I. Executive Summary:
This report delves into the critical need for an advanced, decentralized price discovery platform within the Cardano ecosystem, addressing the pain points of launch supporters and project stakeholders alike. Through meticulous market analysis, we’ve identified a gap in the current crypto investment environment: a transparent mechanism for price discovery, emphasizing consumer protection and education. Our solution proposes to fill this void, offering enhanced investor confidence, fair token valuation, and robust ecosystem health.
The cryptocurrency market has blossomed into a diverse and complex space, hosting an array of investors and project stakeholders with varying needs. A common challenge, however, remains the volatility and unpredictability associated with new token launches. Additionally, there are few truly non-custodial token launch options available. This report aims to unpack these issues, highlighting the necessity for a decentralized price discovery platform on Cardano, a blockchain network renowned for its robustness and innovation.
While there are multiple beneficiaries that are impacted by token launch efforts, we’ve chosen to focus on the launch participant, or speculator/investor, as the primary beneficiary for our research. This report explores the space from their point of view and we aim to highlight opportunities to improve their experience, as well as the overall experience for the project owners and other stakeholders.
Data was garnered through a mixture of qualitative and quantitative research methods, including investor surveys, analysis of market trends, and interviews with project stakeholders within the crypto space. Both statistical analysis and sentiment analysis were employed to interpret the findings.
IV. Key Insights on Investor Needs:
In October of 2023, we launched a survey to our community seeking to better understand the sentiment of early investors in crypto projects. Here’s what we found:
Fig. 1 — Overwhelmingly, the community discovers new token launches via social media channels.
Fig. 2 — Token launch investors claim to be motivated primarily by long-term investment potential when deciding whether or not to support a new project. Additionally, and as part of that decision making calculus, they need to believe in the project and its team.
Fig. 3 — Almost half of the respondents view typical token launches as very or somewhat transparent.
Fig. 4 — Over 75% of respondents indicate that they have encountered losses due to volatility when participating in new token launches.
Fig. 5 — Almost 80% of respondents rate liquidity as extremely or very important when they are considering investing in a new project.
Fig. 6 — Nearly 40% of respondents rate a project’s vision and use case as the single most important influencer in their decision making when investing, followed by their belief in the team behind the project.
Fig. 7 — Most investors try to compare a new token with existing/similar projects to determine the fair value of that token.
Fig. 8 — A large percentage (>50%) of respondents don’t have a clear preference about the best structure for a token launch, indicating opportunity for new concepts like the Liquidity Bootstrap Event to fill a gap in the marketplace.
The key high-level takeaways from this survey data can be summarized into the following major themes:
- Transparency and Communication: There is a strong desire for clear, honest communication from project developers. This includes transparent roadmaps, tokenomics, and regular updates about project milestones. Transparency is a significant trust factor for investors.
- Project Fundamentals: Investors are looking for projects with a solid vision, use case, and reliable teams. There’s an emphasis on long-term potential and credibility over short-term gains.
- Community Engagement: Many responses stress the importance of community support. Building and maintaining a strong community is seen as vital for a project’s success. This may involve interactive sessions like AMAs, regular updates, and active social media presence.
- Fair Launch Practices: Respondents are looking for equitable launch mechanisms to prevent bots and whales from taking advantage of token sales, thus ensuring a fair distribution of tokens.
- Accessibility and Anti-Scam Measures: Accessibility of tokens and prevention of scams are common concerns. Investors want assurance that they’re not investing in a fraudulent project. Verifications, such as third-party audits and visible team profiles, are seen as positive steps.
- Utility and Innovation: There’s an expectation that tokens should have actual utility and the project should bring innovation to the ecosystem, rather than being a mere fundraising tool.
- Tokenomics and Economic Design: Stable and well-thought-out tokenomics that do not change unexpectedly are crucial. Changes in tokenomics should involve community voting or clear communication to avoid losing investor trust.
V. Analysis of Prior and Current Solutions:
While this report primarily focuses on the market dynamics of the Cardano ecosystem, it’s important to learn from token launch history in the broader cryptocurrency ecosystem . Below we’ve chosen two Medium posts that cover several older token launches, as a means of providing some historical context for the more modern solutions we feature from the Cardano ecosystem later in the report.
Feature post #1: On Fair Token Launches
This piece raises interesting points about token distribution in the crypto and blockchain space. The strategies and examples given underline the ongoing experiments and challenges in ensuring tokens get into the hands of those who can contribute meaningfully to a project rather than those who are just there for quick gains.
Let’s break down and reflect on the major points and suggestions presented:
1. Build a meaningful user base first: By ensuring a community or user base before a token distribution, projects can help align initial token holders with the goals of the project. This seems like a prudent strategy as these early adopters are more likely to be dedicated to the success of the project.
