If you follow the Tezos #Misc Slack channel, the second most posted about topic is about the uncapped nature of the Tezos fundraiser. I’ve written this article to postulate the important reasons why the developers have chosen this path.
When Satoshi released the Bitcoin protocols, he set a hard limit in the money supply at 21M coins. These coins are mined at anticipated intervals until they are gone, at which point the supply is what it is and the total value of the blockchain floats on the perceived utility of the network.
Ethereum took a similar mining convention as Bitcoin (called Proof of Work) but front-ended coin distribution with an Initial Coin Offering (ICO). At the time of their ICO in 2014, they had plans to mine at a decreasing rate to infinity, with the thought that the money supply would eventually stabilize. The ICO was also uncapped, and raised about $18M USD during its 2 month period.
With Tezos, the founders are taking the uncapped, time bounded model of the Ethereum ICO and eliminating the mining concepts found in BTC and ETH. Tezos instead proposes a “Proof of Stake” model, and will inflate the money supply annually by approximately 5%, paid out to coinholders who stake their claim (details here). So while the fundraiser is uncapped, it runs for a specified duration (the time it takes to mine 2000 bitcoin blocks - approximately 13 days) after which the number of coins in the Tezos universe will be known, and the “starter” dilution model will be understood as well.
So why is this the right model for Tezos? Here are some reasons to consider:
Everyone can participate
The Tezos fundraiser will be well publicized in advance of it’s opening, and will be open for 12-14 days. This means that everyone who cares about crypto will become aware of the impending offering, and will have a chance to participate. Early participants will all get bonuses, but everyone will have a chance to buy in at whatever level they are comfortable with (minimum 0.1 BTC I have heard).
You need look no further than the mania surrounding the BAT ICO to see the benefit here. The Brave team did an excellent job of promoting their Capped $25M ($35M) ICO, to the point where only a few large participants were astute enough to buy out the sale. What this means to BAT in the longer term remains to be seen, but early trading of the BAT on Bittrex showed a quick pop for early investors but no protracted run-up from there.
The foundation gets one chance to raise funds to fund operations and this is it
When you make a donation to the foundation, you are funding the development of Tezos. As a byproduct, the foundation will recommend that you receive tezzies , that will be spendable, saveable or tradeable. From the foundation’s perspective, they are allocating almost all of the tokens that they will control during the raise. (Approx 10% are held back for future payment for services). The team has an aggressive plan to make Tezos work and work well, but they will need to hire many engineers and support staff to pull of their plans. Those funds will come from the fundraise.
If you want to compare Tezos to a Silicon Valley software startup, Tezos would be considered to be raising their Series A. Looking at the last dozen Series A rounds recorded by Crunchbase, you see $4.5M to $500M. It’s reasonable to assume that Tezos should be in this range.
Uncapped is more efficient and fairer than Sold-out Capped
Uncapped offerings favor the organization and the long term coin holder. Capped offerings that sell out favor the investor by leaving money on the table that the investor will accrue in increased market value immediately following the offering.
This is not just a ICO issue, it’s fundamental to the IPO marketplace. Traditional IPOs set their offer price to clear the number of shares being offered, plus generate a “pop” that the investment bank and it’s best customers take advantage of. Some companies have left hundreds of millions on the table that become nearly riskless profit for the bank and cronies.
By comparison, the Google IPO was a “Dutch Auction” that allowed the company to generate maximum return by collecting bids that would clear all the shares being issued at the highest price investors were willing to pay. This Dutch Auction model is very much aligned with the time bounded uncapped model that Tezos is pursuing.
Tezos wants to be the smart contract platform that runs the world
Tezos is envisioned to eliminate the flaws in Bitcoin and Ethereum that hold them back from becoming dominant distributed ledgers. While the debate between the merits of Ethereum vs. Tezos will unfurl over the next years, one thing for sure is that the Tezos code base will evolve to become more powerful and usable. The mechanics of governance in Tezos are all about community rights and responsibilities. This is a blockchain that is being built for the long haul to create an optimal architecture for governing.
This does not mean that the value of Tezzies will stay flat. To the contrary, the value of any blockchain will eventually need to be tied to the value being created on it. But since the founders are architecting a long term view, they need as many people to use it as possible, and that means it’s less important to create near term returns for the investors.
Tezos is playing the looooong game
While there is not a lot of transparency about what the Tezos team is really up to, if you spend enough time reading their blog posts, listening to their videos and following their Slack comments, it’s evident that they think they are developing something that is a long-term game changer. In fact, there is enough chatter to read between the lines to find some committed futurists.
Much has been written about the 4th industrial revolution and the waves of frontier tech that are in their infancy, but will surely transform society - and humanity - over the next 100 years. The blockchain is one of those technologies, but is actually just an enabling platform for the much more radical changes coming with AI, nanotech and automation. This post is not the place to dive deeply, but I believe the that the Tezos team sees a future where billions, perhaps trillions of intelligent beings will leverage distributed technologies to enter and assure agreements that they believe will be in their best interests. Today’s systems simply can’t support this vision.
Its an experiment - like every other blockchain project so far
Entrepreneurship is a process that requires founders to make decisions with only 20% - 30% of the total amount of information. Collectively, we just don’t know much about this space yet - and that is precisely why massive experimentation is necessary and Tezos is so important.
The best developers I know have strong opinions that are weakly held. They will tell you exactly why the are right and their idea will change the world. But when contrary logic emerges, they refactor their approach. I have a feeling that the Tezos team subscribes to this view point as well. They’ve restructured their code and revised their plans when necessary - even pushing back their fundraise by over a year. This strikes me as a team that grasps the variables that matter and are unafraid to relentlessly refactor.
Do you have additional insight into why an uncapped fundraiser could be the best approach? Post your thoughts below.