, we regard them as tasks of the later liquidity management phase and will not discuss this part of token issuance.
There are two main categories for token issuance: private placement and public placement. Here, we discuss only public placements, as private placements don’t involve these methods.
To summarize the common digital currency issuance methods in a sentence: issuing directly on a public chain is the primitive ICO; sending tokens directly and freely into a user’s wallet is known as an Airdrop; issuing through centralized digital currency trading platforms is IEO, while collaborating with financial regulators for issuance is STO, and issuing on decentralized exchanges (DEX) is IDO.
Private equity funds raise capital in a non-public manner from specific investors targeting specific investment objectives. These funds are established by collecting non-publicly diverse funds via means other than mass communication.
In the token domain, private placements usually involve institutional or individual investors in the field. They are often settled through offline negotiations similar to traditional financing. This form of token financing eventually evolved into SAFT (Simple Agreement for Future Tokens). SAFT is a token issued by blockchain developers for financing blockchain network development, similar to futures, giving investors the right to obtain corresponding tokens once the blockchain network development is completed.
Due to its strong regulatory compliance, SAFT has been adopted by many renowned projects like Telegram and Filecoin. It is especially suitable for utility tokens. While these tokens are not securities upon their release, fundraising for network development constitutes an investment agreement. Adopting SAFT makes the compliance process clearer.
Considering the token issuance indicators, the effects of the private placement method are:
(1)Token issuance coverage: Poor coverage as it only involves investors, not users.
(2)Compliance issue: Generally compliant.
(3)Fundraising indicator: Usually achieves good results with significant amounts raised. It’s hard to control the granularity of funds as it involves high-value users.
ICO is the Initial Coin Offering of digital currency.
Originating from the Initial Public Offering (IPO) concept in the stock market, ICO is an activity where blockchain projects issue their first tokens to raise general digital currencies like Bitcoin and Ethereum. When a company wants to raise funds, they usually issue a specific number of cryptographic tokens and sell these tokens to those participating in the project. Typically, these tokens are exchanged for Bitcoin, Ethereum, or other digital currencies, and sometimes even for fiat currencies.
The ICO is a project fundraising method derived from the digital currency and blockchain industry. The first traceable ICO was from the Mastercoin project (now renamed Omni). In July 2013, they announced an ICO crowdfunding with Bitcoin on Bitcointalk (the largest Bitcoin and digital currency community forum) and generated corresponding Mastercoin tokens distributed to backers. Essentially, this ICO was a barter trade, where participants exchanged Bitcoin for tokens in the Mastercoin project. Initially, ICOs were a community activity for cryptocurrency enthusiasts. But with the continuous development of digital currencies and blockchains, more and more people began to accept and participate. Most ICOs are done through Bitcoin or other digital currencies.
In the blockchain domain, the widespread use of ICOs started after Ethereum introduced the ERC20 token issuance based on its system. This led to a surge in ICO occurrences. The most significant fundraising project was EOS, which used a daily bidding issuance method and raised approximately 4 billion USD over almost a year.
ICO offers an online, cryptocurrency-based method of fundraising. It is straightforward, convenient, and facilitates the distribution of new tokens. The primary strengths of ICOs lie in their ability to effectively raise funds and issue tokens.
Operational Risks: Most projects that conduct ICOs are in their early stages, with limited resistance to adversities, leading to potential operational risks. Consequently, the majority of ICOs, similar to angel investments, face early-stage project risks, resulting in potential investment losses.
Financial Risks: During the ICO investment process, investors may be exposed to risks such as fundraising scams and investment losses. As ICOs are often in their preliminary stages and lack proper oversight, some startups may exploit the booming market to create fake project information and engage in ICO fundraising scams.
Regulatory and Legal Risks: The predominant mediums for ICO fundraising are BTC and ETH, which currently exist in a regulatory gray area, devoid of specific legal frameworks. Post-2017, nations intensified their regulation and control over ICOs. Nevertheless, alternative forms like IXOs have emerged, serving similar purposes to ICOs.
At present, on CoinMarketCap, the term ICO is broadly interpreted as the initial token issuance, which encompasses methods like IEO and IDO. As illustrated: the overarching ICO Calendar represents a generic view of ICOs, while the ICO under the ‘Upcoming Project’ category refers to the ICOs as described in this section.
Drawing from the Token issuance evaluation metrics, we summarize the efficacy of the ICO method:
(1)Coverage of Token Issuance: There are no participation constraints, leading to the broadest coverage. However, it requires the design of participation rules to filter genuine users. Due to investment interests, ICOs often attract many non-end-user investors rather than the intended early adopters of the application. (Combining with airdrops usually yields better results.)
(2)Compliance Issues: Although additions like KYC were incorporated, ICOs are considered potentially illegal in many jurisdictions.
(3)Fundraising Metrics: ICOs generally achieve satisfactory results in fundraising. If an ICO does not produce positive outcomes in this regard, alternative methods are also unlikely to fare well. Managing the granularity of funds can be challenging, with the possibility of significant contributions from individual users.
An airdrop is a distribution method for digital currencies. Initially, the only method to obtain cryptocurrencies like Bitcoin was through mining. However, with the advent of altcoins and forked coins, in addition to mining, airdrops became another distribution method. As the name suggests, airdrops are akin to receiving funds out of thin air. Development teams distribute digital currency to users’ addresses without the need for mining, purchasing, or holding the original coin before a fork. While there are unconditional airdrops, most are based on specific criteria, such as holding certain digital assets. The airdrop rules are set by the issuing party, ranging from providing a set amount of coins upon registration to distribution through snapshots.
