How the traditional token sale model must evolve to support mainstream, securitized token sales (Initial Brand Offering Part III)
*TLDR: For those who don’t want to dive into the deep end, here’s the footnotes:
- Securitized token sales CANNOT use the traditional token sale interface and architecture, as it is far too immature and inefficient
- Hybridized architectures must be leveraged to host token sales that accept fiat currency and disburse tokens with relative ease (and in a way that doesn’t require the investor to have a wallet)
- Managed Wallet Architectures (MWAs) will serve as the foundation for token forward applications to preserve best UX practices
We left off, in Part II, delving into the process of corporatizing Kanye West’s brand and fractionalizing his company equity into security tokens. Now, we need to dive into how we would effectively host the Kanye West Music Company’s (KWMC) Initial Brand Offering (IBO) so that the maximum number of mainstream consumers can participate in the sale and, thus, KWMC can maximize its public valuation.
The Old Tale of Terrible Token Sales
If we were to tokenize shares of Kanye West Music Company (KWMC)and offer the security tokens in an IBO, we would need to completely rethink the Initial Coin Offering (ICO) UX model to make it more scalable, and more palatable to mainstream consumer participation.
2017 introduced many mainstream consumers to their first token sales. Although many took different forms and levels of legitimacy, the ICO interface, more or less, hasn’t changed. Typically, a token sale interface will look like this:
The process for interacting with such an interface, at least within the Ethereum ecosystem, is as follows:
- Register for the token sale by providing your name and email (general KYC process)
- Await the token sale start date, and quickly rush to the website to join the token sale queue
- Choose a number of tokens that you want to purchase, and send your ETH to the token sale address from your wallet (typically MetaMask)
- Wait a few days, maybe a few weeks, for the token disbursement that you purchased
The issue with this current methodology is threefold:
- Poor Scalability: Scalability of the token sale (i.e. the number of people that can participate) is limited by the transaction throughput of the blockchain the token sale is built on. Not only that, but popular token sales, on Ethereum particularly, can create race conditions in which participants compete to participate in the token sale, raise their transaction fees to ridiculous prices, and paralyze the entire network
- Usage of Buy-In Economics: As I noted in my previous brief, every existing, public blockchain network requires that its network participants transact in that network’s native token. The issue with this user experience requirement is that it forces participants to ‘buy-in’ to that localized economy quite literally by purchasing the blockchain’s token. The process of buying any cryptocurrency, even through Coinbase, is far from simple. Due to the complexity of purchasing cryptocurrencies, it is at this point in the on-boarding funnel, that many consumers fall off.
- Poor Private Key Security Education & Wallet UX: For those users that get through to the end of the token sale, and purchase their desired tokens, many consumers have to struggle with cryptocurrency wallets. Many wallets have terrible user experience. In addition, there exists very little education around private key security to ensure that the consumer’s assets are kept safe in their wallet of choice. Without such education, consumers could easily lose access to the tokens they’ve purchased.
These issues are mostly technical, and call for a hybridized approach toward developing securitized token sale platforms. It is abundantly clear that, at the time of this writing (early 2019) that there exists no reasonably decentralized and scalable public blockchain that could support a popularized IBO. For the sake of consistency however, we’ll assume that we’re intending to host the token sale on Ethereum.
Creating a Sustainable Token Sale Platform
Flooding Ethereum’s network with smart contract transactions isn’t wise. Instead, we need to batch transactions and periodically commit them to the root chain (i.e. Ethereum main-net) to minimize transaction fees and distribute the sale’s transactional throughput more evenly across the network (being considerate of our network neighbors). Such transactions can be batched by either using layer two solutions like state channels, as championed by organizations like SpankChain, or batch transactions on a private chain that sits atop of the root chain, like that of a Kaleido. For consistency’s sake, and to prevent our platform from being too reliant on smart contracts (and thus the Ethereum network), I’d prefer to support an architecture that leverages Kaleido and main-net so that we know our transactional throughput is relatively high.
Secondly, we’d need to trigger smart contract functions every time a certain amount of fiat transactions has occurred (or a certain amount of tokens have been purchased). We can do so by building an API that can trigger functions on our smart contract functions to disburse tokens. Resources like SensuiMod, developed by uPort and ConsenSys Social Impact, can serve as a smart contract API that can communicate with both third-party resources like PayPal and Stripe and the Ethereum main-net (or test networks). A second advantage that SensuiMod introduces (inherited from uPort’s original Sensui), is that it can pay for all transaction that utilize its service — meaning that all token sale transactions to purchase tokens can be paid for, and thus, no investor needs to use a wallet to purchase tokens. The user experience (and backend functionality) would work like so:
- 10 investors make purchases for 1,000 DONDA tokens at its starting price of $1 per token
- Since we are batching 10 transactions at a time (in this example), our smart contract API is triggered, having received 10 sale requests from our payment API (i.e. Stripe or PayPal)
- The smart contract API triggers our disbursement function, which sends the respective tokens to each investor that put in purchase orders. The smart contract API pays for the transaction fee
- Investors respective public addresses receive the tokens they purchased, which would show on the token sale interface
Next, we need to leverage a managed wallet architecture (MWA) where tokens are stored at public addresses generated for each investor account. Much like Coinbase, utilizing a MWA allows laymen consumers to rely on the platform to access their digital assets. However, unlike Coinbase, a MWA also allows users to reclaim their address key pairs, and the architecture is not privy to users’s private keys. Such an innovation allows us to hold tokens at auto-generated (and protected) public addresses that the users can claim full ownership of at whichever time they see fit. Paired with an event listening service, to make sure transactions are successful, a MWA could help recreate a traditional application experience by taking away the learning curve of using a cryptocurrency wallet for most mainstream consumers. MWAs are surprisingly not utilized (yet), in part because it does sacrifice individual security integrity (that is, each user setting their own security safeguards for their own addresses) in an effort to smooth out platform user experience. However, due to the reality of mainstream UX demands, it most likely will be used more often in 2019.
In addition, the platform would need to leverage a Know Your Client (KYC) on-boarding process, in compliance with SEC regulations, for every participating investor. Ideally, there should also exists individual investor purchasing limits during the initial phases of the token sale to ensure the maximum amount of unique investors can participate.
Lastly, the platform needs to leverage an extremely simple exchange interface, much like MakerDao’s Oasis Direct exchange seen below.
Of course, there would be some points of differentiation here and there, but the minimalistic design is key. Overall, a mainstream token sale platform should, ideally, achieve the following:
- Give investors the option to completely opt-out of using cryptocurrency wallets while still enabling them to participate in the token sale. Investors should also have the option to redeem full control over their assigned public address (and its respective private key) when they desire
- Pay for all transaction fees incurred by the token sale’s participation
- Utilize a minimalistic UX capable of allowing users to purchase tokens, sell back tokens, redeem full control over their key pair, and download their security certificate
- Batch transactions on a second layer solution (state channel, private chain, or otherwise) to minimize friction on the root blockchain
With that, we can develop a token sale platform that meets traditional application expectations while leveraging blockchain technology in a scalable manner!
Next, in our final Part IV, we analyze (1) how the normalization of securitizing artist brands could change the very nature of how celebrity fits within popular culture and trade finance, and (2) what would be the ethical questions society needs to consider before embracing corporatized brand markets (CBMs).