The Reversible ICO is a new form of an Initial Coin Offering (ICO). A “rICO” runs on a Blockchain to fund projects and (decentralized) infrastructure in a safer way.
You might have heard about the idea from Vitalik Buterin about a DAO like ICO (DAICO), where investors can vote on a projects success and milestones and put the ICO in a “refund” state if things go south. The idea is great and definitely an upgrade from pure ICOs, yet having seen the DAO and how hard it was to get people to vote, I came up with the idea about a Reversible ICO. You may have seen me speaking about it a few times, like here and here, yet I haven’t written anything about that idea yet.
This article is a first explanation of the rICO, as we are at the brink of running the first ever Reversible ICO for LUKSO, the project I am working on since I left the Ethereum Foundation.
You can skip that if you know about ICOs, but for the ones who are new here:
An Initial Coin Offering is a form of a token sale that takes place on a Blockchain. Presumably the Ethereum Blockchain, as it has been for most ICOs in the past years. It was made possible due to a standard called ERC20. This standard defined what a token contract should look like and got adopted globally within the Ethereum ecosystem in 2016. This standard creates compatibility to 90% of Ethereum compatible wallets and exchanges.
In simple terms an ICO is a smart contract that receives Ether (ETH) and returns a number of tokens to the same address. This process is mostly atomic (within the same transaction) and final.
As described, the tokens follow mostly the ERC20 standard and represent anything the project wanted to tokenize. Most commonly they were app-tokens, tokens that were part of a semi decentralized smart contract based application. In some cases we had future native blockchain tokens and in some rare cases real security tokens that represent real world assets. The wole ICO graze got so big that it outsized venture capital by 2017.
All ICOs in a “bubble” chart.
Besides the advantages of ICOs, which are direct ownership and crowd ownership, real time settlement, transferability, potential liquidity and potential 24/7 markets — there are also issues with the way how ICOs evolved.
Current ICOs created:
- FOMO choices, and lock-ins
- No investor protection
- Little responsibility for the project
- No investor involvement
This is what the Reversible ICO solves, as tokens are bought over time and any investor has always the freedom to stop buying tokens by returning their reserved tokens to the rICO smart contract.
This personal choice — which requires no voting — just a simple transfer, is the key of the rICO. Projects can so be judged by the community of rICO participants and act in real time should expectations not be fulfilled.
This balances the power and responsibilities for buyers of tokens and the project issuing it, creating safety by allowing constant choices.
In simplest terms: In a Reversible ICO buyers reserve tokens and then buy those reserved tokens over a period of time (e.g. 8 months) automatically. During this time buyers have the option to return still reserved tokens at any time and receive their associated ETH back.
All examples are in LYX (pronounced “lux”), the native token of the future LUKSO blockchain.
Reserved tokens are a balance that shows on your wallet, but is not movable. Those tokens are associated to the ETH in the rICO smart contract currently buying tokens over time.
Bought tokens are part of your balance, that you fully own and are able to move freely.
The balance is shown as one number in all wallets, to know which amount is reserved and which amount is bought, you need check our website, or the smart contract functions in a block explorer. Moving more than your bought balance will result in a failed transaction.
The Reversible ICO is seperated in two phases, a commit phase and a buy phase. In the case of the LUKSO rICO the commit phase will be 1 month and the buy phase 8 months.
Pink is the amount of ETH collected over time by the project. Due to fluctuations of the reserved amount the line will be probably not so linear.
Commit phase is the period where everyone can reserve tokens and return those reserved tokens if they change their mind, without having bought anything. The project has no access to the ETH, as the buy process has not started yet.
This period is to prevent FOMO and lock-ins and let the right buyers — the believers — to be part of the project and the get flip floppers out.
The Buy phase are the months in which everyone gradually buys their reserved tokens. Meaning with every block on Ethereum, the allocation of ETH to the project and bought tokens to the buyers changes.
The buying happens linearly. Meaning if I have 100 tokens, I will buy those 100 tokens gradually over the course of 8 months (Or the rest of the time, whenever I went in).
Additionally, each month (in the smart contract called “stages”) the price increases slightly to incentivise early participation. Otherwise many would be waiting until the last months as long as they see tokens left to buy, and the project would receive nothing.
During all months, all- or parts of the reserved tokens can be returned to withdraw associated ETH. The returned tokens are now available again for others to reserve.
If a buyer has multiple contributions and only returns part of his reserved tokens, then the smart contract will calculate the average price of all contributions and return those as ETH. This is the only way (we found right now) it can be calculated given the limited calculation power of a smart contract.
There is no way to profit from the increasing ETH price of the rICO by returning reserved tokens later. You will get back what you put in.
What happens if I come in later? If I buy not in the commit phase (month 1), but somewhere in the middle?
In this case you still buy tokens over time, but your time period will be shorter, as globally the rICO already progressed.
E.g. if the the rICO takes 8 months, and you choose to reserve tokens in day 1 of month 2, then your buy phase (from 0–100%) would be just 6 months long.
Any returned reserved tokens will be available for purchase again at the current price of the stage (month).
Regulation is one of the main reasons for the rICO. We — as the Blockchain space — should show how to create safety for investors on-chain, using better incentive models, rather than requiring new laws and regulation that are in the bottom slow and ineffective in the blockchain world.
Laws can not force behavior on blockchain in the long run, yet good smart contract standards and best practices can. If the rICO works well and shows that it is a fairer and safer investment vehicle and that it creates better investor protection than current investment/security laws, we can move the regulatory discussion in a complete different direction. Automation and real-time is a huge advantage, that the old world can not provide.
For LUKSO we worked with the german regulators (BaFin) and Dr. Thorsten Voß to make sure that LYX and the rICO are in alignment with german regulation and do not fall under german security regulations. This is a huge step stone — not only for LUKSO — but the rICO concept as a whole!
If the rICO becomes a success, it can pave the way for better and smarter regulation using on-chain models, rather than paper laws.
We are currently in the last meters of preparation for the mother of all rICOs, and are currently running an audit by ConsenSys diligence. We will soon set the date for the launch.
LUKSO is an EVM (Ethereum Virtual Machine) based Blockchain dedicated to the new digital lifestyle space. This network is the playground and starting point for social blockchain dapps. To learn more head to www.lukso.network!
If we think about it more we can come up with a few iterations that might bring better usability, but are harder to achieve in smart contracts, due to gas limits.
The below versions are not implemented for the LUKSO, but could be built in later iterations of the rICO (The global time version exists, as rICO1.0 on GitHub). The code for the rICO is (obviously) open source and we encourage the community to improve and extend this concept.
Global time rICO
Global time means, the contribution period is fixed for everyone. This would also mean, that if you come in later, you would instantly buy a certain percentage of tokens, as time progressed already for everyone.
In this version tokens can flood the market at a later time, as they are instantly released to a new buyer. It could be beneficial for certain projects to keep the time globally fixed.
Another form of rICO could combine both: price adjustment and time choice. This allows to choose the risk/reward level based on your own liking.
Here a buyer would choose the duration of its rICO buying (there should be a max end date), which in return would affect the price. Meaning if you choose a long duration you have a higher price as you have less risk due to the reversibility, and if you choose a short duration you have a lower price, as you take a higher risk with shorter reversibility.
Let me know what you think. Do you have more ideas that are simple enough and feasible and fit within the rICO concept?
Be on the lookout for the mother of all Reversible ICOs!