In the early stages of blockchain development, airdrop criteria were minimal. However, as the ecosystem evolved to Web 3.0, many projects began distributing airdrops after achieving certain milestones. Airdrops have been used to reward contributing users or guide them to complete related tasks, such as the airdrop design by Arbitrum.
Distributes new tokens to a targeted user base, facilitating circulation and promoting the use of new coins. Airdrops typically don’t involve fundraising, so they usually steer clear of regulatory issues.
Directs airdrops to genuine application users and guides them to complete associated tasks.
An IEO, or Initial Exchange Offering, is a method to raise funds for new projects through cryptocurrency trading platforms. IEOs are usually supported by these platforms, so project teams must ensure the quality of their proposals. In most cases, the IEO proposals undergo rigorous scrutiny by the trading platforms. In essence, the trading platforms vouch for the approved IEO projects with their business reputation.
Through IEOs, potential investors can purchase assets before they’re listed on trading platforms. Registered users who provide KYC (Know Your Customer) details can buy tokens before public trading begins.
Advantages of IEOs:
ICompared to previous ICOs, IEOs have clear advantages. Tokens are directly listed on trading platforms, enhancing their liquidity. For ordinary investors, this means quicker participation in trading. Project teams also benefit as their audience expands to the entire user base of the trading platform, broadening their investor base. For genuine, high-quality projects and early entrepreneurs, IEOs aren’t just an excellent fundraising channel; they also save costs and effort of listing on trading platforms, allowing teams to focus on R&D and community operations. For trading platforms, the most evident benefit of IEOs is increased trading volume and daily activity. Fans of projects flood in, with their funds accompanying, and some might eventually become loyal users. Such activities are more enticing than traditional promotional efforts.
Disadvantages of IEOs:
Listing costs. Trading platforms usually charge listing fees, which can be burdensome for early-stage projects.
IEOs require a certain level of project scrutiny, setting a high bar for many projects.
In terms of token distribution metrics, IEOs primarily cater to users with trading demands and don’t adequately cover the true initial customers of the product. Best used in conjunction with airdrops. While trading platforms usually ensure compliance, IEOs relatively successfully amass substantial funds through trading. However, issues like market manipulation and early exits by initial investors persist.
Compared to the first ICOs, IEOs expand the trading user base, conducive for fundraising.
STO, or Security Token Offering, refers to the issuance of security tokens. Securities are valuable certificates representing property rights. Owners can use these certificates to demonstrate their ownership or claims of rights. The U.S. Securities and Exchange Commission (SEC) defines any investment that satisfies the Howey Test as a security. The Howey Test specifies: A contract, transaction, or scheme whereby a person invests money in a common enterprise and expects profits solely from the efforts of the promoter or a third party. Broadly speaking, in the eyes of the SEC, any investment that comes with an “expectation of profit” should be classified as a security.
STO represents financial assets or rights in the real world, such as company shares, debt rights, intellectual property rights, trust shares, and tangible assets like gold and jewelry, converting them into encrypted digital certificates on the blockchain. It represents the digitization of various assets, rights, and services in the real world.
STOs sit between IPOs and ICOs and are seen as a way for regulators to manage digital currency issuance similarly to IPOs. On one hand, STOs, recognizing their inherent securities nature, accept regulation from securities oversight bodies globally. While STOs still leverage underlying blockchain technology, they can update at a technical level to align with regulatory standards. On the other hand, much like ICOs, the foundational blockchain technology behind STOs allows for a more efficient and streamlined issuance process compared to the complex and time-consuming IPO process.
The continuous bust of ICOs, combined with shattered myths around blockchain technology and events such as baseless ventures, fund schemes, and runaway projects, kept occurring. Fundamentally, these incidents happened because ICOs lacked tangible assets and value, relying solely on marketing, future projections, and unfounded consensus. The lack of direct oversight for crucial stages like ICOs and exchanges also played a significant role. STOs, based on tangible assets and openly embracing government regulation, aim to break the ICO stalemate.
Upon recognizing tokens, a new product of the blockchain, the U.S. Securities and Exchange Commission (SEC) decided to bring them under securities regulations. This move was initially perceived as a severe blow to the digital currency and blockchain industry, with many fearing total devastation.
However, as time progressed, more and more countries started to introduce their regulatory policies. Even though these regulations might differ in their definition of what an STO is, they made the market realize that such oversight wasn’t a catastrophic event but rather a means to legitimize and allow for transparent growth. Consequently, everyone from blockchain projects to traditional industries, capital moguls to securities professionals, and various asset owners began actively eyeing this sector, many rushing to enter it.
In a sense, STOs and the blockchain, tokens, and tokenomics behind them, amidst current controversies and unidentified statuses, are finding regulatory oversight to be not a sword of Damocles hanging over them, but a beacon guiding them forward.
The STO regulations initiated by the U.S. have gradually led many other countries worldwide to follow suit, and a more transparent global regulatory landscape has begun to emerge from the chaos.
