Since 2016, we have seen networks deploy a variety of different token and network launch models in an attempt to increase network participation and grow their respective communities. To date we have seen +4000 attempts, test runs, and failures to efficiently and fairly distribute tokens to users that strengthen participation in a decentralized network, while avoiding security-impeding concentration of holdings.
Have these attempts led us to the golden blueprint on the right way to launch a network? The truth is, there is no archetypal, one-model-fits-all model, but one thing is for certain: as the industry matures, token launches will increasingly evolve and coincide with actual network launches. What could be more fruitful than utility tokens with actual utility?
So where do we stand today? Let’s take a look at current ecosystem trends and how these have evolved over time in the light of recent regulatory, technical developments, and the appearance of new players on the token-powered playing field.
Regulatory scrutiny has increased, which has resulted in initial token distributions increasingly taking place in private rounds of accredited investors. Proposals such as the Safe Harbor present a first step in the direction of formal regulatory guidance that bridges today’s gap between regulation and progressive decentralization
Private infrastructure and capital providers are increasingly evolving into Web 3.0 native business models, uniquely positioned to support early stage bootstrapping and ongoing participation in decentralized networks
The road to Proof of Stake is finally transitioning from its lengthy research phase and genesis implementation to growth
The emergence of delegate work entities present a critical development to drive broader end-user adoption and participation, simultaneously posing new challenges to decentralization and token distribution in the evolving chapter of on-chain governance
Token distribution strategies, as a result of the above, have seen a proportional increase in use-focused distribution mechanisms including proof of use and interactive airdrops
Trend 1: The Regulatory Landscape
Who is allowed to sell what, to whom and when…
The once proliferating, open-to-all token sale landscape that attracted early users, speculators, innovators and scammers alike, is a thing of the past and has seen recent shifts as regulators catch up to innovation.
‘It is during the development phase that questions about the securities/non-securities line seem to be most difficult to resolve.’ – Hester Pierce, SEC Commissioner
Arguably, with a fully functional network there is less need for participation restricting, complex legal agreements when ambiguity can be mitigated by ensuring that tokens are actually used instead of simply bought. Yet this requires a fully-functional network to be available in the first place.
In an attempt to address impending compliance concerns, initial token distributions are therefore increasingly taking place in private rounds of accredited investors. Some have pointed out that these recent developments have undermined what open-source protocols set out to achieve in the first place: putting tokens in the hands of users whose incentives are aligned with utility maximization of the network rather than profit maximizing investors and private companies.
Finding a viable, compliant, and distributed funding model to finance the development of a to-be decentralized network, while ensuring tokens end up in the hands of long-term participants seems to present an ongoing, two-fold challenge. Proposals such as the Safe Harbor and the proactive setting of rigorous, industry-leading standards, present a first step in the direction of potentially bridging today’s gap between regulation and decentralization.
Trend 2: The Rise of Proof of Stake
…and why 2020 is a monumental year for the future of Proof of Stake
As of April 8 2020, the cumulative market capitalization of stake-able crypto-assets is $11.19 billion, with over two-thirds (~67%) of this value currently locked in staking.
Proof-of-Stake networks utilize staking rewards, which are minted by the protocol, as an incentive mechanism to ensure users participate honestly in validating on-chain activity.
Today, it’s all about Proof of Stake chains entering the market. With layer 1 blockchains such as Tezos and Cosmos, as well as layer 2 solutions such as Matic and Loom launching in 2019, the lengthy research phase on the road to PoS is finally transitioning from genesis implementation to growth. In 2020, the long-anticipated launch of eth2 and Ethereum-powered DPoS layer 2 solutions such as SKALE mark a pivotal moment for the future of Proof of Stake adoption.
Moreover, the recent developments in proof-of-stake systems reveal the importance of designing and optimising the initial launch of the network to achieve desired participation rates and ensure long-term viability. Within this context it is critical that pure or delegated proof of stake protocols distribute tokens so that a sufficient number of different actors can stake tokens and run nodes to secure the network. Poor and disproportionate distribution across individual actors can impair network’s security or influence the general perception of the networks’ governance legitimacy.
Trend 3: The New Kids on the Block
The evolving role of VCs and delegate work entities
With the rise of Proof of Stake, on-chain governance and other protocol-native work functions, networks require active user groups that have both the expertise and/or technical resources required to provide network-specific services and infrastructure. At the same time, these productive crypto-assets present new value accrual opportunities for entities with crypto-native business models that play an active role in network participation and adoption.
