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ICO Approaches - Reverse Dutch Auction


ICOs - the good, the bad, and the ugly

As the ICOs take the crypto market by storm, we are witnessing a multitude of different implementation approaches. Unfortunately over time ICOs have earned a kind of a bad reputation, due to the fact that they:

  • a. empower scammers to take advantage over gullable investors.
  • b. have spawned a large number of projects that just didn't deliver.

Now, that doesn't mean that ICOs are inherently bad. In comparison to traditional fund raising methods, they allow the startups an opportunity for much bigger autonomy, due to the fact that they:

  • a. expose the project to a much larger audience interested in investing.
  • b. relieve the startups of the burden of VCs interfering in the creative process.
  • c. provide immediate liquidity of the funds raised.

However, in return, the ICO startup should treat its investors with respect and responsibility. In our blog post ICO features to consider we have discussed a couple of features designed with investors protection in mind.

In this blog post we will start a series of articles that explain the different ICO approaches, and the fact that we start with the Reverse Dutch Auction is not a coincidence. There is a prevalent opinion in the crypto community that this is the model that gives most protection to its investors. Also, some of the most successful ICOs used this model.

The Reverse Dutch Auction

The Reverse Dutch Auction is capped, either in ETH raised or in token sold amount. Also, it is not limited in time.

The auction starts with a high price and cap, which then decline with every new block mined. This property allows investors to buy tokens at the point when they think that the price is fair. The auction ends once the price multiplied with the number of tokens equals the total amount of ETH sent to the auction.

All of the auction participants receive their tokens at the same final price.

From the investors point of view, there are two possible outcomes:

  • a. The sale closes before the valuation drops below his price estimation. In this case, he is protected because he stayed out of, what he would consider a bad deal.
  • b. The sale closes after the valuation drops below his price estimation. In this case, he becomes the investor and receives his share of tokens.

Reverse Dutch Auction examples

Some of the most prominent ICOs that used this model are: Gnosis and Raiden Network.

Gnosis executed a capped sale, with a cap set to $12.5 million. The portion of tokens distributed depended on the crowdsale time span. If the token sale finished on the first day, the amount of distributed tokens would be 5% (and the rest would be held by the Gnosis team). If it finished on the second day, the amount of distributed tokens would be 10%, etc.

We already discussed the benefits of the Reverse Dutch Auction. However Gnosis crowdsale exposed some of its downsides too, the biggest one being the irrational nature of the market. Due to the fear of missing out, a lot of investors bought the tokens on the very first day of the auction, regardless of the valuation. The outcome was that the sale reached the cap within the first few hours, when it was selling about 5% of the total amount of tokens, rendering the project valuation at about $300 million.

In the image below you can see the visual representation of the Gnosis auction model

Gnosis auction

For a more in-depth insight into various ICO models, you can check Vitalik Buterin's blog post on the subject.

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What's Next

If you've completed this tutorial, we recommend you follow up with these tutorials:

ICO Features to Consider
What is Flat Rate Crowdsale?
Increasing Price Crowdsale Explained

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