An Initial Fork Offering typically stems from a fork of mainstream cryptocurrencies, like Bitcoin. An IFO results in a new currency forked from the original Bitcoin blockchain, branching out based on different rules. For instance, Bitcoin’s first fork produced BCH (Bitcoin Cash), a completely new cryptocurrency. This “fork” not only retained most of Bitcoin’s code but also inherited data from before the split.
Forks are often combined with airdrops. The new coins created from the fork are given to existing users, benefitting them and accelerating the acceptance and circulation of the new currency.
But how many forked coin models have truly succeeded? The success of a blockchain project hinges on the continuous development of the project team. Teams that use the IFO model often possess speculative characteristics, making it challenging for the project to thrive.
An IMO, or Initial Miner Offering, introduces tokens by releasing a specific mining machine. A company or team creates a unique blockchain, utilizing a distinct algorithm. Tokens on this blockchain can only be mined using specialized mining machines exclusively sold by that company or team. Typically, these machines have functional applications, providing value through their continued use.
In simple terms, an IMO financing model involves issuing a specialized mining machine to produce new cryptocurrencies. There have been some notable IMOs in the past, such as Thunder’s Play Cloud—Link Coin (formerly Play Coin WKC), QVOD’s Traffic Gem—Traffic Coin (LLT), and the subsequent Storm Play Cool Cloud— BFC Points.
For applications requiring hardware support and those reliant on a hardware-based business model, this method can be beneficial. It helps target early angel users and incentivizes them effectively.
Before delving into IBO, one must understand Bancor, a term derived from a supranational currency concept proposed by Keynes and Schumacher between 1940-1942. In Keynes’s plan, Bancor could serve as an accounting unit for international trade, valued in gold. Member countries could exchange gold for “Bancor” but couldn’t exchange “Bancor” back for gold. All national currencies would be priced in “Bancor”.
However, since the U.S. emerged dominant post-WWII, the British proposal represented by Keynes wasn’t adopted at the Bretton Woods Conference. Turning to the Bancor protocol, it was introduced by the Bancor Network project. The protocol seeks to set accurate exchange prices between digital assets through formulas. The Bancor protocol enables automatic price discovery and an autonomous liquidity mechanism on a smart contract blockchain. These smart tokens have one or more connectors, linked to networks holding other tokens. This connection allows users to directly buy or liquidate smart tokens via their contracts, maintaining a balanced buying-selling transaction volume.
In a standard IBO issuance, the project team needs to pledge a certain value of another token as “collateral”. Tokens are then issued and circulated entirely through smart contracts, with the funds locked within these contracts, open to public scrutiny. Hence, the IBO model has various advantages.
A prime example of IBO is the EOS side-chain project—FIBOS. With the introduction of the IBO concept, FIBOS managed to raise 850,000 EOS within just a week of its mainnet launch at the end of that year.
The IBO model theoretically precedes the underlying theories for applications like DEX. In DEX and IDO, exchanges between various cryptocurrencies are smoother.
Looking at Coinmarketcap and other industry-related materials, IDO is currently the primary issuance method. From the graph in section 2.1, we can see that most projects in 2023 have adopted the IDO method.
IDO, which stands for Initial DEX Offering, refers to the initial token issuance based on decentralized exchanges (DEX). IDOs facilitate token sales through DEXs. Cryptocurrency projects provide tokens to the DEX, users invest funds via the platform, and the DEX handles the final distribution and transfers, all automated via smart contracts on the blockchain.
In 2019, IDOs gained attention due to their near-zero costs and decentralized nature. Hence, IDOs became the preferred platform for projects to raise funds outside of private and early seed rounds. Since the first IDO in 2018, there have been 2,365 IDOs, raising over $1.6 billion (source: CryptoRank, December 2022). Detailed information about IDO can be found in references
https://blog.bybit.com/en-US/post/a-deep-dive-into-the-ido-landscape-blt6b833275fde1a848/。
Although IDOs are issued on DEXs, based on the specific approach, they can be broadly categorized as:
Issuance via traditional DEX platforms, such as Uniswap, Balancer’s LBP, SushiSwap, DODO crowdfunding pools, etc.
Issuance through Token platforms like PolkaStarter, DuckStarter, Bounce, Mesa, etc.
Issuance via DAO platforms, such as DAO Maker.
Other innovative channels: MASK’s ITO method, announced and issued via social platforms like Twitter (with Twitter as the entry point, but the underlying remains a traditional DEX).
Due to the various IDO methods, there are some differences in the processes. On traditional DEX platforms, there’s generally no review process. However, if facilitated by an issuance platform, that platform would conduct relevant reviews. Some projects that have already produced tokens (typically in ERC-20 format) might not need the issuance capabilities of these platforms.
Generally, if a project wants to finance by issuing tokens, many processes are the same:
For those choosing the IDO method, the general procedure involves selecting one of the IDO forms, with many opting for token issuance platforms. However, the exact method varies depending on the platform:
(1)After a review, the project can launch the IDO on a DEX. Tokens are supplied at a fixed price, and users lock in funds to obtain them. Investors later receive these tokens during the Token Generation Event (TGE).
(2)Typically, there’s an investor whitelist. Investors might need to complete marketing tasks to join, or simply provide a wallet address.
(3)Part of the collected funds is used to create the liquidity pool for the project’s token, with the remainder for the team. Investors can trade tokens after the TGE. The provided liquidity is usually locked for a certain period.