2. Target parallel communities: By understanding where potential users or contributors might currently be and targeting those groups, projects can expand their reach and draw in individuals who are more likely to use the platform or contribute positively.
3. Strategic airdropping: The Handshake example suggests that random airdrops might not be the best approach. By strategically targeting a specific group (like open source developers), projects can ensure the initial distribution gets into the hands of those who might actually be interested in contributing or using the platform.
4. Incentivize interaction: The Livepeer example showcases a more hands-on approach where users must actively claim their tokens, ensuring that those who get the tokens have at least some level of engagement and understanding of the project.
5. Balance between sale and distribution: Projects need to be wary of just selling their tokens. By focusing too much on sales, projects can inadvertently prioritize speculators over actual users or contributors.
In conclusion, while the ‘perfect’ distribution model hasn’t been found, projects that aim to distribute tokens in a way that promotes actual use and contribution over speculation are likely to see more meaningful engagement and success in the long run. It’s a delicate balance, and there’s no one-size-fits-all approach, but learning from past projects can offer valuable insights.
Feature post #2: Grin the Mythical Fair Launch
The top takeaways from Arjun’s piece:
1. Definition of a Fair Launch:
- A “fair launch” in the crypto world emphasizes offering everyone an equal opportunity to acquire a coin over an extended duration and at a consistent price. This is assessed mainly on two dimensions: the length of issuance and price equality.
2. Grin’s Launch Assessment:
- Grin’s launch stands out due to its high transparency, inclusive dual Proof of Work system, and its prolonged issuance schedule, which supports accurate price discovery. The author considers Grin’s launch to be among the fairest.
3. Critiques & Rebuttals:
- While some criticized Grin for venture capital-backed initial mining and the extensive attention it garnered, the author argues that competitive mining ensures fair coin distribution, and greater launch awareness enhances fairness in a free-market setting.
Current Techniques and Strategies in TradFi and Crypto
There are several mechanisms in both the cryptocurrency space and traditional finance that aim to reduce the volatility typically associated with the launch of a new asset, whether it’s a stock, token, or currency. Some examples:
1. Initial Public Offerings (IPOs) in Traditional Finance:
- Price Stabilization Strategies: Underwriters in IPOs often use a “green shoe option,” which allows them to stabilize the stock price by selling additional shares or buying back shares in the open market. This strategy can help reduce volatility in the initial trading days after the stock goes public.
- Lock-up Periods: These are contractual stipulations that prevent insiders who held the company’s stock before it went public from selling their shares for a specified period. This helps prevent the market from being flooded with too many shares immediately after the IPO.
2. Initial Exchange Offerings (IEOs) in Cryptocurrency:
- Fixed Price Offerings: Unlike traditional ICOs where token prices can fluctuate, IEOs sometimes offer tokens at a fixed price. Participants know the per-token price beforehand, which can reduce uncertainty and volatility.
- Due Diligence: Cryptocurrency exchanges conducting IEOs often perform extensive due diligence before launching a new token, which can help reduce the risk of scams and improve investor confidence.
3. Automated Market Makers (AMMs) in Decentralized Finance (DeFi):
- Liquidity Pools: AMMs use liquidity pools to facilitate token swaps. These pools can help reduce price slippage and volatility, especially if they’re well-funded, because the price is determined by a constant formula, rather than an order book.
- Incentivized Liquidity Provision: Projects often incentivize users to supply liquidity to these pools, improving the token’s price stability.
4. Stablecoins in Cryptocurrency:
- Asset-Backed Stablecoins: These are cryptocurrencies designed to minimize volatility by being pegged to stable assets like fiat currencies (USD, EUR, etc.) or commodities (gold, silver, etc.). While they’re not a price discovery tool per se, they provide a less volatile asset during periods of high market fluctuation.
5. Futures and Options in Traditional Finance and Cryptocurrency:
- Hedging Strategies: Both traditional markets and some crypto markets offer futures and options contracts, allowing investors to hedge against potential volatility in asset prices.
Each of these mechanisms and products aims to provide more stability in the pricing of new assets, though they come with varying degrees of success and potential downsides. The quest for improved methods of price discovery and volatility reduction is ongoing, especially in the rapidly evolving cryptocurrency space.
Current Solutions in Cardano
Current solutions in the market revolve around various methods, including centralized price discovery, speculative trading, and, more recently, events known as “bootstrapping liquidity events.”
Centralized Price Discovery and Speculative Trading:
- Strengths: These traditional methods allow for quick price establishment and can handle high volume trading.
- Weaknesses: They are susceptible to market manipulation, often lack transparency, and don’t always reflect true market sentiment or fair value, leading to significant price swings.
