This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
Token sales were introduced as a fundraising mechanism for Web3 projects, where tokens are issued against a financial investment, often before the project becomes operational. Originally, smart contracts were used to issue newly minted blockchain tokens to investors—entirely peer-to-peer—between the project's initiators and their investors. As the crypto space matured, the P2P nature faded. Token sales shifted from being a grassroots crowdfunding tool into a more structured funding mechanism, reflecting both the growing sophistication and the increasing regulatory oversight of the crypto economy.
Token sales introduced a P2P mechanism for pre-issuing tokens in return for direct financial investment, even before a project became operational. In this setup, tokens were minted prior to a project’s launch and distributed to investors. Often, a portion—or sometimes the entire supply—of tokens was released to network participants before any substantial development had taken place, and in many cases, even before any code was written. Beyond serving as a crowd-financing tool, token sales also introduced innovative methods for establishing a minimum viable economy for the project in question. This approach was fundamentally different from how the Bitcoin economy began: Bitcoin never conducted a token sale, nor were Bitcoin tokens pre-issued. Instead, they have always been, and continue to be, minted through the process of Proof-of-Work each time a block of transactions is created by a mining node operator.
The first token sales were referred to as Initial Coin Offerings (ICOs). As the term token became more mainstream, variations emerged, such as Initial Token Offerings (ITOs) and Security Token Offerings (STOs)—the latter specifically referring to tokens classified as securities. Other iterations followed, including Reverse ICOs, Equity Token Offerings (ETOs), Initial Exchange Offerings (IEOs), Initial Dex Offerings (IDOs), Simple Agreements for Future Tokens (SAFTs), and DAICOs. For simplicity and consistency, this book will use the term “token sales” to encompass all these variations.
The primary goal of early token sales was to raise funds for Web3 projects by pre-selling tokens to early supporters. These tokens were typically purchased using BTC and ETH. Unlike the heavily regulated Initial Public Offerings (IPOs) or today’s more structured token sales, early ICOs were often conducted without legal counsel, financial intermediaries, or regulatory approval. They resembled crowdfunding more than traditional financial fundraising.
Token sales gained significant traction after the Ethereum network launched in 2015, providing a public infrastructure that allowed anyone to issue tokens for their projects. In the beginning, most investors were crypto enthusiasts, not traditional finance professionals. However, as the market matured and investment returns soared during the bull markets of 2016–2017, professional investors also began participating. This period marked the first mainstream crypto boom cycle. As the industry matured, economic and regulatory realities began to reshape the landscape. New intermediaries, such as token exchanges and specialized service providers, emerged to facilitate the token issuance processes. While the early ICOs were genuinely P2P, involving direct token swaps between a project’s blockchain wallet and an investor’s wallet, today’s token sales are often managed by highly specialized financial intermediaries.
History of Token Sales
The first token sale took place in 2013 when the founders of Mastercoin issued newly minted tokens in exchange for BTC—raising approximately 500,000 USD worth of BTC. Its success inspired other projects to use Bitcoin's blockchain infrastructure for similar crowdfunding purposes. In 2014, the Ethereum project held a token sale that lasted forty-two days, raising about 18 million USD worth of BTC—a record-breaking achievement at the time. These funds were used to develop the Ethereum whitepaper into a fully operational blockchain network. Once live, Ethereum introduced smart contract functionality, allowing anyone to create tokens with just a few lines of code using smart contracts. This innovation simplified token issuance and trading, sparking a wave of record-breaking token sales between 2016 and 2017.
One notable early token sale was conducted by TheDAO, a decentralized investment fund built on the Ethereum blockchain. In just four weeks, it raised approximately 150 million USD in ETH, offering investors a proportional share of future revenues. Early token sales gave supporters the potential for investment returns, distinguishing them from traditional crowdfunding. Initially, token sales were primarily used by experienced engineers raising funds for blockchain protocol development. Over time, however, ICOs became a fundraising tool for projects across diverse industries, many of which had little connection to blockchain networks or their applications. These newer ICOs often lacked a clear business plan or a well-defined token utility. Instead, they relied on hype-driven marketing and vague promises.
