This Tulip Mania innovation might just save the ICO
Over the last few years, ICOs?—?Initial Coin Offerings?—?have been arguably the most controversial topic in crypto. During the height of the last bull run in late 2017, virtually anyone with an idea could run an ICO and raise excessive amounts of capital with relative ease.
Throughout 2017, it was not uncommon to log on Facebook and have your feed littered with ads for the “next Bitcoin.”
A troubling report from 2018 suggested that up to 80% of ICOs were ultimately scams so it’s no wonder that many crypto investors have a negative opinion of ICOs.
Let’s Set the Stage
Let’s agree a project failing does not automatically equate to it being a scam from the start, and most meaningful, sophisticated crypto projects have raised money through holding an ICO, too?—?from Ethereum to Basic Attention Token.
However, due to a handful of bad actors, many crypto enthusiasts and investors have lost faith in the traditional ICO process?—?and sometimes much of their money with it, largely due to crashes that soon follow the sale.
Up until now, the vast majority of crypto projects that have raised capital through an ICO have had either a capped or uncapped sale.
A capped sale means that the ICO sets a maximum amount of tokens to be sold and the sale ends when the intended market cap has been reached.
During an uncapped sale, the amount of money raised does not have a predetermined limit, and the value of a token is only determined once the token sale is complete.
While there have been incredibly successful crypto projects that have leveraged either a capped or uncapped sale, several prominent crypto projects such as Algorand are turning to a Dutch Auction for their token distribution with the hopes of bringing more transparency to the process.
What Is A Dutch Auction?
So what exactly is a Dutch Auction, and why might it be the most effective way to hold a token sale in today’s crypto environment?
Given the constant comparison of the Tulip craze seen in the Netherlands in the late 1600s to the chaos seen at the top of any crypto bull market, it’s only fitting that the Dutch Auction actually came about as the result of Tulip Mania.
At the time it was believed that the most efficient way to buy and sell tulips was through as few bids as possible given the short timeframe that tulip bulbs could be dug up and transported. If you’re fascinated by the subject, Optimal Auctions has a great blog post on it here.
A Dutch Auction, as defined by Investopedia, “is a public offering auction structure in which the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold. In this type of auction, investors place a bid for the amount they are willing to buy in terms of quantity and price.”
In this type of auction, instead of buyers purchasing an offering at a fixed price, the process allows anyone to bid their own chosen quantity and price they are willing to pay. Unlike traditional auctions, the price of the asset continues to fall until the winning bid is made.
A Dutch Auction can also have a reserve price set, but the final price will fall between the reserve price and the initially inflated price offered. In the case of a Dutch Auction, the price with the highest amount of bidders becomes the offering price.
While not the most popular type of auction, Dutch Auctions have been used by massive tech companies such as Google for their IPO and even the U.S. Treasury to sell bonds, Dutch Auctions have also been used to sell fruit in many European countries as well.
Perhaps the most significant benefit of the Dutch Auction in crypto is that it allows more people to be a part of the process. Because anyone can bid on the offering for any quantity and price, participation is not reserved exclusively for insiders or high net worth individuals.
The Biggest Project Using The Dutch Auction
Algorand is one of the most high-profile crypto projects to turn to the Dutch Auction, with its first one being completed on June 19th. With an incredibly impressive team led by Turing Award winner and MIT professor Silvio Micali, Algorand is working to solve the Blockchain Trilemma and create the new standard for blockchain technology.
As Algorand notes on their website, “We believe that the market should determine the value of the Algorand Public Blockchain, and by proxy, the Algo. We find that auctions, in particular, Dutch Auctions, achieve this fairness for two main reasons. First, at every auction, everyone who buys an Algo buys it at the same price. Second, the price is determined by the market.”
During the auctions, thousands of people all around the world are glued to their computers watching the auction happen in real time using Algorand’s very own blockchain. Given Algorand’s vision of creating a borderless economy, a community of diverse individuals is imperative for their long term success.
Although Dutch Auctions do carry many benefits, having the price decided by the market during a token sale can be a risky endeavor for even the best run crypto projects. Algorand’s decision to hold a Dutch Auction speaks volumes to their belief in their community and potential success.
Here is a quick breakdown of how the sale is held:
This chart explains the Algo distribution according to Algorand’s recent Dutch Auction offering.
A More Trusted ICO Alternative
One of the most unique aspects of the Algorand Dutch Auction is that they have committed to offering a refund of up to 90% of the auction price based on the value paid for up to a year after purchase. Anyone who participated in the auction can return their Algos back to the Foundation, as long as they send the Algos from the original wallet in which they used to buy into the auction.
Imagine if you had the opportunity to buy the stock $200 and that the company guaranteed you could sell back your investment at 90% of the price if you were unhappy with the performance. That’s precisely what the team at Algorand is attempting to pull off.
For investors who are more conservative in nature, this buyback represents a massive shift in how token sales have typically been held. While there is always a risk with any investment, the buyback offer gives investors a way to recoup a large portion of their investment should things not go as planned.
Opportunity for the savvy investor aside, this refund program goes a long way in helping build trust with the community and demonstrating the Algorand Foundation is truly in it for the long haul. Far too many crypto projects up until this point have over promised but under delivered.
The crypto world will be closely watching what comes from Algorand’s Dutch Auctions, and if successful it may become the new preferred funding model of the future.