The importance of token distribution in project analysis: differences between PoW and ICO

I have decided to write a post on a subject that is particularly close to my heart: the launching of projects in cryptocurrencies, their funding, and their tokenomics (project economy). It’s important to differentiate between two types of projects: those that launch through an ICO (Initial Coin Offering) also known as IEO/IDO depending on the platform where these token emissions are carried out, and those that develop through proof of work (PoW). Projects whose launch system (ICO) was particularly popular in 2017, notably following the first by Ethereum, generally enable the pre-financing of a project’s development through fundraising from retail and professional investors (investment funds). This fundraising is conducted with a proof of concept and a whitepaper that explains the technological objectives, the means used, and the project’s roadmap to achieve its goals. Overall, it is apparent that many ICOs, even the majority launched in 2017, were scams in the projects they developed. However, the distribution and economic design of these launches still allowed retail investors access to interesting prices. For the most serious projects, or at least those that have seen significant gains subsequently, the price at which the public could access them was very appealing, especially examples like Ethereum or Solana. Today, some projects are very interesting technically, but the configuration of tokenomics is simply shameful in many respects. Indeed, the share reserved for the public (ICO) is increasingly smaller (2/10% maximum) compared to Ethereum, Cardano, or Ergo (>75% for the general public). Here are some infographics that well represent the evolution of token distribution in the launching of projects.

This chart shows the distribution model and public sale conducted during the initial crypto fundraisings (portion sold to the public in blue)

This chart shows the current distribution model and public sale conducted by new projects (portion sold to the public in yellow)

Not only is the offer available to the general public much lower, practically nonexistent, but beyond this change, the capitalizations at launch are much higher, meaning that retail investors do not have the opportunity to access these cryptos at good prices as was the case previously. Often, when cryptocurrencies are indexed on exchanges, the prices are already at a value of x5/10/20 compared to the ICO price, not to mention the prices at which private investors had access.

Projects like APTOS, SUI, Arbitrum, or Starknet, to name a few, thus find themselves with very high capitalizations having only 10/20% of the supply in circulation. The true capitalizations are therefore 5 to 10 times higher if we consider the total number of tokens, those already in circulation as well as those that will be released in the coming months and years. This is simply indecent, and many investors are unfortunately deceived due to a lack of knowledge of this very specific functioning of cryptocurrencies.

On the other hand, there are projects whose launches and financing go through an onchain system and often progress through proof of work (PoW for insiders). This is notably the case for historic projects like Bitcoin, or Monero, but there are also a multitude of projects that use this financing model to develop and expand their community base starting with the miners’ ecosystem. This system is not perfect either, and it is important to sort through with the frequent presence of scams, but there is an economic operating mode that is often much more equitable for retail investors. Indeed, even for the most demanding projects at the launch with what is called « premine, » meaning coins acquired by the team at the launch of the blockchain, these allocations rarely exceed 20%, meaning that the remaining 80% can be freely acquired by miners or investors as soon as the cryptocurrency in question has been indexed on an exchange. However, typically projects do not finance themselves through a premine at launch but by a percentage allocated to the team with each block (5/10%). It is clear that the teams of serious projects need funding, only Bitcoin and Monero have today managed to finance their development solely through a donation system (somewhat like free software). It is therefore entirely acceptable that the developers of serious projects can be remunerated over time through part of the token emission. The difference is that this remuneration will only have value if the developers perform quality work in technological, community, and marketing development. Investors, for their part, can invest very early and at very low prices, but they also carry more risks regarding the success of the project and the delivery of promises. In these projects, one can mention TAO, Zano, Qubic, Kaspa, Xelis, Octaspace, BlocX, Salvium, or NeurAI.

Everyone is then free to choose in which types of projects they wish to invest, but it is very important to understand the notion of tokenomics and project financing as well as the different forms of projects present in the ecosystem. For my part, I consider today that projects that do not do an ICO or similar and choose to create their own proof of work blockchain are much more equitable projects for retail investors. Yet another reason, despite widespread criticism, to appreciate the proof of work consensus and the equitable financing of projects that it allows, thanks notably to the miners ecosystem.