Before launching a sale, developers would present a whitepaper outlining the technical specifications and goals of the project. As ICOs proliferated, many whitepapers became little more than vague business plans with scant technical or economic details. This lack of transparency paved the way for intentional and unintentional scams, leading to significant financial losses for many investors. During the ICO boom of 2016–2017, more than 800 token sales were conducted, raising an equivalent of about 20 billion USD, mostly based on a simple promise and often on no product at all. Some individual projects achieved staggering fundraising results, such as Telegram (1.7 billion USD) or EOS (4.1 billion USD). Many token sales were oversubscribed and sold out in minutes—or even seconds—suggesting that even larger sums could have been raised. However, as market sentiment shifted in 2018, token valuations plummeted. Many tokens became valuable only if bought early at a discount and resold immediately after the public sale—a phenomenon known as the greater fool theory.
This led to pump-and-dump schemes, where coordinated groups artificially inflated token prices before quickly selling off for profit. Such schemes, while illegal in traditional markets, were difficult to prosecute in the token sales landscape of that time due to the lack of easy identification of individual participants and cross-jurisdictional challenges. Many early project founders, primarily engineers, lacked experience in portfolio management. Raised funds, often held in volatile assets like BTC or ETH, were mismanaged or lost to market fluctuations. For example, Ethereum’s 18 million USD fundraise shrank to 6 million USD after BTC’s price dropped from 600 USD to 200 USD because the funds were raised and held in BTC. Ethereum Classic faced similar funding crises due to price crashes, and Steemit had to cut team members after token value losses. This underscored the need for professional asset management and strategic treasury planning—skills not typically possessed by blockchain engineers who were managing those funds at the time.
As the ICO boom faded, regulatory scrutiny increased. Authorities required projects to define whether their tokens were securities and address tax implications and other legal requirements. This regulatory pressure, combined with investor skepticism, forced the market to consolidate. Many non-viable projects faded away, and institutional investors began playing a larger role in token sales. New service providers emerged, including legal advisors, investment consultants, custodians, and insurance providers. These professionals specialized in navigating Know-Your-Customer (KYC) and Anti-Money Laundering (AML) requirements, as well as securities legislation. The rise in compliance obligations made token sales more bureaucratic and less accessible to the average developer or small investors who were willing to take the risks involved.
As legal and operational challenges grew, many Web3 projects began targeting institutional investors and authorized financial entities rather than the general public. Pre-sales became common, with institutional investors receiving tokens at discounted prices ahead of a public issuance and trading of tokens. These investors often dumped tokens on public markets once trading began, exploiting their early-entry advantage. To prevent these practices, vesting mechanisms—common in traditional venture capital—were gradually introduced, limiting how and when tokens could be sold after fundraising. While this shift brought a more professional fundraising environment, it also reintroduced centralization into what was originally a P2P fundraising model. Institutional involvement meant greater oversight and professional support for projects but reduced opportunities for small-scale retail investors to participate early.
However, the FTX collapse in 2022 demonstrated that even institutional investors were not immune to failures in due diligence. Despite FTX being backed by highly respected venture capital firms, mismanagement and fraud could not be prevented.
Initial Exchange Offerings (IEOs)
Many early token sales lacked proper investor protection mechanisms, standardized procedures, and clear accountability. Project teams were soon overwhelmed by the complexities of managing crowd-investing processes entirely P2P while trying to comply with emerging regulatory requirements. Instead of focusing on their core task—developing the applications they were raising funds for—these teams found themselves stretched thin. They had to maintain constant communication with investors across multiple social media channels, navigate Know-Your-Customer (KYC) and Anti-Money Laundering (AML) compliance processes, and work to secure listings on centralized exchanges. Without a token being listed on an exchange, potential buyers and sellers had no market to trade, rendering the token effectively illiquid. This made exchanges the gatekeepers of the emerging token economy.
