Exploring Token Issuance Models
On January 3, 2009, the first Bitcoin was issued. Over 13 years later, nearly 19 million Bitcoin are in circulation, representing around 90% of the total 21 million Bitcoin that will ever be issued.
Bitcoin's issuance model, while novel at the time, has become a popular template for other cryptocurrencies. The majority of well-known cryptocurrencies, including Ether, use a model similar to Bitcoin's, with tokens being gradually released over time via rewards to miners.
That said, there are many more types of token issuance models out there, and Horizen is working to allow developers to design their own token policy, including supply and issuance model.
In this article, we'll explore token issuance models for cryptocurrencies. We'll start with Bitcoin's model and then explore a few other models that are gaining in popularity. We'll also look at how Horizen will allow developers to design their own token policy.
2009 - 2013: Bitcoin Mining
As the first blockchain and cryptocurrency, PoW-based Bitcoin mining was the first and only issuance model for several years. Miners were rewarded with Bitcoin for verifying and committing transactions to the blockchain. Transactions were verified through a competition of hashing power, with the miner who found the solution to a cryptographic puzzle being rewarded with new Bitcoin.
The goal was to ensure a large distribution of Bitcoin to as many people as possible. Satoshi Nakamoto, the creator of Bitcoin, set a limit of 21 million Bitcoin and designed the system to release them gradually over time. The first miners were rewarded with 50 BTC, with the award dropping by half every four years.
This issuance model was later adopted by many other cryptocurrencies. These cryptocurrencies use a halving schedule that releases new tokens at a fixed rate until all tokens have been released. This creates a sense of scarcity and drives up demand for these tokens.
2013 - Present: Alternative Issuance Models
In contrast to PoW-based models, which rely on miners to generate new tokens, ICOs allow companies to issue new tokens in exchange for cryptocurrencies like Bitcoin or Ether. These tokens can then be used by investors to participate in the company's ecosystem or traded on exchanges.
ICOs and IEOs
The first ICO, then known as Mastercoin (now Omni) was held in July 2013. Over $18 million was raised in the sale, which was used to develop the Omni Layer, a protocol that allows for the creation of custom digital assets and currencies.
Since then, ICOs have become increasingly popular. In 2018, over $6 billion was raised in ICOs, delivering several times more capital to blockchain-based startups than traditional venture capital rounds. One issue with ICOs is that they can be abused by scammers, who create fraudulent projects and take advantage of unsuspecting investors.
Many other issuance models have taken off since then, including: IEOs Airdrops Auctions (including Launch Auctions and Dutch Auctions)
An Initial Exchange Offering (IEO) is similar to an ICO except that the tokens are issued by an exchange instead of the company itself. This has become a popular way for new exchanges to increase their user base and liquidity.
The first IEO was conducted by Binance in January 2019 with the debut of Bittorrent Token, raising around $7 million. Binance Launchpad, the platform for hosting IEOs, was created specifically for this purpose. Other exchanges, from Bitfinex to Huobi, have since followed suit.
IEOs offer a number of advantages over traditional ICOs. First, exchanges have a greater degree of trust with users than individual companies. This helps to reduce the risk for investors and drives up interest in participating in IEOs. Second, exchanges have extensive vetting procedures for admitting new projects onto their platforms.
This helps to reduce the number of fraudulent projects and increases the quality of the projects that do participate. Third, IEOs are often conducted using token sales platforms like Binance Launchpad or Latoken Launchpad. These platforms help to streamline the process for both investors and projects.
Airdrops and Auctions
Airdrops are another way for companies to distribute tokens to holders of existing cryptocurrencies. In an airdrop, the company sends new tokens to holders of a certain cryptocurrency in proportion to their holding. For example, if Company A plans to do an airdrop and it has 100,000 total tokens to give out, it might send 100 tokens to 1,000 holders of Bitcoin, Ether, and Litecoin.
Airdrops are a way for companies to increase the adoption of their tokens. They also provide a way for users to passively accumulate tokens. One issue with airdrops is that they can be difficult to track and participants may not be able to immediately use the new tokens they receive.
In an auction, potential buyers submit bids for a set number of tokens. The highest bidder wins the right to purchase the tokens at the price they bid. This type of sale is often used by governments or institutions that want to sell off assets such as property or securities.
Launch auctions are similar to standard auctions, except that the tokens being sold are not yet available. This type of auction is often used by startups that want to sell off their initial allotment of tokens before they are released onto the open market. It provides a way for early investors to get in before demand drives up prices.
Dutch auctions are a type of auction that allows multiple buyers to purchase items at the lowest price possible. This type of auction is often used when there is excess inventory or when the seller wants to get the best price possible for their item.
Creating your own issuance model
The field of tokenomics, or the study of how to create and manage tokens, is still in its early days. But this is changing fast, as more and more projects look to issue their own tokens as a way to raise money and power their networks.
However, there is no one-size-fits-all model for token issuance. Each project needs to design its own model based on its specific needs and goals. Horizen, for example, will allow developers to customize the token policy for their own tokens, including a maximum supply, an inflation rate, and staking or mining based reward mechanisms.
This flexibility gives projects the ability to tailor their tokens to fit the specific needs of their applications and users. For example, a project could set a lower maximum supply for its token if it wants to create a deflationary currency. Or it could choose a higher inflation rate if it wants to reward early adopters with more tokens.
And by using staking or mining rewards, projects can give users incentives to validate transactions and help keep the network humming. This can be an important way to bootstrap a new network and get it up and running smoothly.
All of this flexibility makes Horizen an attractive platform for developers who want to create their own tokens. With Horizen's platform, they can design a token that meets the specific needs of their application and users. This will help them stand out in an increasingly crowded field and build a successful project.