(4)During the TGE, tokens are transferred to users, and liquidity funds open for trading.
I believe one of the reasons IDO is popular now is the lack of regulatory concerns.
IDOs are evolving and face a balance between regulation and innovation, as well as between decentralization and risk control.
Compared to the earlier IEOs, the user base of IDO trades was not significant initially. Still, with the growth of decentralized exchanges, the results will gradually surpass centralized exchanges.
In the previous section, we discussed several common IDO channels, namely:
Issuance through traditional DEX platforms such as Uniswap, Balancer’s LBP, SushiSwap, DODO crowdfunding pools, etc.
Issuance via token distribution platforms like PolkaStarter, DuckStarter, Bounce, Mesa, etc.
Issuance through DAO platforms, for instance, Dao Maker.
New channel methods: The ITO model created by MASK, which announces and distributes tokens via social media platforms like Twitter. (Twitter acts as the entry point, but the underlying platform remains a traditional DEX.)
The IDO rankings can be viewed on the Cryptorank.io website at https://cryptorank.io/ido-platforms-roi. The following data is a screenshot from May 30, 2023. It showcases the total number of IDOs on each platform and their respective return on investment.
Based on Cryptorank’s historical data, tokens from these IDO platforms have witnessed surges ranging from several hundred to even thousands of percentage points from their issuance to their all-time highs. For instance, tokens from the GameFi platform soared by as much as 4946.3%, making it one of the highest-performing IDOs in the records. This indicates that top-tier IDO platforms often feature tokens with a higher growth potential, making them one of the most favored choices among blockchain investors.
A Few Typical IDO Platforms
Comparison of Main Issuance Methods
There are two main purposes for Token issuance:
NFTs can also achieve these two objectives. Sending NFTs to users can be done directly to their wallet addresses or via NFT marketplaces. In terms of usability, it often depends on the perception of the value of the NFT. Many NFTs are presented in collections, reflecting memetic cultural elements. Typically, it only requires finding one person in a vast crowd who recognizes its value. By selling NFTs, fundraising can be accomplished, especially with equity-based NFTs, as users’ expectations of future returns make them more inclined to purchase.
This niche area will be deeply explored by other members of the economic group, and relevant research outcomes will be published in future articles.
The economic model team hopes to study the overall process related to tokens. This encompasses several aspects: the design of the economic model, the issuance of tokens, and the management of token circulation. This article primarily discusses content related to token issuance. With the growth of blockchain and Web3 projects, projects have begun to incorporate both FT (Fungible Tokens) and NFT (Non-Fungible Tokens). Currently, the academic and application fields are focusing more on the issuance of FTs. The research and accumulated case studies on the role and issuance of NFTs are still limited. Dr. Xiaofeng from Wanxiang Blockchain released “The Three Token Models of Web3 Applications”, which touches on NFT-related knowledge. In the final section of this article, we also briefly analyze the issuance of NFTs. The team will continue to conduct in-depth research in this niche area in the future.
(1)In 2018, FINMA categorized tokens based on their potential economic functions. This classification has been widely recognized internationally. According to this more official and professional definition, tokens can be divided into the following three types:
Payment Tokens: These are used as a means of transferring money or value to obtain a certain item or service either now or in the future. They resemble what we typically refer to as currency.
Utility Tokens: These exist in digital form and are primarily used for applications or services developed on the foundation of blockchain technology, such as for covering gas fees.
Asset Tokens: These tokens are backed by specific assets, such as debts or equity that the token holder can claim from the issuer, or a share in a company’s future profits or a certain portion of asset liquidity. Economically, these tokens resemble stocks, bonds, or derivatives. Stablecoins, when viewed as an asset, could be considered this type of token.
There are overlaps in these classifications. Some tokens can have attributes of two or even all three categories.
This classification is more aligned with viewing tokens from a financial and monetary perspective. Tokens in projects generally undergo a process: they initially have utility attributes. As the utility thrives, these tokens then take on the nature of a general equivalent (currency) and tend to be used more for payments. Widely-used tokens have excellent liquidity and value endorsement, making them more asset-like.
(2)Regulation-Centric Classification: Utility and Security (also known as: Application and Equity)
Tokens fundamentally serve as carriers of value. Using blockchain technology, values, rights, and physical assets are tokenized. Their essence can represent rights, like dividend rights, ownership, or debts; assets, like the blockchain representation of physical assets, corresponding to asset tokens; currency, like BTC or USDT, corresponding to payment tokens; or tokens issued for use within applications or services. Many dApps issue their own tokens, which corresponds to utility tokens. They can also represent anything of value, like creativity or attention.
However, some tokens are hybrids of multiple types. For example, tokens issued by exchanges are backed by a portion of the exchange’s profits and have strong financial attributes. Still, the exchange also creates numerous use-cases for them, giving them utility value.
The concept of “token economy” emerges from these tokens and is believed to have boundless potential. The main feature is utilizing the inherent properties of tokens to foster superior ecosystems, better value models, a wider user base, and achieving massive distributed value creation—a touch reminiscent of open-source collaboration.
This regulatory-focused classification divides tokens into two main categories and four subcategories:
Utility Tokens:
Use of Product Tokens: Represent the right to use a company’s product or service.
Reward Tokens: Users earn these through their actions.
