How Does A Token Crowdsale Work?

Looking for a new indigenous way of raising support and funds for a new idea? Well, meet token crowdsale! Token is a representation of any particular utility or asset, which can be tradeable for anything. From loyalty points to commodities to cryptocurrencies, it can be anything that is agreed upon before the trade.


For example, when blockchain projects release their cryptocurrency to the public through a crowdfunding event, you donate your bitcoin to support the new cryptocoins through the event and at the end of it, receive the cryptocoins corresponding to the amount of bitcoins one donated. In short, you purchase the cryptocoins with your bitcoins but the exchange rate depends on how overwhelming responses are, determined by supply and demand.


The majority of the crowdfund are distributed back to the public, however, a certain portion would be kept by the project team, paying the team for their developing efforts and other costs of promoting the project.  There are also several parameters that defines a crowdfund, concepts of bounties, caps, floor, escrow and team vesting periods are set up to protect and reward crowdfund participants for their enthusiasm and support for the project.


Value Of Cryptocoins


The mathematics to determine the value of each cryptocoin is simple: the the value of bitcoins raised is divided by the amount of cryptocoins that is launched for distribution to the public after deducting the amount of cryptocoins set aside by the project team. In a simple example, if the team raised $10 million in bitcoin value and decided to launch 50million cryptocoins. And out of the 50million, they decided to keep 20% of the cryptocoins, which leaves it with 40million crytocoins for the public. With the mathematics of $10million bitcoins divided by 40million crptocoins, each coin is valued at $0.25.


So if participant A contributed $1000 to the crowdfund, the participant now owns $1000/$0.25 = 4000 tokens. The token can be utilized on the project’s network or even sold to buyers on a cryptocurrency exchange.


Cap and Floor


As mentioned earlier, there are parameters which is used to protect crowdfund participants. The cap and floor are set up to protect the participants’ best interests. Some project institutes set a cap on the funds raised as well as a floor which basically sets the maximum and minimum amount that should be raised in the event. Raising beyond the cap of the project can cause each token to be too expensive and less accessible to the future users, which may result in less demand for expensive tokens.


On the other hand, having insufficient support for the project may indicate that there is minimal confidence and interest and is a strong indication that the project will likely face struggles moving forward and is detrimental for participants as the tokens will be of little use or value to the users.


Team Vesting Schedule and Escrow


As mentioned earlier, a certain percentage of tokens is set aside for the project team and potential development of the project. The tokens are used to compensate the team for their efforts and to help keep their interest aligned. A vesting schedule is required to keep the team members focused on delivering a great project after the crowdfund.


Instead of receiving the full portion of the compensation, team members receive tokens after regular vesting periods, according to the project milestones. An escrow, a trustworthy third party, is usually recruited to keep the founders from straying and ensuring that the project is being steered forward in the responsible manner promised.


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