Looking at the future direction of IEO from Dutch auction

Recently, there have been a lot of bad-mouthing articles about IEO, saying that IEO has come to an end. In this regard, the author holds the opposite attitude. Under the financing dilemma of domestic blockchain projects, IEO will achieve sustainable development for a long period of time. Let's briefly analyze that currently, for domestic blockchain projects, the possible exit channels are nothing more than IPO, ICO, IEO and STO. For traditional IPOs, possible channels include Hong Kong stock backdoors and the emerging Science and Technology Innovation Board.

First of all, backdooring in Hong Kong stocks is no longer feasible. On July 26, the Hong Kong Stock Exchange issued the document "Consultation Summary on Backdoor Listing and Other Shell Activities". The release of the document means that "if the listed issuer's control or actual control changes and the issuer's main business fundamentally changes after the Hong Kong stock company is acquired, the regulatory authorities will very likely use the anti-acquisition rules to carry out Suspension or even delisting processing." This move does not rule out that it is aimed at OK, Huobi’s acquisition of Advance Holdings, and Tongcheng Holdings to curb the backdoor behavior of blockchain companies in Hong Kong stocks.

On the other hand, for the Science and Technology Innovation Board, its own positioning determines that in the short term, it is impossible for it to accept the listing of blockchain companies. The Science and Technology Innovation Board mainly welcomes technological innovation-oriented enterprises that are in line with the national strategy. However, the current definition of national strategic emerging industries mainly covers fields such as “energy conservation and environmental protection, emerging information industries, biological industries, new energy, new energy vehicles, high-end equipment manufacturing and new materials”, and does not include the blockchain industry. According to the dynamics of the science and technology innovation board projects disclosed by the Shanghai Stock Exchange on July 26, as of 17:00 on July 26, the total number of companies accepted by the science and technology innovation board was 149, of which 35 companies had submitted to the China Securities Regulatory Commission for registration, and 28 companies agreed to register. Home is in the registration process. There are indeed no blockchain concept stocks.

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The data comes from ITjuzi

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Data from ICORating

Let’s look at STO again. STO is a compliant token issuance model represented by the United States. It is an attempt by governments of various countries to incorporate the existing token market into traditional financial regulation without introducing new regulatory policies. STO is endowed with two important connotations - token issuance complies with current laws and regulations, and tokens are backed by real assets. At the same time, STO requires circulation only among a very small number of qualified investors. This has led to the fact that STO assets must be supported by physical assets like traditional financial market targets, and lose the core competitiveness of Token in terms of global circulation. For projects that already have physical assets, the value of issuing coins is greatly reduced. Therefore, STO has not made significant progress so far.

Let’s look at IEOs again.

For exchanges, IEOs are a perfect marketing tool. By endorsing the in-depth brand of the project party in exchange for traffic, it can not only attract new users, but also promote vitality. Moreover, IEO is usually carried out on a single exchange, and the funds raised are mainly platform tokens, so IEO has a boosting effect on platform tokens. In addition, most exchanges still need to hold a platform currency to obtain the right to participate in IEO, which further promotes the rise of the platform currency.

For the project side, early harvest traffic, mid-late harvest funds. Compared with the 50%+ fundraising share of ICO, the IEO fundraising ratio is usually controlled at around 10%. In order to attract users, the IEO price is even lower than the private placement price, which is comparable to the market-making margin that needs to be paid to the exchange. Compared with a drop in the bucket. Therefore, for the project side, it only needs to achieve the purpose of obtaining traffic in the early stage. There is only one IEO project per phase, usually 1-2 phases a month. The frequency is low and the promotion of exchange linkage is much higher than that of ordinary listings, which is enough to attract the attention of a large number of retail investors. After attracting a large number of retail transactions in the early stage, the traffic can be realized in the middle and late stages.

For users, compared to ICO, IEO projects do not have the risk of not being listed on the exchange. If you win the lottery, you can get several times the profit at the opening. According to data from PAData, the average maximum multiple of IEO project investors on the first day is about 8.44 times. Among them, investors who participated in the Binance IEO project had the highest average first-day returns, with an average of about 12.62 times, followed by Huobi, with an average of about 8.82 times, and the lowest was Gate.io, with an average of about 5.25 times.

IEO project opening multiple & the highest multiple on the first day

(*The multiples are relative to the IEO crowdfunding price)

Overall, IEO is the best token exit channel in the market. But it has many problems to overcome. The nature of IEO's positioning in marketing makes it too focused on "face engineering". From the figure above, it can be seen that the opening price of some exchanges’ IEO projects on the first day of launch is actually lower than the crowdfunding price, such as Binance’s latest IEO project ERD, Gate.io’s IEO projects BKC, DREP, and CNNS. Obviously, opening at a low price is conducive to impacting higher first-day gains. However, once the popularity of the project passes, it will face the dilemma of constantly breaking new lows, and even become a shell resource.