Before the rise of Initial Exchange Offerings (IEOs), project founders often had to allocate significant portions of their raised funds to cover the fixed listing fees imposed by exchanges or offer a percentage of their funds in exchange for listing rights. Without an exchange listing, tokens struggled to acquire any market value, as liquidation outside an exchange required finding buyers manually, which was rarely feasible. This listing bottleneck became a significant hurdle, as exchanges struggled to keep up with due diligence processes for the influx of new tokens to list. As demand grew, listing fees skyrocketed, with reports suggesting costs rising up to 2.5 million USD per listing. Only about one-third of tokens issued in 2017 ever secured a listing on an exchange after their token sale, leaving many investors stuck with illiquid assets. Even when tokens did manage to get listed, trading was often hindered by low liquidity and shallow market depth, resulting in extreme price volatility. Token holders frequently had no choice but to hold onto their tokens for extended periods, as even small sell orders could cause significant price drops.
Centralized exchanges emerged as ideal third-party service providers for token sales, addressing many of these challenges. Instead of selling tokens directly via their project websites and managing P2P smart contract transactions, token issuers could now raise funds through centralized exchanges, which handled the token sale on their behalf. In an Initial Exchange Offering, token issuers transfer their newly minted tokens to the exchange, which then sells them to its existing user base. This approach reduced the administrative burden related to regulatory compliance, investor verification, and marketing efforts, while also ensuring that tokens would be immediately listed for trading post-sale. IEOs offered a convenient, one-stop fundraising platform with a built-in pool of potential investors. Exchanges, on the other hand, benefited from attracting new customers eager to participate in token sales conducted on their platforms. Despite these advantages, IEOs also marked a step away from the decentralized, P2P nature of early token sales, representing a shift back towards centralization.
While IEOs may seem superficially similar to traditional Initial Public Offerings (IPOs), significant differences remain. IPOs generally require businesses to have a proven operational track record and involve extensive pre-marketing and preparation. They also rely on a network of established financial institutions, including investment banks, which provide an additional layer of checks and balances. IEOs, on the other hand, rely almost entirely on the exchange conducting the token sale to perform due diligence. These exchanges often have vested financial interests in the success of the token sale, which can lead to conflicts of interest and less rigorous oversight.
DAICOs, SAFTs & SAFEs
The concept of a DAICO (Decentralized Autonomous Initial Coin Offering) was introduced by Vitalik Buterin in 2017 as a fundraising model aimed at combining the decentralized governance principles of a Decentralized Autonomous Organization (DAO) with the fundraising dynamics of an Initial Coin Offering (ICO). In a DAICO setup, project teams would publish a DAICO smart contract defining the parameters of the token sale. Investors could then contribute ETH based on the predetermined price curve of the sale. Once the fundraising period ended, only a limited amount of the total raised funds could be withdrawn at a time. This withdrawal amount would be voted upon by the DAO's token holders, effectively allowing investors to allocate periodic budgets for the project team. While the concept aligned well with the decentralized ethos of Web3, it was never widely adopted. One possible reason is that more centralized fundraising models, such as Initial Exchange Offerings (IEOs), and structured legal agreements like SAFEs (Simple Agreements for Future Equity) and SAFTs (Simple Agreements for Future Tokens), became more popular. These alternatives were more compatible with established financial market practices and attracted institutional investors.
- SAFTs (Simple Agreements for Future Tokens) is a framework designed to provide a legally compliant way to raise funds under U.S. securities law, which has been adopted in other jurisdictions as well, though it remains incompatible with securities laws in certain countries. Under a SAFT agreement, investors do not receive tokens immediately. Instead, they contribute funds in exchange for a future promise of tokens once the project's decentralized application is operational and the tokens have been officially issued. This approach allows project developers to use the raised funds for building their network and technology before issuing tokens. Early investors under SAFT agreements typically receive tokens at a discounted rate.
- SAFEs (Simple Agreements for Future Equity) is a variation of the SAFT, where investor contributions can later be converted into equity instead of tokens. Both SAFT and SAFE agreements are classified as non-debt financial instruments, meaning investors risk losing their entire investment if the project fails.
