The Initial Coin Offering (ICO) uses the blockchain as a new organization unit – a decentralized and self contained mini-economy. The token is the key access point into the system as the middleman has been cut out. Designing the token becomes a key part of the new system as it determines the flow of payments and rewards to those using the system.
In developing an ICO, one must determine the cryptoeconomics of the token including the maximum number of tokens, value for purchase (usually based on Bitcoin or Ether or an alternate (ALT) coin), discounts for purchasing early, and distribution of the token to founders, backers, developers, and other uses such as marketing, legal, and security.
The key to determining the tokenomics is estimating the size of the digital ecosystem and how many players both contributors and users will engage the system and how many transactions they will incur. One should issue enough tokens to run the core system but also consider how the system may grow over time.
One can optimize the token for different goals. Most ICOs issue tokens for building out the system and running it in its basic form. One could take the longer view and price the token to increase usage of the platform, i.e. setup a price that matches the value the user receives. Similarly, one could price the token to encourage developers to build out the digital ecosystem around the ICO.
It can be difficult to develop a plan for the entire life of the blockchain system envisioned so one may consider issuing another type of token later that give a higher level of access to the digital system since it may be in a more mature state.
One may also issue different types of tokens to give unique benefits to users. As the system grows, new applications and higher value benefits will become available.
Hall T. Martin is the founder of TEN Capital and a builder of entrepreneur ecosystems by startup funding through angel networks, funding portals, syndicates, and more. Connect with him about fundraising, business growth, and emerging technologies.
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