Bootstrapping Liquidity Events:
A relatively new phenomenon, these events are designed as a mechanism for projects to attract capital. They involve pooling resources to create an initial market for a new token, often facilitated by a third party or the project creators themselves.
- Strengths: They can generate substantial initial liquidity and public interest while providing projects with immediate access to capital.
- Weaknesses: The parties coordinating these events are often incentivized by maximum capital accumulation rather than establishing a fair and sustainable token price. This misalignment of interests can lead to inflated valuations during the event, followed by sharp corrections and increased volatility in the open market. Furthermore, these methods can sideline smaller investors, concentrating token distribution among large stakeholders and exacerbating the risks of centralization and market manipulation.
Given these insights, there’s a clear gap in the market for a solution that offers fair, transparent, and decentralized price discovery, aligning the interests of projects, initial investors, and the broader crypto community for long-term market health and stability.
Contrasting LBE Launches With Traditional token Launches
Given that LBE’s are a fairly new concept, it’s important to evaluate their success or failure based on the data from their resultant token launches, when compared to traditional token launches.
Below, we highlight the traditional token launches of SUNDAE, MIN and LQ on the Cardano blockchain, and then showcase the LBE-supported launches of INDIGO and FACT.
Traditional Launch Case Study #1: SUNDAE
Traditional Launch Case Study #2: MINSWAP
Traditional Launch Case Study #3: LQ
All three traditional launches follow the same obvious trend of an early buying frenzy, followed by massive post-launch sell-offs, where investors flood the market with buys for the new token, and early/advance token holders rapidly sell into the market to take their profits, while crashing the token’s price.
LBE Case Study #1: Minswap LaunchBowl (INDY)
LBE Case Study #2: WR Launchpad (FACT)
The INDIGO token launch example shows strong promise for the potential of a well-run LBE platform, in that it is seemingly able to minimize much of the initial launch volatility and release the token into the marketplace in a much more controlled and coordinated manner that allows natural market dynamics to take place and help investors realize the true value of the token.
The FACT launch also shows early indicators of having reduced massive launch volatility, though the token is still very much in its early days.
“ILE” Case Study: Optim
The OPTIM token launched in October 2023, leveraging what the OPTIM team termed a “Initial Liquidity Event”, which is a tiered variant of a traditional token launch with a fee schedule implemented post-launch to disincentivize token dumping. The OPTIM market performance as of mid-November 2023:
Much like FACT, it’s hard to draw many long term conclusions regarding the impact of their homegrown ILE launch scheme, especially given that they were fortunate to launch almost directly into the larger market bull run of fall 2023, which resulted in their token trading near its launch value, after losing value directly after launch.
Notably, their post-launch fee structure which imposed high trading fees that degraded over time elapsed post-launch, was met with a fair degree of criticism from token holders. With the data available, however, it appears this fee scheme may have helped to dampen some initial token dumping activity. More time should be allotted to draw stronger conclusions about the success or failure of this launch model.
VI. Project Stakeholder Requirements:
In general, projects looking to launch a token are focused on accomplishing their launch objectives by meeting the needs of the potential investor community for that token. From our user survey, we can infer that project owners need:
- A fair and accurate token valuation that reflects genuine market interest
- Sufficient liquidity to support token stability and investor interest
- Mechanisms that builds investor trust, promoting a healthier funding environment
The goal of most launchpad products is to make as much money as possible for the project stakeholders and launchers, but focusing on the needs of early investors can also help achieve those goals while increasing safety and reducing post-launch volatility.
Consumer Thoughts vs. Consumer Actions
Even when evaluating the limited initial success and future potential of the LBE token launch model, it’s important to point out the visible disconnect between the thoughts and the actions of speculators participating in token launches, as a dynamic that should be taken into account when designing new token launch platforms and technologies.
Our user survey attempted to surface the different motivating factors behind token launch speculators and found that overwhelmingly, participants in token launches claim to be focused on long-term value and team proficiency. However, when evaluating the actions of token launch speculators vis-a-vis the various historical market performance of various tokens, it’s clear that there’s a disconnect between these rational thought processes and the actual actions that are taken.
It’s possible that rational speculators can easily fall prey to social media and market hype and be convinced to ignore fundamentals for the fear of missing out, and engage in behavior that reinforces dynamics leading to “the first to dump the token, wins” phenomenon that is seen far too often with token launches.
We are merely speculating at this point, but feel it’s important to point out the discrepancy surfaced in our user survey. This topic likely warrants further exploration in its own research report.
The Potential of LBE’s
The growth of Liquidity-Bootstrapping Events as a means of decentralized price discovery on Cardano is poised to revolutionize token launches. By addressing the core needs of both investors and project stakeholders, it paves the way for a more stable, transparent, and flourishing ecosystem.
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