Security Tokens:
Equity Tokens: Similar to a company’s shares or bonds.
Asset Tokens: Correspond to real-world assets like real estate or gold.
This categorization aligns more with a regulatory perspective. While utility tokens can develop freely, security tokens are subject to regulation. However, if a utility token engages in financial activities and acquires security attributes, it will also be regulated.
Note: Our previous article titled “Quadrant Token Economy Model (Part 1): Dual FT Model“ provided a detailed discussion on this topic.
Purpose of Token Issuance
From existing cases, there are two main purposes for token issuance:
(1)Distributing tokens to users (encouraging user engagement with the application)
(2)Raising funds
Two Types of Tokens: FT & NFT:
(1)FT aligns more closely with the characteristics of currency. Its two aforementioned purposes are most evident. For FT issuance, it’s vital to find a group of individuals who recognize its value. The value of FT lies in the depiction of the project’s future potential.
(2)Although NFT can also achieve the above objectives, due to its unique features and development history, there’s limited content available for analysis. (We will dedicate a separate section to discuss the issuance of NFT later on).
Given the purpose of token issuance, we’ve summarized a few criteria. While compliance should ordinarily take precedence, the early phase of blockchain industry development means regulatory and compliance issues are still being explored. Some scenarios remain ambiguous, so for now, we’ve placed compliance issues second.
(1)Coverage of Token Issuance: Targeting high-value Web3 users is a common strategy. Depending on the application’s characteristics, other selection methods may be required. The aim is to plan and execute to achieve the maximum coverage of target users. The domains that a token should cover vary based on each application’s unique calculations.
(2)Compliance Issues: Depending on the nature of the token and the policies of major countries, adopt compliant issuance methods or undergo compliant verifications.
(3)Fundraising Metrics: Once compliance and coverage are ensured, whether the funds raised meet the predetermined goal is a primary metric. This metric is viewed from two dimensions: the total amount and granularity.
As for the lock-in period of the issued tokens, we consider it a task for the design phase and the subsequent liquidity management phase, and not a criterion for the issuance phase.
In the case studies of token issuance, there are a few standard research categories:
(1)Initial total issuance (two types: an initial quantity of zero and a non-zero initial quantity).
(2)Fixed total amount vs. variable total amount (this dimension only affects liquidity analysis later on and will not be discussed in this article).
The model represented in the figure below is for a fixed total amount with an initial circulation quantity of zero. Bitcoin serves as a representative example of this economic model design. There’s no early token issuance concern with this model. As for the later issuance based on a difficulty system, it will not be covered in this article but will be categorized under subsequent liquidity management for study and research.
Fixed Total Token Model (Initial Circulation of Zero)
The model depicted in the following figure starts with a non-zero initial quantity. It relies on token issuance methods to raise funds or reach users more precisely. Ethereum serves as the representative token for our study on token issuance methods like ICO, IEO, IDO, etc. The scope of these methods is shown in the red circle in the figure. For token quantities that exceed actual application, economic measures are needed to freeze liquidity.
Fixed Total Token Model (Initial Circulation not Zero)
For tokens issued during the project’s operation through methods like PoW or PoS, we regard them as tasks of the later liquidity management phase and will not discuss this part of token issuance.
There are two main categories for token issuance: private placement and public placement. Here, we discuss only public placements, as private placements don’t involve these methods.
To summarize the common digital currency issuance methods in a sentence: issuing directly on a public chain is the primitive ICO; sending tokens directly and freely into a user’s wallet is known as an Airdrop; issuing through centralized digital currency trading platforms is IEO, while collaborating with financial regulators for issuance is STO, and issuing on decentralized exchanges (DEX) is IDO.
Private equity funds raise capital in a non-public manner from specific investors targeting specific investment objectives. These funds are established by collecting non-publicly diverse funds via means other than mass communication.
In the token domain, private placements usually involve institutional or individual investors in the field. They are often settled through offline negotiations similar to traditional financing. This form of token financing eventually evolved into SAFT (Simple Agreement for Future Tokens). SAFT is a token issued by blockchain developers for financing blockchain network development, similar to futures, giving investors the right to obtain corresponding tokens once the blockchain network development is completed.
Due to its strong regulatory compliance, SAFT has been adopted by many renowned projects like Telegram and Filecoin. It is especially suitable for utility tokens. While these tokens are not securities upon their release, fundraising for network development constitutes an investment agreement. Adopting SAFT makes the compliance process clearer.
Considering the token issuance indicators, the effects of the private placement method are:
(1)Token issuance coverage: Poor coverage as it only involves investors, not users.
(2)Compliance issue: Generally compliant.
(3)Fundraising indicator: Usually achieves good results with significant amounts raised. It’s hard to control the granularity of funds as it involves high-value users.
ICO is the Initial Coin Offering of digital currency.
Originating from the Initial Public Offering (IPO) concept in the stock market, ICO is an activity where blockchain projects issue their first tokens to raise general digital currencies like Bitcoin and Ethereum. When a company wants to raise funds, they usually issue a specific number of cryptographic tokens and sell these tokens to those participating in the project. Typically, these tokens are exchanged for Bitcoin, Ethereum, or other digital currencies, and sometimes even for fiat currencies.
