There has recently been a lot of criticism of token sales in the Ethereum community, not just in relation to the amount of money thrown at these projects (some more deserving than others), but also to how they are conducted and their affect on the Ethereum network.

We at floodgate.network believe some of the more well-funded token projects have fair valuations when taking their future potential in to account. But regardless of whether one may perceive a token’s valuation to be rational, there are many benefits to token sales over other crowdfunding methods such as Kickstarter, Indiegogo or any of the platforms which essentially equate to internet begging.

Firstly, token sales allow easy market entrance to anybody holding Ether (there are of course problems with some methods and certainty of participation, discussed below). Participants also, of course, do not have to trust a third-party to mediate the transaction, which is one of the main advantages of blockchains and with smart contracts, demonstrates Ethereum’s potential in this domain. Thirdly tokens inherently allow a sort of decentralized stock market which actually also helps the company grow, rather than just existing as a betting market. At the moment this is mostly handled by centralized exchanges, however that is changing quickly with projects such as 0x, which would be impossible without token sales!

Fourthly, token sales are investments, not begging. Participants in a token sale gain something in return for their funding support. Assuming the project succeeds and the token has an actual use, it will be valued higher and initial investors can make a profit. This obviously incentivizes development in the blockchain and decentralized project spaces. Additionally, and to use the example of our Floodgate Token (FLT), the FLT has a utility within the ecosystem; as a means of determining the value of leaked information.

However incentivizing developers to continue developing the project after you invested in it is another matter. The token usefulness plays a part here, as developers will profit from their own retained share of the tokens. Additionally they will benefit from hodling their tokens, as the value should rise over time, which gives initial investors more confidence as well! But there is still the issue of sales that raise more money than anyone could spend in their lifetime. What incentive do developers have to continue work on the project if they can retire immediately and buy a Lambo every month for the rest of their life?

Vitalik wrote a great article a couple of months ago on ways to avoid some of the issues with how token sales affect the Ethereum network. He also points out that while all the issues cannot be solved simultaneously, developers can prioritize some of the 5 issues.

Certainty of valuation Certainty of participation Capping the amount raised No central banking Efficiency

At floodgate.network we are choosing to prioritise 1, 3, and 4. While increasing the chances of participation by having more than one crowd sale opportunity, starting with our limited presale (capped @ 400 ETH). Our retained share of the tokens after the general token sale will also be locked up within a smart contract, to be released at regular intervals in regular amounts (to be decided before the token sale). We believe this staggered crowdfunding method ensures developers continue working and listening to the community’s input. It also demonstrates the superiority of Ethereum smart contract-based crowdfunding over more traditional methods, or via other cryptocurrencies.

In short, token sales are superior to other crowdfunding methods when they have a dual use as a commodity and a stock. This also allows formation of a decentralized stock exchange. They also offer a low barrier of entry and display the power of Ethereum smart contracts. Again, done correctly, token sales create incentives for developers to continue development, as well as create incentive for people to participate in the token sales.