Why ICO token burn is NOT a good thing for investors and the better alternative!

  • This site uses cookies. By continuing to use this site, you are agreeing to our use of cookies. Learn more.

Adriaan Admin

Administrator
Staff member
Jan 30, 2018
231
45
28
www.bitcoinforbeginners.io
#1
In the perception of most people involved in ICO's, the general believe is that the burn of unsold tokens is the best thing that can happen after an ICO has ended. Compared to adding unsold tokens to for example the marketing pool or company funds, I wouldn't disagree with that opinion, because indeed a token burn would decrease the total supply and thus preventing future dilution of the circulating supply. Token burn therefore has now turned in a religiously celebrated positive feature of any ICO.

Personally I never gave it too much thought, but recently I realized that token burn actually isn't so wonderful for the ICO token investor and that it actually benefits the company/founders/team more than the investors. And that there is a better alternative, which the Dutch ICO Seal Network implemented, which made me re-think the token burn concept.

To be clear: I am only talking about unsold ICO token burn, not about token burn programs that run after the whole ICO process.

So let's calculate a few examples here:

Let's assume your average ICO: $40 million hardcap and 80 million tokens being issued and a token sale price of $1. The token allocation would look like this in the whitepaper:

50% of token supply: sold in private, presale and/or ICO = 40 million tokens
25% of token supply: for founders, team and advisors with lock up and vesting periods = 20 million tokens
10% of token supply: company reserve = 8 million tokens
10% of token supply: marketing pool = 8 million tokens
5% of token supply: bounty program = 4 million tokens
100% = 80 million tokens = $ 40 million raised = break even point market cap for ICO investors: $ 40 million.

If indeed all (50% = 40 million tokens) tokens are sold then the relative and absolute token allocation will remain the same.
However, if only 50% of the available crowdsale tokens are sold and the unsold tokens are burned the relative allocation looks very different after the token burn:

33.33% of token supply: held by private, presale and/or ICO investors = 20 million tokens (50% of 40 million burned)
33.33% of token supply: for founders, team and advisors with lock up and vesting periods = 20 million tokens
13.33% of token supply: company reserve = 8 million tokens
13.33% of token supply: marketing pool = 8 million tokens
6.67% of token supply: bounty program = 4 million tokens
100% = 60 million tokens = $ 20 million raised = break even point of market cap for ICO investors: $ 20 million.

As you can see, due to the token burn the market share of all others but the investors has increased (from 50% to 66.67% market share), while the market share of the investors has decreased (from 50% to 33.33%) as a result of the dilution. Therefore, a coin burn is more in the advantage of the founders/team/company than in the advantage of investors.

A much better alternative would be to airdrop/distribute all unsold ICO tokens proportionally to all token BUYERS (the investors, whether, private investors, presale or main ICO investors). In that case the allocation would look like this:

50% of token supply: held by private, presale and/or ICO investors = 40 million tokens
25% of token supply: for founders, team and advisors with lock up and vesting periods = 20 million tokens
10% of token supply: company reserve = 8 million tokens
10% of token supply: marketing pool = 8 million tokens
5% of token supply: bounty program = 4 million tokens
100% = 80 million tokens = $ 20 million raised = break even point of market cap for ICO investors: $ 20 million.

As you can see the break-even-point of the market cap for ICO investors stays the same, and is not influenced by the fact that the total token supply is either 80 million tokens or 60 million tokens, HOWEVER the market share for the ICO investors is remarkably better than in the case of token burn; because it should exactly be the allocation as described in the whitepaper. The only thing that happens is that the COST BASE PER TOKEN for the ICO investors decreases from the ICO price of $1 to the new ICO investor cost base (and break-even-point) of $0.50 per token ($20 million raised funds / 40 million sold tokens).

Therefore the idealization of ICO unsold token burns is misinforming propaganda and in fact disadvantages the ICO investors relative to the other (non-monetary contributing) parties in the allocation pool. And therefore the airdrop of unsold tokens among token buyers should be the preferred method of dealing with unsold tokens and ICO's applying this method should get extra points for that in the ICO assessment by investors.

I hope this post and my point of view is insightful for anyone researching/investing in ICO's. I would be interested in reading your opinion on this matter! Do you agree or do you see it differently?
 
Jun 12, 2018
70
6
8
#3
HOWEVER the market share for the ICO investors is remarkably better than in the case of token burn; because it should exactly be the allocation as described in the whitepaper.