The ICO is a project fundraising method derived from the digital currency and blockchain industry. The first traceable ICO was from the Mastercoin project (now renamed Omni). In July 2013, they announced an ICO crowdfunding with Bitcoin on Bitcointalk (the largest Bitcoin and digital currency community forum) and generated corresponding Mastercoin tokens distributed to backers. Essentially, this ICO was a barter trade, where participants exchanged Bitcoin for tokens in the Mastercoin project. Initially, ICOs were a community activity for cryptocurrency enthusiasts. But with the continuous development of digital currencies and blockchains, more and more people began to accept and participate. Most ICOs are done through Bitcoin or other digital currencies.
In the blockchain domain, the widespread use of ICOs started after Ethereum introduced the ERC20 token issuance based on its system. This led to a surge in ICO occurrences. The most significant fundraising project was EOS, which used a daily bidding issuance method and raised approximately 4 billion USD over almost a year.
ICO offers an online, cryptocurrency-based method of fundraising. It is straightforward, convenient, and facilitates the distribution of new tokens. The primary strengths of ICOs lie in their ability to effectively raise funds and issue tokens.
Operational Risks: Most projects that conduct ICOs are in their early stages, with limited resistance to adversities, leading to potential operational risks. Consequently, the majority of ICOs, similar to angel investments, face early-stage project risks, resulting in potential investment losses.
Financial Risks: During the ICO investment process, investors may be exposed to risks such as fundraising scams and investment losses. As ICOs are often in their preliminary stages and lack proper oversight, some startups may exploit the booming market to create fake project information and engage in ICO fundraising scams.
Regulatory and Legal Risks: The predominant mediums for ICO fundraising are BTC and ETH, which currently exist in a regulatory gray area, devoid of specific legal frameworks. Post-2017, nations intensified their regulation and control over ICOs. Nevertheless, alternative forms like IXOs have emerged, serving similar purposes to ICOs.
At present, on CoinMarketCap, the term ICO is broadly interpreted as the initial token issuance, which encompasses methods like IEO and IDO. As illustrated: the overarching ICO Calendar represents a generic view of ICOs, while the ICO under the ‘Upcoming Project’ category refers to the ICOs as described in this section.
Drawing from the Token issuance evaluation metrics, we summarize the efficacy of the ICO method:
(1)Coverage of Token Issuance: There are no participation constraints, leading to the broadest coverage. However, it requires the design of participation rules to filter genuine users. Due to investment interests, ICOs often attract many non-end-user investors rather than the intended early adopters of the application. (Combining with airdrops usually yields better results.)
(2)Compliance Issues: Although additions like KYC were incorporated, ICOs are considered potentially illegal in many jurisdictions.
(3)Fundraising Metrics: ICOs generally achieve satisfactory results in fundraising. If an ICO does not produce positive outcomes in this regard, alternative methods are also unlikely to fare well. Managing the granularity of funds can be challenging, with the possibility of significant contributions from individual users.
An airdrop is a distribution method for digital currencies. Initially, the only method to obtain cryptocurrencies like Bitcoin was through mining. However, with the advent of altcoins and forked coins, in addition to mining, airdrops became another distribution method. As the name suggests, airdrops are akin to receiving funds out of thin air. Development teams distribute digital currency to users’ addresses without the need for mining, purchasing, or holding the original coin before a fork. While there are unconditional airdrops, most are based on specific criteria, such as holding certain digital assets. The airdrop rules are set by the issuing party, ranging from providing a set amount of coins upon registration to distribution through snapshots.
In the early stages of blockchain development, airdrop criteria were minimal. However, as the ecosystem evolved to Web 3.0, many projects began distributing airdrops after achieving certain milestones. Airdrops have been used to reward contributing users or guide them to complete related tasks, such as the airdrop design by Arbitrum.
Distributes new tokens to a targeted user base, facilitating circulation and promoting the use of new coins. Airdrops typically don’t involve fundraising, so they usually steer clear of regulatory issues.
Directs airdrops to genuine application users and guides them to complete associated tasks.
An IEO, or Initial Exchange Offering, is a method to raise funds for new projects through cryptocurrency trading platforms. IEOs are usually supported by these platforms, so project teams must ensure the quality of their proposals. In most cases, the IEO proposals undergo rigorous scrutiny by the trading platforms. In essence, the trading platforms vouch for the approved IEO projects with their business reputation.
Through IEOs, potential investors can purchase assets before they’re listed on trading platforms. Registered users who provide KYC (Know Your Customer) details can buy tokens before public trading begins.
Advantages of IEOs:
ICompared to previous ICOs, IEOs have clear advantages. Tokens are directly listed on trading platforms, enhancing their liquidity. For ordinary investors, this means quicker participation in trading. Project teams also benefit as their audience expands to the entire user base of the trading platform, broadening their investor base. For genuine, high-quality projects and early entrepreneurs, IEOs aren’t just an excellent fundraising channel; they also save costs and effort of listing on trading platforms, allowing teams to focus on R&D and community operations. For trading platforms, the most evident benefit of IEOs is increased trading volume and daily activity. Fans of projects flood in, with their funds accompanying, and some might eventually become loyal users. Such activities are more enticing than traditional promotional efforts.
Disadvantages of IEOs:
Listing costs. Trading platforms usually charge listing fees, which can be burdensome for early-stage projects.
IEOs require a certain level of project scrutiny, setting a high bar for many projects.