Binance, Huobi, OKEx IEO ROI multiples drop day by day after the peak

(*ROI multiple = daily closing price/IEO price)

With the decline of ICOs and the inability to serve as a steady stream of project pools for exchanges, the currency circle lacks a powerful fundraising tool, and the exchange's "difficulty in finding projects" will become increasingly prominent. The positioning of IEO is bound to return from marketing to fundraising itself in order to provide real value to the industry. Next, the question we want to discuss is how should a brand new IEO be played?

How should a brand new IEO be played?

Increase the volume of IEO tokens

Compared with ICO, which has a large amount of funds raised and takes a long time to raise funds, anyone can participate. It is not uncommon for IEOs to release too small shares, and it is not uncommon for project parties to quietly unlock secondary market sell-offs. The process of IEOs makes wealth more concentrated. This is also the main reason why V God criticized "IEOs feels like a step backwards".

The current attractiveness of IEO is mainly due to the low offering price and the large room for price exploration. At present, the users attracted by IEO are usually "wool party", and the funds they hold flow between IEO projects of various exchanges in a tidal manner, and the projects themselves are usually not concerned. After increasing the sale volume, its scarcity will be reduced, the FOMO effect will be reduced, and more users will be able to participate; after the sale volume is increased, the sale price will inevitably be increased, so that users will become rational and begin to judge whether the project itself is good or bad, and the market will change again. It has to be effective.

Redistribution of proceeds from fundraising

At present, IEO raises less funds, and the exchange usually returns all of them to the project party. However, after increasing the IEO issuance volume and offering price, this will be a very considerable amount of funds.

We know that blockchain technology can issue tokens at zero cost. Before there is specific equity support, the tokens issued by the project party are all "air". 100% of the issue price is repurchased to achieve bottom-line issuance. For large-scale fundraising, the proceeds raised by the exchange custody can play a check and balance role on the project side.

Custodian funds, the exchange can be allocated to two places. One is to carry out weighted repurchase according to the number and duration of the user's platform currency holdings after a certain period of time. The second is for currency holders to vote to judge the actual completion of the development roadmap in the white paper of the project party to unlock in stages. If the development of the project is good, there will be fewer people requesting repurchases theoretically, and more funds will be unlocked and flow to the project side; on the contrary, if the project is developing poorly, no investors are willing to hold the tokens for a long time and ask for repurchase at the issue price. In an extreme case, all the money will be used for repurchase, and the exchange will return all issued project tokens + 0 yuan fundraising proceeds to the project party.

There are two destinations for the proceeds of fundraising, which makes the funds reach a balance between the project side and the users. This balance is completely regulated freely by the market. An effective market enables high-quality projects to raise a large amount of funds, while low-quality projects can only get 0 yuan. To a certain extent, it plays a role in driving out bad money with good money.

In the above process, the exchange receives transaction fees. In order to maximize returns, the exchange needs to maintain a large number of sustainable transactions to achieve. As a result, the exchange has realized the transformation from short-term interests (coin listing fees, market-making margin, etc.) to long-term interests (handling fees). If the project party does not do anything, or even deceives users with false marketing, it will inevitably lead to users asking for repurchase soon, which is obviously not conducive to the long-term benefits of the exchange. Therefore, the exchange must strengthen the review and try to launch projects with longer vitality.

Looking at it from another perspective, the proceeds from the exchange’s custody fundraising also play a role in the platform currency lock-up.

Fair participation methods and market-oriented pricing methods

For users, there are currently three main ways to participate: grabbing, shining in the sun, and drawing lots. Needless to say, grabbing, it depends entirely on hand speed or plug-in quality, it is definitely not a long-term playable thing. Relatively speaking, the sunshine and lottery seem to be relatively fair, but these two methods can be participated in parallel by multiple accounts, which is not necessarily fair.

In terms of price, the platform or project parties set their own prices and sell it at a fixed price. Most of them are determined by brainstorming, which is not conducive to discovering the real price.

In fact, try a Dutch auction. The Dutch auction changes the time priority in the snap-up method to price priority, and the participation method is more fair; and users can get tokens gracefully at a price they recognize, which is a more market-oriented pricing method.

The reason why we put forward this view is that we have more or less realized at this stage that exchanges and users are going through a long or short process of power transfer, and platform autonomy will be an irreversible big issue. trend. Dutch auction is a way for exchanges/projects to transfer pricing power to investors. Just like the current hot Staking, users have changed from interest-free holdings to interest-bearing holdings on the platform. The current situation of numerous exchanges forces exchanges to step down from the altar and transfer more rights to users. The exchange is gradually returning to a place for buying and selling. The only three points that can compete are the depth of users, project screening capabilities, and security capabilities.