On one hand, we are increasingly seeing traditional venture models evolve into crypto-native hybrids. Capital providers with long-term holding strategies such as Multicoin Capital and ConsenSys Labs recognize the opportunity to create additional alpha by supporting networks in their portfolio through the provision of infrastructure and performance of crypto-native operations. These entities are uniquely positioned to support teams that are building decentralized protocols to bootstrap and jumpstart network effects.
Well designed agreements and incentives can ensure that all token holders involved in early stage project funding in the protocol’s development lifecycle can be valuable supporters that earn rewards from their own and ongoing participation and contribution to the network.
On the other hand, we have seen the proliferation of another stakeholder group – so called ‘delegate work entities’ (in case you haven’t read it yet check out this great article by Ben Sparango). Delegate work entities are network stakeholders elected by a token holder to perform network-native work functions, such as staking and voting, on their behalf.
The premise of earning rewards on productive crypto-assets in exchange for contributions to the network is an attractive one, yet not all token holders necessarily have the time, desire, or technical ability to perform the required tasks themselves. This is where delegate work entities come in. Today, delegate work entities including non-custodial (Staked, Stakefish) and custodial (e.g. Binance, Coinbase, Anchorage) providers are largely focused on providing staking services to both institutional and retail clients. We believe custodians, exchanges, funds and independent delegate work entities will play a critical role in driving broader institutional and retail adoption of productive crypto-assets.
Recent developments such as Katalyst, Kyber’s 2020 protocol upgrade, also reveal the increasing relevance delegate work entities will play in the governance realm either as direct actors in the voting process or by offering proxy voting functions on a token holder’s behalf.
We expect to see further growth and diversification in delegate work entities and other service providers as the Proof of Stake landscape continues to expand and believe these entities will continue to play a critical role in driving broader adoption and maturation of the industry. A research study conducted by the ConsenSys team in March revealed that across almost 300 active token holders 41.4% would like to participate in on-chain governance directly while 28.2% would like to delegate their vote to a representative.
It is important to note, however, that delegate work entities, particularly custodians, exchanges and funds with large and accruing token allocations, could result in centralization risks particularly as Proof of Stake systems increasingly co-evolve into on-chain governance.
Trend 4: Evolving Token Distribution Strategies
The future of use-focused token distributions
As network participation data indicates, it is not enough to have a broad distribution, but critical to have a distribution that aligns incentives amongst all network stakeholders. Healthy networks have a representative and actively engaged network of stakeholders.
So how have the aforementioned trends manifested themselves as design considerations in more recent token distribution models?
We have seen a proportional increase in public token distribution mechanisms focused on targeting actively contributing users.
These have come in the form of both interactive airdrops, such as Livepeer or Edgeware, as well as different implementations of proof-of-use enabled token distributions such as NuCypher, Solana and SKALE that are focused on distributing tokens to actual users.
We believe that designing distribution models that factor in self-selected productive efforts beyond capital contributions in a sale or (pseudo)-random selection in a passive airdrop is essential to:
Maximize regulatory compliance by ensuring that a token is being used for its intended purpose on the network, rather than a speculative holding.
Filter for participants most likely to participate in the network to disincentive short-term speculation, price volatility and dumping.
Effectively bootstrap the network at launch, whilst enabling early adopters to familiarize themselves with the network and earn token-based rewarded for their efforts
With the technical maturation of token-powered networks, particularly in the context of rising Proof of Stake adoption, the industry is leaving it’s adolescent, wild west years behind as we begin entering the chapter of ‘actual’ use and utility.
The chapter of use also creates a new window of opportunity for stakeholders with crypto-native business models, including VCs and delegate work entities, that play a critical role in the adoption and maturation of productive crypto-assets and the decentralized networks they are a part of.
While there is still a lack of formal regulatory guidance on the blueprint for compliant token launches we believe the emerging discourse, setting of industry best-practices and increasing focus on use-focused token distributions are a step in the right direction.
At Codefi Activate, we have anticipated this industry evolution and are well prepared to take an active role in driving the adoption of decentralized networks by empowering it’s users and enablers through the application layer.
Want to find out more about Codefi Activate? Visit activate.codefi.network
Written by Mara Schmiedt, Global Strategy and Business Development Lead, Codefi Networks