The Initial DeFi Offering

ICOs, or Initial Coin Offerings, exploded in popularity in 2017. In 2019, it was Initial Exchange Offerings (IEOs), where centralized cryptocurrency exchanges like Binance served as third-party springboards for new token offerings. Circa 2020, traditional ICOs and IEOs have all but died down, while a new kind of crypto-native offering type has arrived: Initial DeFi Offerings.

The decentralized finance sector, which uses smart contracts rather than third-party intermediaries to power traditional and unprecedented financial products, has become among the Ethereum’s brightest stars over the past few years. In this span, we’ve seen major new DeFi projects arise around things like borrowing and lending (e.g. Compound), synthetic assets (e.g. UMA Protocol), and more.

In addition, another one of the biggest hits so far in the rising DeFi sector has been decentralized exchanges (DEXes), upon which users can trade tokens 24/7 and in non-custodial and permissionless fashion. Among these platforms, Uniswap, which was first deployed on Ethereum in November 2018, has particularly surged in popularity and become a premier and trusted source of liquidity for the cryptocurrency ecosystem.

Indeed, Uniswap has become a darling in the space because it’s a publicly-available and well-engineered smart contract, meaning anyone or any project in the space can leverage its practical infrastructure. On the point of Initial DeFi Offerings, Uniswap has increasingly become the system of choice for distributing a new class of crypto-native products: governance tokens. DeFi projects like Compound and UMA Protocol are different under the hood and in their direct goals, but they and a few other projects in the arena have become early trailblazers of governance token offerings through platforms like Uniswap.

A governance token confers token holders’ the right to vote on, and thus manage, the direction of an underlying protocol — a valuable right in the blooming DeFi sector. The Compounds and UMAs of the space are decentralized, so without a central power-broker they need a decision-making apparatus, and a community of token holders supplies that. As such, Initial DeFi Offerings offer a decentralized avenue to getting governance tokens into the hands of project communities.

With all that said, it’s always key to separate the wheat from the chaff. Fundamentally speaking, the most attractive Initial DeFi Offerings will be from projects that have finished products that are battle-tested on the Ethereum mainnet or have publicly released MVPs. Efforts that launch with just an ERC20 token and a whitepaper still aren’t worth your time.

Recent DeFi Token Offerings

UMA

Launch date: April 29th
DEX: Uniswap 🦄
Initial token price: $0.26
Initial market cap: $2 million
Current token price: $2.20
Current market cap: $116 million
ROI to date: +800% 💸

Announced in December 2018, UMA Protocol is a decentralized financial contracts platform aimed at trustlessly providing “Universal Market Access” to global users. Specifically, the UMA Protocol specializes in powering so-called priceless synthetic tokens, which are collateral-backed ERC20 tokens that can track anything without needing a continuous on-chain price feed from an oracle. To demonstrate its tech, the project launched its debut priceless token, ETHBTC, in May 2020. The inaugural release tracks the ETH/BTC price ratio, allowing investors the ability to short or long the ether price against bitcoin.

In April 2020, the UMA Protocol team announced plans for an Initial Uniswap Listing (i.e. read as Initial DeFi Offering) on April 29th for the $UMA governance token. The inflationary token was created to give holders the ability to govern important parameters of the UMA Protocol, as well as the ability to help resolve contract disputes by fulfilling price requests through the project’s Data Verification Mechanism (DVM).

To launch the offering, the project’s backers took 2 million $UMA tokens — or 2% of the starting 100 million UMA supply — and opened up a Uniswap liquidity pool using approximately $535,000 worth of ETH. As listed, this gave $UMA an initial price of roughly $0.26. The offering marked the first time the public had access to the token, and the UMA Protocol team explained at the time:

“[This] implies a fully diluted market capitalization of ~26.67mm for the UMA token network. This is the same valuation used in our initial seed investment.”

Firms like Coinbase Ventures, Dragonfly Capital, and Two Sigma Ventures participated in that seed round. As for the $UMA token’s planned distribution, the Risk Labs Foundation — the team behind UMA Protocol — has slotted:

1. 2 million $UMA for the Uniswap market,
2. 35 million or UMA users and builders,
3. 14.5 million for future token sales, and
4. 48.5 million for Risk Labs’s creators and key contributors.

With regard to price discovery, the $UMA token exploded in price upon its Uniswap listing, spiking from $0.26 to over $2 within 5 minutes of the offering’s start. As the market settled in the ensuing hours, the token faced an acute selloff and found support around the $1.40 mark. In the two months since the offering began, the $UMA has climbed above $2 once again.

COMP

Launch date: May 16th
DEX: Uniswap 🦄
Initial token price: $34
Initial market cap: $38 million
Current token price: $182
Current market cap: $500 million
ROI to date: +500% 💸

Launched on the Ethereum mainnet September in 2018, Compound is an algorithmic money market protocol that centers around decentralized lending and borrowing. Users can supply liquidity to the protocol to earn compounding interest or borrow assets by putting up collateral. Since launching, Compound has ascended into the status of being one of Ethereum’s most elite dapps. As of early July 2020, Compound was handily the largest DeFi project, boasting a Total Value Locked (USD) of $679 million — some $70 million more than was locked in the second-largest DeFi project at the time, MakerDAO.