Dutch auctions have some nice properties. The first is that in the mechanism of continuously decreasing prices, each auction can guarantee a transaction; the second is that each participant ends up at the same price, regardless of the order of participation and the amount of participation. This feature avoids the front running problem faced by the order-based trading model (suitable for DEX).

However, in the special scenario of exchange IEO, the Dutch auction has problems that need to be improved.

How can the Dutch auction be improved to adapt to the exchange environment?

We mentioned above that the volume of IEO tokens should be increased, but how to determine the specific number of auctions?

Perhaps we can learn some lessons from the most famous Dutch auction in 2019, Algo.

Theoretically speaking, when the put option should lead to a price lower than 90% of the auction price, some investors will go to the secondary market to pick it up, so as to make arbitrage when the option is exercised. However, compared to the auction price of $2.4, the current secondary market price of Algo has broken badly. The reason is mainly attributable to the private placement stage.

According to the rules, 1.7 million tokens of private equity investors are released every day, and 51 million tokens are released a month, which is equivalent to two rounds of auctions in the Netherlands, while Dutch auctions are auctioned twice a month, with a target of 25 million for each auction. Algo, that is to say, the number of tokens that can be used to exercise options can just dilute the amount of private placement in the secondary market. However, those participating in the auction have a strong incentive to sell when the price rises, and buy when it falls below 2.4*0.9=2.16. This has led to a balance of buying and selling orders below 2.16; double selling pressure above 2.16. If the auction can continue normally, the project party has actually given Algo a clear price range-floating around 2.16.

However, at 1:30 p.m. on July 31, Algorand officially released the latest article "Promoting the Economic Balance of the Algorand Ecosystem | Summary Report on Recent Experience | conduct an auction. However, private equity unlocking is carried out every day. As long as the market price of Algo is 0.05 higher than the private placement price, private placement investors will have the motivation to smash the market, but there are no more auctioned tokens to back it up. If things go on like this, it is not impossible to hit the private placement price.

This leads to a very important conclusion: when a trading platform conducts a Dutch auction, under time-weighted conditions, the amount released by the auction must at least exceed the amount unlocked by private placement. Moreover, the reason why Algo can be sold at a high price of 2.4 does not rule out the participation of private equity parties in "carrying the sedan chair". It is worth considering whether to strengthen KYC and prohibit private equity parties from participating in the auction.

For private placement parties, under the expectation of sideways currency prices, they can also consider giving higher rewards to participants who are willing to lock positions to encourage long-term staking.

Do you want to limit the ceiling?

In the traditional Dutch auction, the best situation is that it is sold out at the first price, so there is no limit to the maximum amount that participants can bid during the auction. Looking at the results of Algo’s auction, we can also see that the distribution of tokens is very concentrated: Algo auctioned a total of 25 million tokens, and a total of 689 participants were successfully auctioned, of which 7 people auctioned more than 1 million tokens. The 7 people took a total of 14.4 million pieces, accounting for 57.6% of the total auction. Such a concentration of tokens is obviously not conducive to the performance of the secondary market, and for most current POS mechanisms, it is also not conducive to the distribution of nodes. For the exchange, in order to allow more users to participate, it may be necessary to limit the amount that can be auctioned according to the actual situation of the registered participants.

If the self-government concept of the trading platform we expressed before develops smoothly, not only the newly listed IEO projects, but also any currency and any transaction can be completed through a Dutch auction, similar to the Dutch auction-type exchange of DutchX It will also gradually move towards the mainstream. For the Dutch auction exchange, the Loopring auction agreement Oedax (Open-EndDutch Auction eXchange) launched in March 2019 may be able to give more practical suggestions.

Think of Oedax as a two-way transaction rather than a one-way auction, a combination of two parallel Dutch auctions with shared configurations. After all, in the transaction between two tokens, who has more currency attributes and who has more commodity attributes is a very subjective definition.

Suppose Alice wants to sell TokenA to buy TokenB; and Bob wants to sell TokenB to buy TokenA. The fair market price of TokenA relative to TokenB is P, and the initial price of TokenA is set to M*P (M is a parameter greater than 1). Taking BTC and ETH as examples, the market fair price P of BTC relative to ETH is 50, if M=10, then the initial price of BTC will be set as BTC=10*50ETH=500ETH.

Suppose the time span is T, that is, the length of time it takes for the auction to end without anyone participating. Next, specify two price curves, which are the selling price curve of TokenA, referred to as SC; and the buying price curve of TokenA, referred to as BC. The gray shaded area between SC and BC is the tradable price distribution range.

