Grading Grin among a sea of cryptocurrency distribution models
When Grin launched in early January after years of anticipation, it faced material pushback from prominent Bitcoiners who labeled it a “VC coin” and compared it to offerings from the 2016/18 ICO era. We think that criticism is unjustified as Grin’s launch was one of the fairest launches ever, if not the fairest.
What constitutes a fair launch?
Philosophers have debated questions of fairness for thousands of years, so we won’t pretend to have any new insight there. Instead, we will focus our analysis on what criteria for a fair launch have emerged over the short history of private currency markets.
The foundational principle we observe is that a fair launch offers equal opportunity — not equal outcome — to acquire a coin 1) over a long period of time 2) at a relatively equal price. This can be broken down across two dimensions: length of issuance and price equality.
1 – Length of Issuance
A lengthy issuance schedule is important to give the market ample time to become aware of the project and discover a fair price. When 100% of the token supply is sold in a single 1-month time span, did the market really have a chance for proper price discovery for each of the tokens? On the other end of the spectrum, we find issuance schedules that are stretched out over decades. Here, the market has a good chance to absorb the supply and discover a fair price.
2 – Price equality
The second dimension, price equality, proposes that there is no group or person that can acquire the token at a sizable discount to the market price. Zcash and Beam both have a timelocked pre-mine (the founder’s reward), that was partially sold to accredited venture investors. With Dfinity (and many other ICOs), early investors paid 1/100 or less than later investors in the public offering. It can be argued that these discounts are justified because these investors lend needed credibility to projects and accept longer lockup/illiquidity periods than public investors. Whether the market agrees with this argument remains to be seen.
Our aim isn’t to provide a normative view of what projects should or shouldn’t do, it is simply to describe market realities around perceptions of fairness. The argument that venture investors take on material risk, including whether or not the project will launch, is trivially true. In our view, the longer a project remains illiquid to pre-sale backers, the more any discount offered is “earned”, as this can be thought of as the investors’ own proof of work.
Venture investors accessing a pre-sale is distinct from the notion of pre-mines or allocated coins. While we believe pre-mined coins suffer from issues of price discovery, they are not inherently bad for price equality.
Comparing ICOs and PoW
ICOs are generally fairer the longer they are open. The EOS ICO, although unjustly criticized by the market, was the fairest to date because it took over a year. This continuous ICO functioned similarly to proof of work, auctioning coins to the market on a daily basis, giving the market ample time to become aware of the offering and its details and allowed finely grained price discovery to happen in secondary markets.
Expanding on this idea, proof of work can be seen as a perpetual ICO where every day, a fixed number of coins are auctioned on the market and the proceeds are burned. When discussing fairness, proof of work is sometimes criticized due to the power law winners that emerge via economies of scale, but this argument is easily debunked. Large-scale mining operations operate in a highly competitive environment that ensures that coins are immediately delivered to the secondary market as they become available, as miners need to sell to replenish their liquidity. There, millions of participants have the opportunity to purchase these coins while miners are left with a small margin (or even without a margin at all in many cases). The more competitive mining is, the more it feels like coins are directly issued to the secondary market itself.
Across these two dimensions, time and price, we can graph different distribution models that we have seen so far.
As ICOs and pre-mined coins often sell a large portion of their token supply in a short time window (unequal opportunity to buy across time) and are known to give some investors large discounts over others (unequal price) they are deemed more unfair by the market on both dimensions. Projects that bootstrap initial financing entirely in private and maintain a large ownership stake in the project, such as Dfinity, are on the extreme end of the “unfairness” scale.
Grading Grin’s launch
So where does Grin rank? Let’s look at the properties of their launch:
- The project was highly transparent. The specs of the project, including its technical features, monetary policy, etc. were all known well in advance, giving the market ample time to become aware of them.
- The hashing algorithm(s) used in Grin’s PoW were also known and discourse around this crucial decision happened in the project’s public forums. In order to ensure that the offering was open to as many participants as possible, the community converged on offering a dual-PoW system over the first 2y, with one hashing algorithm targeting generalized hardware and the other allowing for specialized optimizations (via ASIC). This was a pragmatic choice, the development of ASICs on the Grin network was seen as inevitable. However, rather than privilege vertically integrated miners who can develop ASICs prior to launch, the team chose to gradually scale up the portion of coins allocated to the ASIC-friendly hashing algorithm over 2y, allowing small-scale hobbyist miners to participate.
- The total supply is auctioned over a long period of time, which ensures proper price discovery across the full issuance schedule. Grin’s tail issuance, while not as strict as Bitcoin’s hard cap, allows for continual participation forever.
Arguments against Grin
There are primarily two arguments made against the Grin launch by Bitcoiners.
The first argument is that much of the initial hash rate was provided by mining operations which were predominantly funded by venture capital dollars and that this is somehow indistinguishable from a pre-mined offering. This argument is a red herring — our previous explorations have shown that the more competitive a mining market is, the fairer the distribution will be perceived, as competition guarantees that coins are delivered to the market at the smallest possible margin. Venture investors are speculators like any other and when investing in miners, they’re rewarded proportionally for the risk they take on around operational execution and market reception.
The second argument is that there was a lot of attention on the Grin launch, while Bitcoin’s launch happened with few eyeballs. We think this argument, that a launch can no longer be fair because more people are interested in it, is irreconcilable with a free market view. In fact, we argue the opposite: a launch is fairer the more potential buyers are aware that a project exists. This cannot be held against Bitcoin as the number of people interested in non-sovereign money at the time was admittedly limited to a small group of participants on a cypherpunk mailing list. However, if you launch a project silently today, many would see it as an act of deception no different than giving some set of investors unequal opportunity (access) over others.
In the spirit of free-market competition between monies, we believe all distribution models are generally fine. A distribution model’s theoretical “fairness” is divorced from questions about whether the project works as advertised. All cryptocurrency projects are nascent experiments with varying degrees of success. Assuming a reasonable level of market efficiency, full access to transparent information — allowing market participants to discern between reality and fiction — matters even more than the perceived accuracy of a project’s claims. Discerning whether an ambitious project’s vision is misleading or naive is a problem better left to the market and is orthogonal to the fairness of the distribution model.
In conclusion, we argue that fairness of launch or distribution is evaluated by the market on two dimensions: a lengthy issuance—so the market can discover a fair price for each token—and price equality, so no one can buy a token below this fair market price. Grin’s launch excels in both dimensions. While the concept of “fairness” is ultimately subjective and a “perfectly fair” launch a pipe dream, these are the factors the market currently considers most relevant.