In terms of token distribution metrics, IEOs primarily cater to users with trading demands and don’t adequately cover the true initial customers of the product. Best used in conjunction with airdrops. While trading platforms usually ensure compliance, IEOs relatively successfully amass substantial funds through trading. However, issues like market manipulation and early exits by initial investors persist.
Compared to the first ICOs, IEOs expand the trading user base, conducive for fundraising.
STO, or Security Token Offering, refers to the issuance of security tokens. Securities are valuable certificates representing property rights. Owners can use these certificates to demonstrate their ownership or claims of rights. The U.S. Securities and Exchange Commission (SEC) defines any investment that satisfies the Howey Test as a security. The Howey Test specifies: A contract, transaction, or scheme whereby a person invests money in a common enterprise and expects profits solely from the efforts of the promoter or a third party. Broadly speaking, in the eyes of the SEC, any investment that comes with an “expectation of profit” should be classified as a security.
STO represents financial assets or rights in the real world, such as company shares, debt rights, intellectual property rights, trust shares, and tangible assets like gold and jewelry, converting them into encrypted digital certificates on the blockchain. It represents the digitization of various assets, rights, and services in the real world.
STOs sit between IPOs and ICOs and are seen as a way for regulators to manage digital currency issuance similarly to IPOs. On one hand, STOs, recognizing their inherent securities nature, accept regulation from securities oversight bodies globally. While STOs still leverage underlying blockchain technology, they can update at a technical level to align with regulatory standards. On the other hand, much like ICOs, the foundational blockchain technology behind STOs allows for a more efficient and streamlined issuance process compared to the complex and time-consuming IPO process.
The continuous bust of ICOs, combined with shattered myths around blockchain technology and events such as baseless ventures, fund schemes, and runaway projects, kept occurring. Fundamentally, these incidents happened because ICOs lacked tangible assets and value, relying solely on marketing, future projections, and unfounded consensus. The lack of direct oversight for crucial stages like ICOs and exchanges also played a significant role. STOs, based on tangible assets and openly embracing government regulation, aim to break the ICO stalemate.
Upon recognizing tokens, a new product of the blockchain, the U.S. Securities and Exchange Commission (SEC) decided to bring them under securities regulations. This move was initially perceived as a severe blow to the digital currency and blockchain industry, with many fearing total devastation.
However, as time progressed, more and more countries started to introduce their regulatory policies. Even though these regulations might differ in their definition of what an STO is, they made the market realize that such oversight wasn’t a catastrophic event but rather a means to legitimize and allow for transparent growth. Consequently, everyone from blockchain projects to traditional industries, capital moguls to securities professionals, and various asset owners began actively eyeing this sector, many rushing to enter it.
In a sense, STOs and the blockchain, tokens, and tokenomics behind them, amidst current controversies and unidentified statuses, are finding regulatory oversight to be not a sword of Damocles hanging over them, but a beacon guiding them forward.
The STO regulations initiated by the U.S. have gradually led many other countries worldwide to follow suit, and a more transparent global regulatory landscape has begun to emerge from the chaos.
An Initial Fork Offering typically stems from a fork of mainstream cryptocurrencies, like Bitcoin. An IFO results in a new currency forked from the original Bitcoin blockchain, branching out based on different rules. For instance, Bitcoin’s first fork produced BCH (Bitcoin Cash), a completely new cryptocurrency. This “fork” not only retained most of Bitcoin’s code but also inherited data from before the split.
Forks are often combined with airdrops. The new coins created from the fork are given to existing users, benefitting them and accelerating the acceptance and circulation of the new currency.
But how many forked coin models have truly succeeded? The success of a blockchain project hinges on the continuous development of the project team. Teams that use the IFO model often possess speculative characteristics, making it challenging for the project to thrive.
An IMO, or Initial Miner Offering, introduces tokens by releasing a specific mining machine. A company or team creates a unique blockchain, utilizing a distinct algorithm. Tokens on this blockchain can only be mined using specialized mining machines exclusively sold by that company or team. Typically, these machines have functional applications, providing value through their continued use.
In simple terms, an IMO financing model involves issuing a specialized mining machine to produce new cryptocurrencies. There have been some notable IMOs in the past, such as Thunder’s Play Cloud—Link Coin (formerly Play Coin WKC), QVOD’s Traffic Gem—Traffic Coin (LLT), and the subsequent Storm Play Cool Cloud— BFC Points.
For applications requiring hardware support and those reliant on a hardware-based business model, this method can be beneficial. It helps target early angel users and incentivizes them effectively.
Before delving into IBO, one must understand Bancor, a term derived from a supranational currency concept proposed by Keynes and Schumacher between 1940-1942. In Keynes’s plan, Bancor could serve as an accounting unit for international trade, valued in gold. Member countries could exchange gold for “Bancor” but couldn’t exchange “Bancor” back for gold. All national currencies would be priced in “Bancor”.
However, since the U.S. emerged dominant post-WWII, the British proposal represented by Keynes wasn’t adopted at the Bretton Woods Conference. Turning to the Bancor protocol, it was introduced by the Bancor Network project. The protocol seeks to set accurate exchange prices between digital assets through formulas. The Bancor protocol enables automatic price discovery and an autonomous liquidity mechanism on a smart contract blockchain. These smart tokens have one or more connectors, linked to networks holding other tokens. This connection allows users to directly buy or liquidate smart tokens via their contracts, maintaining a balanced buying-selling transaction volume.
