The mechanism
A team publishes a document describing what they intend to build and a token that will be
used inside it. Buyers send funds to an address and receive tokens in return, before any
product exists. If the project succeeds and the token is genuinely needed, early buyers hold
something useful. If it does not, they hold a token.
What made this possible was the absence of a gatekeeper. Raising money from the public
normally requires registration, disclosure and liability for what you claimed. A token sale
conducted on a blockchain, to buyers anywhere, sidestepped all of it, briefly.
- Sold
- Before a product
- Disclosure
- Voluntary
- Buyer recourse
- Effectively none
- Gatekeeper
- Absent, then not
What 2017 showed
Enormous sums were raised on documents. Projects with no working code, no named team and in
some cases plagiarised whitepapers took in millions, occasionally within minutes. The bar was
not low; there was no bar, and the market demonstrated exactly what it does under that
condition.
Regulators responded by applying existing securities law: if you sell an instrument to the
public on the expectation of profit from someone else’s efforts, the label on it does not
change what it is. Public token sales largely stopped, enforcement actions ran for years, and
the practice migrated into forms with more structure.
Where it went
Into launchpads that gate participation, private rounds followed by a public listing, and
airdrops that distribute tokens for using a protocol rather than for money. Each version
changes who buys first and on what terms, and each keeps the essential feature: a token
distributed before the thing it is meant to be used for is proven.
The most useful lens on any of them is supply. Who received tokens, at what price, and when
can they sell. A private round at a fraction of the public price, unlocking six months after
listing, tells you more about the likely price path than any part of the roadmap.
The question that survives
Whatever the fundraising is called this year, ask what the token is required for and what
would happen if it did not exist. Where the honest answer is that the product would work
fine without it, the token is a fundraising instrument rather than a component, and it should
be assessed as one.
Reading a token distribution
Four numbers describe most of what matters. How much of the supply the team and early
investors hold, at what price they received it, when it unlocks, and how much is circulating
on day one. Together they tell you who is positioned to sell into whatever demand the listing
creates.
A distribution where insiders hold most of the supply at a fraction of the public price, with
unlocks beginning within months, is not hidden information. It is usually published in the
documentation, and it predicts the shape of the first year better than anything written about
the technology.
Where the money went, mechanically
A sale collected funds into an address and issued tokens in return, and the part worth
understanding is what happened next, because it explains most of the failures better than any
account of intent.
Raised funds were usually held in the asset they were raised in. A project that collected during
a rise and did not convert was holding an asset that could fall by most of its value before
anything was built, which turned a budget into a market position nobody had chosen to take.
Several projects that intended to deliver simply ran out of runway this way.
The second mechanism was liquidity. Tokens sold to early buyers at a discount arrived on
exchanges alongside a much smaller float, so the price was set by whoever was trading a fraction
of the supply while the larger holdings waited. That structure produces a strong opening and
persistent selling pressure afterwards, independent of whether the project was any good.
Neither of these requires bad faith to explain a bad outcome, which is why reading the funding
structure told you more than reading the whitepaper did.
What has actually improved since
Disclosure norms, mostly by force. Documentation now routinely covers vesting and supply
because buyers learned to ask, and platforms that gate participation apply at least some
filter. That is real progress from a market that had none.
What has not changed is the basic asymmetry. Someone is selling a token before the thing it is
for exists, and the reasons to buy remain projections. Better paperwork around that
arrangement makes it more legible without making it a different arrangement.
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