“Scarcity” may be a crypto buzzword, but “shortage” has hardly made the footnotes – until now.
In early July, the developers behind U Network, a blockchain publishing protocol valued at around $8 million, abruptly announced that it had run out of its reserve of UUU crypto tokens, and that it planned to buy back some of the supply it distributed to early investors through its airdrop in February.
At the start of the project, U Network established a 10 billion UUU cap on its token supply (worth approximately $15.6 million), setting aside 40 percent of its total tokens (about $6.2 million) for the founding team and future development.
Yet, due to a rising number of strategic partners and interest in its token, the project announced on Medium, “The demand for UUU tokens has exceeded our current designated holdings.”
The post continued:
“The team now faces a problem: leaving our ecosystem tokens intact, how do we pursue these new opportunities to grow the U Network ecosystem?”
The result is a problem that seems to have little precedent.
The structure of ICOs and airdrops varies widely across projects, particularly with regard to the number of tokens minted, distributed and maintained by a given company or non-profit. While some projects do not limit the number of tokens that can be created within their blockchain ecosystem, others, like U Network, choose to implement a cap on the total supply.
For U Network, the 10 billion limit was implemented because the content-centered project, which aims to “help online content platforms better align with the interests of their users,” wanted to “provide sufficient incentives to community members.”
While U Network’s dilemma is currently an outlier in the industry, other blockchains that have implemented hard caps on their ICOs and airdrops may soon find themselves in a similar quandary as they begin building their ecosystems.
Likewise, U Network’s situation may force similar projects to confront an even more difficult question: what happens when your startup runs out of its own tokens?
Method to the madness
Incentives are especially important in blockchain systems, and so far, there is no established methodology by which projects can determine how many tokens to issue and keep.
That’s according to Joshua Gans, a professor of strategic management at the University of Toronto, who told CoinDesk: “There is no metric.”
“If you want to use tokens for incentives, the amount of the incentive is dependent on the price of the token,” he explained. “At the start, it is hard to predict that.”
Gans added that establishing the amount of tokens projects should keep is equally as unsystematic.
According to Catherine Tucker, a professor of management and marketing at MIT, projects face a doubly difficult situation in the highly scrutinized industry. Not only do they lack methodologies for determining token supplies and holdings, they must also consider the perception of their actions.
“I think this case illustrates the huge trade-offs founders face,” she told CoinDesk. “If they keep too many tokens in reserve, they are often accused of being greedy. But if they give away too many tokens then they lose a crucial lever they need to incentivize people to use their platform or service in the future.”
As such, remedying a shortage of tokens looks to be a precarious task. Solutions such as increasing the token supply of the network could influence the token’s price, angering investors and jeopardizing their trust in the project.
So instead, U Network plans to refurbish its holdings by conducting a token “buy-back.” In practice, this means it will re-purchase 1,000 ETH worth of UUU (about $284 million worth) from current token holders over the course of several stages.
“For the first stage we would be buying back 200 ETH worth of UUU between the price range of 0.004 and 0.005 USD,” U Network told CoinDesk. At press time, one UUU token was valued at $0.001569.
As for how the project determined the number of tokens to re-purchase, it explained, “We believe it’s a reasonable amount. Not too high to affect market price, not too low to affect the expansion needs.”
From Gans’ perspective, the buy-back is “a good way to go.” He went on, “You issue the tokens and retain some other currency to use for buy-backs if you make an error. The other option is to give yourself the ability to issue more tokens for incentive purposes but that is ultimately the same as retaining some tokens at the outset.”
And as for what the rest of the industry could do to avoid U Network’s dilemma, MIT’s Tucker suggested:
“If I had to give advice to founders, it would be to think about the uncertainty involved with the project. In those cases of heightened uncertainty, it might be best to limit the initial distribution of tokens until the business plan has evolved and been tested.”