In a standard IBO issuance, the project team needs to pledge a certain value of another token as “collateral”. Tokens are then issued and circulated entirely through smart contracts, with the funds locked within these contracts, open to public scrutiny. Hence, the IBO model has various advantages.
A prime example of IBO is the EOS side-chain project—FIBOS. With the introduction of the IBO concept, FIBOS managed to raise 850,000 EOS within just a week of its mainnet launch at the end of that year.
The IBO model theoretically precedes the underlying theories for applications like DEX. In DEX and IDO, exchanges between various cryptocurrencies are smoother.
Looking at Coinmarketcap and other industry-related materials, IDO is currently the primary issuance method. From the graph in section 2.1, we can see that most projects in 2023 have adopted the IDO method.
IDO, which stands for Initial DEX Offering, refers to the initial token issuance based on decentralized exchanges (DEX). IDOs facilitate token sales through DEXs. Cryptocurrency projects provide tokens to the DEX, users invest funds via the platform, and the DEX handles the final distribution and transfers, all automated via smart contracts on the blockchain.
In 2019, IDOs gained attention due to their near-zero costs and decentralized nature. Hence, IDOs became the preferred platform for projects to raise funds outside of private and early seed rounds. Since the first IDO in 2018, there have been 2,365 IDOs, raising over $1.6 billion (source: CryptoRank, December 2022). Detailed information about IDO can be found in references
https://blog.bybit.com/en-US/post/a-deep-dive-into-the-ido-landscape-blt6b833275fde1a848/。
Although IDOs are issued on DEXs, based on the specific approach, they can be broadly categorized as:
Issuance via traditional DEX platforms, such as Uniswap, Balancer’s LBP, SushiSwap, DODO crowdfunding pools, etc.
Issuance through Token platforms like PolkaStarter, DuckStarter, Bounce, Mesa, etc.
Issuance via DAO platforms, such as DAO Maker.
Other innovative channels: MASK’s ITO method, announced and issued via social platforms like Twitter (with Twitter as the entry point, but the underlying remains a traditional DEX).
Due to the various IDO methods, there are some differences in the processes. On traditional DEX platforms, there’s generally no review process. However, if facilitated by an issuance platform, that platform would conduct relevant reviews. Some projects that have already produced tokens (typically in ERC-20 format) might not need the issuance capabilities of these platforms.
Generally, if a project wants to finance by issuing tokens, many processes are the same:
For those choosing the IDO method, the general procedure involves selecting one of the IDO forms, with many opting for token issuance platforms. However, the exact method varies depending on the platform:
(1)After a review, the project can launch the IDO on a DEX. Tokens are supplied at a fixed price, and users lock in funds to obtain them. Investors later receive these tokens during the Token Generation Event (TGE).
(2)Typically, there’s an investor whitelist. Investors might need to complete marketing tasks to join, or simply provide a wallet address.
(3)Part of the collected funds is used to create the liquidity pool for the project’s token, with the remainder for the team. Investors can trade tokens after the TGE. The provided liquidity is usually locked for a certain period.
(4)During the TGE, tokens are transferred to users, and liquidity funds open for trading.
I believe one of the reasons IDO is popular now is the lack of regulatory concerns.
IDOs are evolving and face a balance between regulation and innovation, as well as between decentralization and risk control.
Compared to the earlier IEOs, the user base of IDO trades was not significant initially. Still, with the growth of decentralized exchanges, the results will gradually surpass centralized exchanges.
In the previous section, we discussed several common IDO channels, namely:
Issuance through traditional DEX platforms such as Uniswap, Balancer’s LBP, SushiSwap, DODO crowdfunding pools, etc.
Issuance via token distribution platforms like PolkaStarter, DuckStarter, Bounce, Mesa, etc.
Issuance through DAO platforms, for instance, Dao Maker.
New channel methods: The ITO model created by MASK, which announces and distributes tokens via social media platforms like Twitter. (Twitter acts as the entry point, but the underlying platform remains a traditional DEX.)
The IDO rankings can be viewed on the Cryptorank.io website at https://cryptorank.io/ido-platforms-roi. The following data is a screenshot from May 30, 2023. It showcases the total number of IDOs on each platform and their respective return on investment.
Based on Cryptorank’s historical data, tokens from these IDO platforms have witnessed surges ranging from several hundred to even thousands of percentage points from their issuance to their all-time highs. For instance, tokens from the GameFi platform soared by as much as 4946.3%, making it one of the highest-performing IDOs in the records. This indicates that top-tier IDO platforms often feature tokens with a higher growth potential, making them one of the most favored choices among blockchain investors.
A Few Typical IDO Platforms
Comparison of Main Issuance Methods
There are two main purposes for Token issuance:
NFTs can also achieve these two objectives. Sending NFTs to users can be done directly to their wallet addresses or via NFT marketplaces. In terms of usability, it often depends on the perception of the value of the NFT. Many NFTs are presented in collections, reflecting memetic cultural elements. Typically, it only requires finding one person in a vast crowd who recognizes its value. By selling NFTs, fundraising can be accomplished, especially with equity-based NFTs, as users’ expectations of future returns make them more inclined to purchase.
This niche area will be deeply explored by other members of the economic group, and relevant research outcomes will be published in future articles.