Last summer, cryptocurrency primary markets kickstarted with its own fundraising instrument, the "Initial Coin Offering".
Founders managed to raise consequent money by selling utility tokens to bootstrap their operations. Often, the team has no product to show, meaning the token is only for future use.
As a result, it creates uncertainty around the project feasibility, as investors struggle to estimate the current value of a token and forecast its growth.
Coupled with a craze for mind-boggling fundraising rounds at unclear valuations, primary markets got plagued by fraudulent projects, cash grabs schemes and naive business models.
In hindsight, most of the tokenised sales introduced poor alignment of incentives between token issuers and holders.
Problems in the status-quo
Till date, first-generation primary market investors have still no say in major financial decisions, including:
- The valuation of the tokenised network - investors are not able to negotiate with the issuers regarding its initial capitalisation.
- The use of proceeds and cash flows - holders have no say on how their investments' are going to be spent to bootstrap the network.
In today's scenario, token issuers set unilaterally their valuation and after a successful round, they have access to a large pool of proceeds, without any constraint from the investor side.
Recent primary crypto-market innovations tackle these fundamental flaws with fresh incentives programmed on smart contracts:
- For instance, the interactive sale solves the first problem and the dilemma of sale participation and valuation. It allows token holders to set personal caps and enter or exit an investment accordingly.
- Regarding a project's future cash flows, both the Reverse ICO and capital building mechanism models allow token purchasers to retract and commit their investments respectively, instead of issuing funds straight up to the token issuers.
The Continuous Organisation intends to solve the misalignment of incentives between token holders and issuers' during the asset issuance phase, and introduces a continuous fundraising mechanism, in which every stakeholder is aligned on the financial success of an organisation or network.
The Continuous Organisation (CO) sets up an external Decentralised Autonomous Organisation that holds the organisation present or future cash-flows.
Continuous Organisation = Legacy Organisation + Decentralised Autonomous Trust
As explained in their whitepaper, the CO model includes a "Legacy Organisation" and a DAO referred to as a Decentralised Autonomous Trust (DAT).
The DAT is a smart contract which "implements a bonding curve contract with sponsored burning to automatically mint, burn and distribute fully digital security tokens". These assets represent a "claim on the future cash-flows handled by the DAT".
The bonding curve contract, first introduced by Simon De La Rouvière in 2017, holds two different functions, one to buy (B) and one to sell (S) digital security assets:
- The function B determines the token price at which it can be bought from the DAT and issues the amount.
- The S function is the opposite: it defines the asset price when sold to the DAT and issues a refund in the currency used to purchase the tokens.
Thanks the bonding curve contract, investors can purchase tokens from the DAT and sell them back at a discount. In this representation, the difference between the buy and sell price, in green, represent the money raised and available to the organisation. The area in blue, below the sell price, represents the funds allocated to the buy-back scheme.
External financial manager
The author identifies four core financial functions for the DAT: it accepts investments, facilitate an exit, issues dividends and accepts day-to-day income.
Furthermore, it handles two types of digital assets, one referred as the "currency" (a major cryptocurrency like BTC or ETH) and one in the form of tokens called here "FAIR securities" (FAIRs).
The first source of cash-flow for COs is its investors. An investment starts with a token purchase order to the DAT, which then issues the FAIR tokens to the investor. The DAT keeps a fraction of the investment in the "buyback reserve" and the rest is sent to the legacy organisation.
2. Investment exits
Investors are now FAIR holders and can decide to exit their position in the Continuous Organisation by selling their FAIRs to the DAT.
The smart contract will then burn these FAIRs and issue a refund payment at the sale price calculated by the sell function. The currency is taken from the "buyback reserve".
3. Paying dividends
The organisation can also issue dividends in the currency to its investors (= FAIR tokens holders).
Once the DAT receives the dividends:
- The buyback reserve increases. The DAT stores the funds received for dividends in the reserve and mints new FAIRs accordingly. All of the dividends are stored "with a contribution ratio of 100%" which increase the slope of the sale price of FAIRs, creating value for its holders.
- FAIR holders receive more FAIRs. Dividends are paid up in the currency, but in additional FAIRs issued to respective holders based on a pro-rate of their initial holdings.
4. Receiving income
Continuous Organisation can also decide to route their daily income to the DAT.
When the DAT receives a payment from a customer, the legacy organisation receives the majority while a "fraction of the payment is used by the DAT to mint new FAIRs". Similarly to the dividend function, a payment issues an amount of FAIR to investors and keeps the fraction of the payment in the buyback reserve.
The author identifies six advantages for the model:
- Fundraising never stops; the DAT can mint new tokens to investors if demand exceeds supply.
- The asset remains liquid at all times; bonding curve contracts facilitate continuous buy-back schemes.
- It incentivises a long-term relationship ; the DAT limits the opportunity for speculators to gain profit out of the model.
- The asset is security; as its holder has a right future cash-flows of the organisation.
- Permission-less relationships; the process of purchasing and selling the asset is automated and runs on an immutable contract
- No governance enforced; as the DAT does not impose a voting relationship between the organisation and the asset holder. The DAT can accommodate governance, but does not have to.
The continuous organisation model is still at its infancy stage, and yet to develop a formal implementation. It was first published on a Medium post by Thibauld.