A significant amount of Compound’s recent rise has come from the Compound team’s launch of the COMP governance token. First unveiled in February 2020, COMP was released as a means to distribute power to the Compound community from Compound’s builders, who maintained from the start that COMP wasn’t a “fundraising device or investment opportunity.” Caked into the token was a delegation function, meaning COMP holders could delegate their tokens to like-minded influential community members to vote on protocol matters for them. A holder must have at least 1% of the COMP supply at any given time in order to offer a Compound governance proposal.

In May 2020, Compound’s creators outlined a COMP token distribution scheme that entailed setting aside more than 4.2 million of the 10 million total COMP supply into a “Reservoir” contract. Every Ethereum block, 0.5 COMP gets automatically and proportionally distributed among Compound’s borrowers and lenders. These distributions began on June 15th, 2020, and amount to 2,880 COMP per day. Within hours of the distribution beginning, an anonymous liquidity provider opened up a COMP-ETH market on Uniswap, creating a de facto Initial DeFi Offering.

On the first day of trading, the associated Uniswap pool fielded +14,000 COMP and +3,750 ETH, and the COMP price spiked from $34 to over $60. In the ensuing days, buy pressure pushed that price up as high as $427, though the token has returned to earth after a Coinbase.com listing in late June. At the time of this article’s writing in early July, the COMP price was hovering around $184. The token’s Uniswap listing marked the first time investors were able to buy COMP tokens on the open market. Compound had previously held a $8.2 million seed round in 2018 and a $25 million Series A in 2019.

DXD

Launch date: May 20th
DEX: dxtrust.eth.link
Initial token price: $68
Current token price: $105
Current market cap: $2.59 million
ROI to date: +54%

Kickstarted by the Gnosis team in March 2019, DXdao is a decentralized collective that’s focused on developing DeFi products. So far, DXdao backs and owns projects like decentralized predictions marketplace Omen.eth and the permissionless DEX Mesa.eth.

DXD is the native currency of the DXdao ecosystem and, per its builders, grants token holders with an “economic claim to DXdao’s revenue and … future access to a suite of services and premium features in decentralized applications, such as gasless transactions […].”

In May 2020, DXdao announced it was launching a “continuous token offering via a bonding curve” to fundraise through the DXD token. As designed, the bonding curve ensures that $300,000 worth of ETH will have been raised upon 12,000 DXD being issued. Those tokens are in addition to the 100,000 DXD pre-mint the DXDao has claimed for itself. Nearly two months into the bonding curve being public, the DXD buy price is above .51 ETH, and the DXD total supply is over 124,000. The tokens can also now be traded on Uniswap, as well.

BAL

Launch date: June 23rd
DEX: Balancer
Initial token price: $6.65
Initial market cap: $435,000
Current token price: $11
Current market cap: $388 million
ROI to date: +65%

Launched in March 2020, Balancer is a flexible automated market maker (AMM) protocol that allows users to open up liquidity pools without using the 50/50 two-token split model that’s been popularized by Uniswap. Instead, Balancer supports customizable pools that can be composed of up to 8 ERC20 tokens. The creators of the protocol have outlined early, low-hanging fruit use cases like Liquidity Bootstrapping Pools (LBP), which lets projects “provide only a small fraction of the total pool value in ETH and/or DAI (e.g. 10% or 20%) and the rest in their own project tokens.”

In March 2020, Balancer Labs, the team behind the eponymous protocol, raised $3 million in a seed round from investors like Placeholder and Accomplice. The seed price was reportedly $0.60 per BAL token. On March 31st, the Balancer Protocol went live on the Ethereum mainnet. Weeks later in May, Balancer Labs publicly proposed the BAL governance token, which was created to “decentralize and diversify governance of the Balancer Protocol” and would employ a total supply of 100 million BAL.

Of that total supply, 25 million BAL tokens were proposed for Balancer’s founders and key contributors, while 75 million tokens were allotted to be distributed mainly to liquidity providers going forward. 145,000 BAL were slated to be distributed to Balancer liquidity providers weekly, which equates to roughly 7.5 million BAL a year in so-called liquidity mining potential. This distribution schedule will inflate the founder’s initial 25 million token supply by some 30%, but the idea is to use these funds to quickly bootstrap a teeming community of Balancer users. The protocol’s liquidity mining campaign kicked off on June 1st, and the first BAL distributions started on June 23rd.

For now, the BAL token supply minted so far is over 35 million, which covers a 5 million BAL ecosystem fund and a 5 million BAL fundraising fund, i.e. tokens for future investment rounds. Upon being listed on Balancer, Uniswap, and 1inch on June 23rd, the BAL price quickly spiked up to above $15 per token. After peaking over $17, the BAL price settled down to the $10.5 range within two weeks.