Both agreements define the milestones a project team must meet before certain funds or tokens can be distributed. Unlike peer-to-peer token sales of the early days, where tokens were sold to a broad, unfiltered audience against no milestones, SAFTs and SAFEs are restricted to accredited investors only. These investors are legally authorized to handle securities and are expected to have the expertise and financial capacity to engage in high-risk investments. This structure mirrors traditional angel investments or venture capital (VC) rather than the open, permissionless nature of early token sales. The general public takes a backseat, as a public token sale follows a SAFT or SAFE agreement with accredited investors.
This exclusivity has drawn significant criticism from early Web3 advocates. But the criticism goes much further. Institutional investors, such as venture capital firms and angel investors, who are typically considered a safety mechanism for retail investors, often exploited their privileged know-how and sometimes also their access to tokens in the early years. Taking advantage of the unregulated environment, many VCs engaged in pump-and-dump schemes and front-running, where they would buy tokens before retail investors were allowed in, at a discounted rate, and then dump their tokens onto the retail market—at the expense of retail investors and the teams running the projects. These investments were either not vested at all (locked against premature sale), and even if they were vested, the periods were too short. This created almost guaranteed profits while leaving project founders and retail investors exposed to financial risk.
Today, more formalized mechanisms have been established, where institutional investors only receive tokens with a lock-up of two years or more to avoid such pump-and-dump schemes. The introduction of vesting periods, also referred to as freezing or cool-off periods, prevents early investors from transferring or selling their tokens. The goal of vesting periods is to prevent market manipulation, specifically the premature dumping of discounted tokens by early investors, which could lead to a price crash immediately after listing on an exchange. They have become a standard practice, particularly for large token holders who secured early-stage discounts. If vesting periods are poorly implemented or omitted altogether, it should raise red flags for later-stage investors. Similarly, founders should be cautious when dealing with venture capitalists who pressure them to skip or weaken vesting clauses. Without proper vesting mechanisms, early investors could undermine the project's long-term economic stability by offloading their tokens prematurely, jeopardizing investor confidence and the project’s sustainability.
Issuance Mechanics & Clauses
Similar to Initial Public Offerings, institutions conducting token sales have experimented with a variety of pricing mechanisms across different stages of the sale. One approach involves issuing tokens at a fixed price throughout the sale's duration. Alternatively, the token price can increase over time, offering early investors a lower price as a reward for assuming higher risks. Another pricing strategy involves Dutch auctions, where the sale begins with the highest price per token, which gradually decreases as time progresses. While increasing prices and Dutch auctions can better account for investor demand, they can also create undesirable market dynamics. Various forms of bonding curve mechanisms have also been experimented with by different projects and, for a time, were quite popular as pricing mechanisms for continuous token sales.
When token sales are conducted via centralized exchanges, lotteries are commonly used instead of a first-come, first-served system. Some exchanges require potential investors to hold a minimum amount of the exchange's native token to qualify for participation. In such setups, the number of lottery tickets an investor can claim often depends on how many native exchange tokens they hold in their account. This is believed to increase demand while lowering token turnover.
Another critical parameter in token sales is the number of tokens issued. Projects can either issue a fixed number of tokens (e.g., 1 million) or opt for an unlimited supply. In some cases, tokens are distributed proportionally to the total funds raised rather than a predetermined issuance cap. The questions of what type of token is issued, how many tokens are issued, and how they are distributed are decided by the project owners. It is a project-specific strategic economic decision that depends on the type and purpose of the project, the expected economic dynamics of the internal economy of the token system, and regulatory requirements, which, in turn, depend on the nature of the project. There is no one-size-fits-all solution. The question of how to design a token system is discussed in more detail in the chapter “How to Design a Token System.”
