Fix the market cap indicator.

A post from Zach Herbert  at Sia Tech, written last April on using total tokens vs circulating tokens for calculating market caps.

Every site we could find that lists out tokens by price, volume and market cap does so based on circulating supply rather than total supply. Circulating supply indicates how many coins are in circulation, but does not include coins held by the project. By contrast, total supply includes coins in circulation + coins held by the project.

Here is our list of recommendations to remedy this issue:

  1. Replace the existing flawed market cap metric with total market cap on sites such as
  2. Add a new field called inflation factor.
  3. Add both metrics to exchanges.

It’s something that has bothered us as well. When doing our own ICO analysis, we always look at the total value of all tokens, rather than the amount being raised, which is often 50% or less of total tokens. It’s may not be entirely correct in all cases, especially when there is a usage for some of the tokens not released, but it’s a more accurate look than only circulating tokens.

As of today, the three sites they mentioned still show market cap based on circulation tokens.

Paradigm Shift for Calculating Value?

From David Einhorn’s latest letter to investors, via Josh Brown:

we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?

Brown recently wrote a post with similar sentiment. It’s interesting to think about how business models and values are changing in light of the recent token sale boom. And beyond token sales, there will be successful projects that will operate completely decentralized and based upon the exchange of tokens. There still won’t be any public financials and traditional valuation methods will likely be just as challenging as they are now.

3 Keys to Optimal Token Sales

Albert Wegner with thoughts on Optimal Token Sales:

Though he goes into much more detail, the basics are:

  1. Keep initial sale small.
  2. Hold one or more subsequent sales of increasing size
  3. When the protocol is ready, hold a final sale and/or distribution that gets all but a small fraction of the initially available tokens out for use.

Some of his ideas are quite similar to what Vitalik described previously (which he also cites). Before getting to the right way to hold a token sale, he lays out the two extremes in token sales with the right way somewhere in the middle:

The most potential for trouble are token sales which are one-time, large (possibly even uncapped) and take place when minimal specification / technical work has been done. In these the risk of outright abuse is highest (eg team starts paying themselves above market salaries, lavish perks), as well as the risk of nothing of use ever shipping is highest also

Conversely, the least problematic and the best incentives for the operation of a protocol would come from a highly distributed “helicopter drop” of a token that can immediately be used in a fully functioning protocol. The team makes no money here so there is zero potential for abuse, there is no technical risk (by assumption) and the recipients have a windfall so they will have no issue selling or using the token.

“99%+ of the ICOs out there are scams”

From Pierre Entremont early this month, ICOs: You’re scammy and you know it:

99%+ of the ICOs out there are scams. It has the very unfortunate side effect to make good teams/projects look dubious by association, so it has to stop.

I spent a lot of time thinking about what defines legitimate players. I feel the framework is now robust enough to be shared.

First three parts are definitions of what are Decentralized Networks (I), Tokens (II) and ICOs (III). Once these concepts clearly defined, identifying legitimate players is pretty straightforward.

He’s not the only one that things many ICOs are scams, though the 99% figure seems high. While most projects may not succeed, it seems ridiculous that 99% of projects are out to purposefully deceive investors/token holders. Entremont lays out his questions to ask for determining if a particular ICO is legitimate:

  • Is this organization really building a Network, or is it just a traditional company looking for easy and unregulated money?
  • Is there value to Decentralize this Network ? Some things work very well in a centralized way, plus decentralization is still an early and very costly/underperforming technology, it’s not a good idea to decentralize everything
  • Is the value of the Infrastructure the Organization says it will build correlated to the amount and Tokens % they are asking ? (example: Asking €x00m and x0% of the Tokens to “build a new currency for Africa” by cloning Bitcoin is questionable)

Most certainly don’t pass those questions and are using token sales primarily as a fundraising method .That doesn’t necessarily make it a scam, in my opinion, but they aren’t capturing the full technological potential presented by tokens and blockchains.

Thursday Links

  1. Guide to launching an initial coin offering – by Chris McCann. Given the relative newness of ICOs, he acknowledges it’s an evolving process:

    Given the blockchain industry is relatively new, there isn’t a whole lot of information on the topic (from a project’s perspective), and with each new ICO, teams are learning best practices on what to do and what not to do. Below is a guide of all of the information we collected about the ICO process, with input from people who experienced the process first hand…We will update this post with changes as we collect them.

  2. Brett Winton on How to Value a Cryptoasset. This is a precursor to Chris Burninske’s post, which we mentioned last week. Definitely still worth a read.

    At the simplest level, the network’s value is determined by the value of tokens that get held aside in user wallets to facilitate the network’s transaction flow.

  3. Lawrence Lundy on Convergence and the larger scale implications of blockchain:

    This means we constantly underestimate the pace of change and as software eats more industries, improvements compound as traditionally human-centric industries like healthcare, logistics and agriculture digitise. As these industries come online and capture, process and automate data; ownership of this data will define the state, market and nation over the next half a century. Blockchains are therefore one of the most significant technological innovations since The Internet and fundamental to Web 3.0.

    The development of blockchains is a good example, as exceptionally talented developers push the boundaries of cryptography with zero-knowledge proofs and smart contracts but fail to see the implications on broader governance structures and political philosophies.

  4. CB Insights’ published Blockchain Investment Trends In Review with lots of analysis and data on the amount being raised both via VC and token sales.

    The steady decline of early-stage equity deals may indicate that blockchain, like other emerging technologies, is undergoing the evolution from creation, to crowding, to consolidation.

    However, according to CB Insights data, blockchain’s consolidation may be tight, with blockchain companies failing at a higher rate than tech startups in other areas. Of 103 blockchain companies that received initial seed or angel funding in 2013 – 2014, only 28% managed to raise additional funding, and just one company made it to Series D: Japan-based cryptocurrency exchange, bitFlyer, with a small $1.8M round.

    In comparison, of 1,098 tech companies we tracked that raised seed rounds in the US in 2008 – 2010, 46% raised a second round of funding. An additional 14% went on to raise a fourth round of funding, versus blockchain’s 2%.

For stable token values, sinks are highly beneficial

Vitalik published a post on the valuation of medium of exchange tokens, which have dominated the ICO landscape. This type of token implies that it can be exchanges for goods and services on a platform built by the development team. It’s similar to a Kickstarter-style funding, except that tokens must have ongoing value. It’s not sufficient to deliver a product once.

…the cycle is not complete, and in fact it never will be; there needs to be an ongoing stream of buyers and sellers for the token to continue having its value.

He goes on to the many factors that go into determining the value of a token, concluding:

One immediate conclusion from this particular insight is that appcoins are very much a multi-equilibrium game….Another, and perhaps even more important, conclusion is that the market cap of an appcoin depends crucially on the holding time H. If someone creates a very efficient exchange, which allows users to purchase an appcoin in real time and then immediately use it in the application, then allowing sellers to immediately cash out, then the market cap would drop precipitously….hyper-efficient exchanges are around the corner

Due to this, he says values cannot be sustained solely on their usage as a medium of exchange; there are too many outside factors. He cites Etherdelta as an example of an alternative model, where fees are collected in the interface. Another option it to set a side a specific amount to buy back tokens and burn them, thus reducing deflation/costs of holding over time.

The important thing is that for the token to have a stable value, it is highly beneficial for the token supply to have sinks – places where tokens actually disappear and so the total token quantity decreases over time.

There’s been a lot of discussion lately about the value of tokens and the right way to do a token sale/ICO. The standards around tokens/ICOs need to be raised and hopefully this helps push more projects in the right directly. Of course, it won’t do much to help the dozens of poorly structured projects that have already raised millions.