These two curves satisfy the following constraints:

SC(0)==P*M and SC(T)==P/M;

BC(0)==P/M and BC(T)==P*M;

There is a time point t ≤ T, so that SC(t) = BC(t) = P, at this time the auction is completed.

Still taking BTC and ETH as an example, the BTC selling curve:

When t=0, that is, when the auction just started, the selling price of BTC is SC(0)=50*10ETH=500ETH, which is at the highest price; when t=T, that is, when the auction ends, the selling price of BTC is SC(0) T) =50/10ETH=5ETH, at the lowest price point. The tradable price range of BTC is 5-500ETH.

BTC buying curve:

When t=0, the buying price of BTC is BC(0)=50/10ETH =5ETH. It is easy to understand the conversion angle. The buying price of BTC is the selling price of ETH, that is, when the market just opened, the selling price of ETH The price is 1/5BTC, which is also at the highest price; when t=T, the buying price of BTC is BC(T) =50*10ETH=500ETH, that is, the selling price of ETH is 1/500BTC, which is at the lowest price. Therefore, the tradable price range of ETH is 1/5-1/500 BTC.

Further assume that at time t after the auction starts, the quantity of TokenA is Qa(t), and the quantity of TokenB is Qb(t). Then we can use p(t) = Qb(t)/Qa(t) to represent the actual price at time point t, and draw p(t) with a series of line segments on the coordinate axis. We call the combination of these line segments the actual price line (the gray horizontal line in the figure below represents the actual transaction price curve at different times).

If at some point in time T', the actual price falls exactly between SC and BC (line B), then there must be a successful transaction and liquidation after the auction ends. The time interval from the start of the auction to T' is extremely uncertain. If the actual price never falls between SC and BC (line A) until the end of the auction, then there will be no liquidation in the end, and the transaction will not occur. Only after the time point T' enters the auction link can the transaction be guaranteed. If the selling curve SC intersects the buying curve BC (line C), it means that the current selling price is equal to the buying price, and the auction ends.

Different service fee charging standards can be set according to the possible transaction or not and the uncertainty (risk) of the transaction price depending on the entry time, so as to encourage participants to join the auction as soon as possible and push the price to fall between SC and BC. between.

There is a possibility of no transaction before time T', so participants can deposit and withdraw any amount of TokenA or (and) TokenB. But after T', the amount of deposit and withdrawal will be limited.

When the time is t, the calculation method of TokenA’s recharge limit is as follows:

The maximum holding amount of TokenA = existing amount of TokenA + upper limit of TokenA recharge = existing amount of TokenB / minimum conversion ratio of TokenA to TokenB at time t (1)

That is, the upper limit of TokenA recharge = the amount of TokenB / the minimum exchange ratio of TokenA to TokenB at time t - the amount of TokenA (2)

For example, there are 100 ETH and 10 BTC in the pool. Then, the maximum rechargeable BTC=: 100ETH/min(5-500)ETH-10BTC=100/5-10=10. Up to 10 BTC can be recharged.

The above formula (2) can be simplified to the upper limit of TokenA recharge: Qb(t)/BC(t) - Qa(t), and so on, the following formula can be obtained:

The upper limit of TokenB recharge is: Qa(t)*SC(t) -Qb(t)

The withdrawal limit of TokenA is: Qa(t) -Qb(t)/SC(t)

The withdrawal limit of TokenB is: Qb(t) -Qa(t)*BC(t)

In order to make it easier for participants to conduct large transactions, there is also a recharge waiting queue for temporarily hosting assets that exceed the recharge limit. ,, Once the counterparty also makes a large amount of recharge, you can participate in Oedax along with the counterparty's participation, and part or all of the assets in the recharge waiting queue. For example, if the number of BTC recharges exceeds the upper limit of 10, this part will be put into the recharge waiting queue. When there is a new recharge in Ethereum, the BTC in the waiting list will be actually recharged according to the maximum amount. After the auction ends, the assets in the recharge waiting queue will be automatically returned to the participants.

Or you can add depth to the opening by building rolling Dutch auctions—generating a series of automated auctions at fixed intervals, with new auctions being automatically triggered when the oldest one closes. For the Dutch auction of the same two tokens, if there is any remaining assets in the recharge waiting queue after the previous one, this part of the amount can be used as the initial recharge for the next auction, so as to increase for each round Opening depth.

To sum up, we believe that IEO will return to the nature of fundraising from a marketing tool, and will be optimized in terms of the volume of IEO tokens, the redistribution of fundraising proceeds, the fairness of participation methods, and the marketization of pricing methods. As the most important node of IEO, the exchange will become an irreversible trend in the fierce competition environment, and the exchange and users are going through a long or short process of power transfer.

The above is the author’s thoughts on IEO. If there is anything wrong, please leave a message to discuss.