Airdrops & Similar Token Drops
Airdrops represent another key mechanism that emerged alongside token sales. An airdrop refers to the unsolicited distribution of free tokens, typically sent from a project’s wallet directly to individual users. These tokens can represent various rights, such as network assets, governance rights, or access rights. The earliest known example of an airdrop dates back to 2010, when Bitcoin developer Gavin Andresen set up a website offering five Bitcoin (BTC) for free to anyone with a Bitcoin wallet address (though back then this was not called “airdrop.”) The intention was to encourage developers to experiment with the Bitcoin network without the need to mine or purchase Bitcoin. However, the term "airdrop" only became popular in 2014 with the launch of “Auroracoin,” which aimed to offer Icelanders an alternative to their national currency, the Icelandic króna, in response to the 2008 financial crisis. Every Icelandic resident was eligible to claim 31.8 AUR (valued at approximately 385 USD at the time) by registering their permanent resident ID on Auroracoin's website. This initiative aimed to bootstrap network adoption without requiring participants to invest their own capital.
Airdrops quickly became a popular marketing tool, particularly during the token sale boom of 2016–2017. Many projects began using airdrops to attract attention, often targeting prominent crypto influencers in hopes of securing endorsements on social media platforms. Beyond marketing, airdrops served practical purposes, such as distributing small amounts of tokens to kickstart a minimum viable economy.
Over time, variations of airdrops emerged, including “bounty airdrops,” where participants were rewarded for performing community tasks like sharing social media posts, signing up for newsletters, or completing promotional activities. “Exclusive airdrops” targeted specific individuals, such as influencers or loyal early adopters, while “holder airdrops” rewarded users based on their existing token holdings, often proportional to their stake in the network or tied to NFT ownership. “Lockdrops” require participants to temporarily lock their existing network tokens into a smart contract for a predetermined period. In return, they become eligible to receive new tokens. The allocation often depends on the amount and duration of the tokens locked. While token drops have proven effective for community building and network adoption tools, they also raised many legal and tax-related questions over the years.
Footnotes
[1] The statistics vary due to a lack of reporting standards, and the fact that a growing portion of tokens are offered in a pre-sale to a select number of often undisclosed investors.
[2] Telegram canceled the public sale of its token after raising over 1.7 billion USD in a private pre-sale, which usually allows VCs and larger investors to buy tokens at lower prices. It is unclear whether they raised enough already or whether regulatory issues forced them to abandon a public sale. Reports claim that fewer than 200 investors funded the whole sum. Telegram eventually had to pay a fine and return all of the funds to investors.
[3] The EOS token sale lasted a whole year (June 2017 to June 2018). Their subsequent main net launch had some issues, and couldn’t go live for at least two weeks, with issues recurring again later. It was later revealed that only 21 accounts pumped the price up artificially, meaning only a fraction of the claimed funds were ever invested.
[4] In Ethereum, transactions can range from a simple “send money“ to complex smart contract interactions. To reflect the difference, transactions consume “gas” – a measure of computational steps. Users can‘t change how many computational steps are needed for an action, but they are able to decide how much they are willing to spend for them. By paying a higher or lower price per computational step, they can help miners make a decision on including the transaction in the next block. In a “gas war,” several users are competing for a spot in the next block. Especially during ICOs, being included in the next block or not can make a difference in being successful in an auction. During peak times, users have paid many multiples of average transaction fees, effectively outbidding each other for miners to include their transaction as soon as possible.
[5] Angel investors are a type of very early stage high risk investor who provide so called "seed capital" to very early stage startup companies or other ventures. This typically comes before venture capital funding which usually comes after a company has proved some resilience on shoestring funding.
[6] Venture capital (VC) is a form of high risk funding by private equity at a relatively early stage but after an angel investment round, where investors bet on a high return on investment but are willing to accept that many of their investments might never materialize due to the high risk.
[7] A bonding curve is a market mechanism that allows funds to be raised in a continuous manner. The purchase price moves along a mathematical curve: buying pushes the price up, selling pushes the price down. Since buying and selling follow the same curve, funds can never be withdrawn from the contract, which means that they must remain in the smart contract. This mechanism was created to prevent a lot of the exit scams that were conducted by ICOs in 2016/17. Project owners can only generate revenues between the price discrepancy of buy and sell. Bonding curves can also enable tokens that are uncapped – i.e. have no limit of the amount of tokens issued. The price mechanisms infinitely continue to issue tokens as long as there is investor demand.
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