Advanced Web3 Tokenomics Design — Part 2: Pre-Seed Funding without Pre-Minted Token Allocation
Nearly all the crypto-assets currently launched by web3 companies suffer horrible tokenomics design. In this blog post, I will be discussing the opportunity to fund early web3 development without pre-minting tokens as a part 2 of a complete series. This work is a follow up to a previous blog post “How to Design Web3 Tokenomics”. Web3 founders are the main target, but crypto investors in general might find the content interesting to help them make investment decisions.
Unlocking Revenue Streams
As discussed in the Part 1 of this series of blogs on Advanced Web3 Tokenomics Design, having revenue streams feed into web3 tokenomics provide real advantages to protect real users and ensure long term sustainable value creation. One such protection mechanism is to prevent the minting and allocation of tokens to early investors as well as the team, etc. This is often referred to as a fair token launch where early participants do not receive free tokens or discounted tokens. A prime example of a fair launch would be Kaspa, as no tokens were allocated to anyone before their launch, not even to their team. Additionally, Bitcoin never had any token allocation to anyone when it first launched (implying that everyone had to either mine or buy Bitcoin before they could sell them).
Often web3 projects by the time they launch publicly have already allocated more than 50% of their supply to early investors, to the team behind the project, to their advisors, to partners, to their treasury, etc. This creates incredible sell volume as the project launches and continues operating unless long daily vesting is in place. Meanwhile, if a project launches without pre-minted token allocation, then there is no need for vesting at all, and there is very low selling pressure in the early days or months after launch.
Funded through Equity or NFT Allocation
Web3 companies that unlock revenue streams into their economic model have two opportunities for early funding unavailable to web3 companies without revenue streams. They can fund their pre-launch operations by selling equity in the business, or by selling NFT’s representing a royalty on the revenue streams that we discussed previously. Investors that buy equity in the business would expect the business to eventually turn a profit, and since there is no token pre-allocated for the team or the company, this means they have to rely on transaction fees or some other means of generating revenues supporting the business.
Since few web3 companies get acquired, equity is not likely to be worth much to early investors, I would tend to say a portion of royalty on revenues should be favored, and is vastly more liquid than equity. Not all investors are set up for such an investment model however, and I have never seen NFT of royalty of a business yet. I suspect they will become widespread in the future given the advantages. Unfortunately, these royalty NFT certainly qualify as securities which brings additional legal hurdles.
SEC and Regulatory Hurdles
Every country has different rules regarding crypto and securities. However, the US has the majority of the headlines and is often one of the most strict when it comes to crypto regulations especially after the FTX scandal. Fortunately, rules over equity crowdfunding (Reg CS) have been created to help small companies get access to funding even from non-accredited investors.
The rules:
- require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal
- permit a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period
- limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period and
- require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering
Securities purchased in a crowdfunding transaction generally cannot be resold for one year.
Equity crowdfunding platforms like Republic.com are ideal and also support crypto companies and all the rules above are managed automatically by the platform.
I am looking for the day that most crypto launchpads are fully licensed to operate and sell crypto-securities like Republic. In the meantime, it is possible to raise funds to operate the launch of a web3 business without having to pre-mint tokens and give allocation to anyone before the actual launch greatly reducing the pump and dump scams going on. With the recent news in the US, and the regulatory landscape becoming “idiotic” (US Attorney General claiming Ethereum is a security), maybe excluding the US entirely remains a valid funding strategy to avoid issues.
Pros and Cons of Royalties
Royalties have definite advantages as early investors cannot receive more value than the revenue generated from the network. As well, revenue is more based on uses even once a project starts to plateau. Most crypto-assets assume infinite growth potential which is completely ridiculous, it is to be expected that at some point the price of the token ceases to grow at which point where is the upside for buyers or early backers? With royalties, the upside remains with continuous use even if the price of the token has reached its maximum.
However, royalties for tech companies are similar to bleeding much needed cash to finance growth, and more often than not, tech companies can operate for a very long time before generating a single dollar of profits.
With that said, in the SaaS and Ecommerce industries, financing through royalties has taken a decent chunk of the market, for example funders such as Clearco have grown significantly.
Conclusion
I explained the opportunity for web3 companies to fund their early operations through the sale of NFT’s on licenced security platforms (equity crowdfunding) to ensure fair launch of crypto-assets. In the next blog post of this series on Advanced Web3 Tokenomics Design, we will cover the topic of “Active Treasury Management, Minting, & Burning” to help web3 builders in designing better economies for themselves and their community.
Please subscribe to the other social media channels where comprehensive content will be added:
Use my referral code below for various crypto tools used for trading:
Centralised Crypto Exchanges to trade with Leverage and Grid Bots:
Keywords: #web3 #crypto #cryptocurrency #ethereum #blockchain #tokenomics