DeFi Tokens Coming Soon

BZRX

Rebranded from b0x to bZx in July 2018, bZx is a decentralized platform for lending and margin trading. During that brand pivot, the project explained:

“Unlike most blockchain startups, bZx has made the ethical decision not to offer its tokens to the public without a fully functional platform.”

Among other things, the builders of bZx are behind Fulcrum, the front-end, user-friendly dapp that allows investors to easily take out loans or margin positions through the bZx protocol. The bZx team conducted a public pre-sale in September 2018, and the ensuing BZRX governance tokens were locked “until we launch our official public sale.” 13.65% of the token supply was allocated to that private sale, giving BZRX an original sale price of ~$0.01679. This suggested BZRX had a pre-circulation market cap of around $2.36 million.

Notably, BZRX tokens unlock to the public on July 13th, 2020. In February 2020, the bZx protocol was attacked via flash loan exploits, which resulted in losses just under $1 million. In early July, the bZx team announced a “plan to compensate traders for that downtime and restore liquidity to the [protocol’s] iETH pool.” This plan involved a vested BZRX fund that affected traders could apply for compensation through, as well as an iETH campaign that allowed liquidity providers to trade iETH for BZRX at a considerable discount. Users wanting to exit the iETH pool will be able to purchase discounted BZRX that will be locked in a vesting contract for 4 years.

In late June, the bZx team unveiled the BZRX token model v3. As part of the rollout, the creators announced a token disbursement program that would allocate 20% of the total BZRX token supply to rewarding bZx users. Of that allocation, 17% will go to a fee-refunding system, which will refund half of users’ bZx trading fees in BZRX per an initial rate of .0002 ETH per token. The other 3% will go to a disbursement fund, which will pay out 0.25% of the BZRX token supply weekly over a period of 3 months. This bootstrapping fund will be distributed proportionally according to the amount of fees generated weekly by users.

As for value capture, the tokenomics of BZRX will offer stakers multiple avenues to yield. To start, there’s the token’s fee-sharing system: staked BZRX entitles a holder to fees generated by bZx “in proportion to their contribution to the staked supply.” These fees get sweeped into one of two Balancer pools, through which BZRX stakers also receive associated Balancer LP tokens. In turn, these Balancer pools accrue fees to the benefit of those holding the fee pools’ shares. These pools also generate BAL rewards, so BZRX stakers can simultaneously liquidity mine through Balancer while serving as an LP for AMMs.

Another key value capture prospect for BZRX is the bZx insurance fund, which is grown through trading fees, half of all origination fees, and interest payments. Since BZRX can be redeemed for a proportion of the insurance fund, this dynamic brings value to the tokens by backing them with “current assets as well as future cash flows.” Zooming out, the new BZRX model also paves the way to bZx providing swap liquidity for margin traders, wherein the protocol could serve as an LP for other AMMs.

MTA

Launched in May 2020, the mStable protocol is an all-in-one decentralized hub for stablecoin lending and liquidity. The protocol allows users to deposit ERC20 stablecoins like Dai, USDC, or USDT in order to generate mUSD at a 1:1 ratio. In extension, mUSD can be deposited in a “Save” contract to earn yield through projects like Compound and Aave, or the token can be used with a “Swap” feature, which allows zero-slippage stablecoin trades.

Meta (MTA) is the governance token of the mStable protocol, and it will be released to the public through a Balancer pool on July 15th, 2020. To create the pool, 2,666,666 MTA and around $400,000 of mUSD will be deposited, indicating an initial price of $0.15 per MTA and a diluted market cap of $15 million.

The MTA token has been designed to fulfill three primary purposes, including:

1. acting as insurance for re-collateralization processes,
2. coordinating governance, and
3. bootstrapping mASSET liquidity.

In exchange for accepting the risk of liquidation and/or dilution, MTA token holders earn a percentage of interest and fees generated on the mStable platform.

CRV

In June 2020, Curve Finance — a premier decentralized exchange for efficient stablecoin-to-stablecoin trades — unveiled the Curve DAO and the CRV token. The DAO is Aragon-based and will collect Curve trading fees, while the CRV token is a governance token that will support staking (i.e. vote-locking).

The initial supply of CRV is 1 billion, which is a third of the eventual supply of +3 billion tokens. As an inflationary token, CRV will be distributed to users of Curve. The token is still yet to be released to the public, but it will be distributed in decentralized fashion and will spur DEX liquidity pools rapidly upon release.

Conclusion

Initial DeFi Offerings come in different shapes and sizes, but one thing’s for sure: there are many more to come. On the one hand, that’s because these kinds of offerings have only just begun. Additionally, these types of public releases are already proving useful for bootstrapping community activity around projects early in their lifespan, so more projects will surely chase this success. The key for investors, then, is to hone in on offerings from projects that have finished products or interesting MVPs — just having a whitepaper and a token is far from adequate these days.