1. The idea behind our design

The idea behind our approach comes largely from our belief that we've been doing capital formation all wrong, or at least that the way we have been raising capital for venture building in the past is no longer relevant to crypto and blockchain projects.

In the blockchain space, community interest precedes product. Ideas and roadmaps rather than products get staked, and founders want a quick way to translate this interest into funding that helps them get their project off the ground.

The idea here is that once you’ve received some initial funding, you can then figure out, together with the community, what's best for your project.

So we started tinkering with a “new new” capital formation tool that would help projects, including OtoCo itself, raise flash funds onchain, ICO-style, without the fear of regulatory reprisals. At the same time, we wanted our design to be simple, fair and transparent.

No fear

First, we looked at ways to raise initial funds without the fear for regulatory reprisals.

The challenge was to find a way to raise capital from the widest possible group of investors without offending securities regulators.

We looked at a number of models from outside the blockchain space. i.e. pre-orders of still-to-be-launched products, pre-paid phone cards, voucher schemes etc.

We then stumbled on a key insight: you can ask people for money as long as you hold it in escrow and you give them their money back if they want out.

In the simplest terms: as long as you can’t get your hands on other people’s money, they haven’t invested in you.

This got us started on a rudimentary escrow smart contract.

Blockchain does escrow really well, compared to the paper mill and costs of an offchain, lawyer-mediated escrow arrangement.

DeFi provides a self-custodied variant of escrow, by letting you stake and unstake using your own wallet: you lock some crypto assets e.g. when you stake a liquidity pool on a decentralized exchange, and simply unstake when you do no longer want to provide liquidity.

Applying this principle, we became comfortable that if we would ask people to stake us over an initial period during which they could also unstake, such staking in itself would not be considered a securities offering.

As a result, the risk for regulatory reprisals during this initial phase, which we refer to as the “token pre-order window”, could be significantly reduced.

Simple

The above approach has the added benefit that it is simple: anybody can open a token-pre-order window and invite their followers to stake.

In its simplest implementation, all stakers do is secure a place in the queue. By unstaking, they leave the queue. All along, the smart contract keeps track of who is in what place in the queue.

Transparent

The use of blockchain also guarantees the transparency of the process.

This becomes especially relevant when rewards are linked to people’s place in the queue.

In the context of a capital raise, such rewards are typically bigger discounts to those who commit early as a premium for their higher risk.

The still widely used Simple Agreement for Future Tokens (or “SAFT”, which is in itself an investment instrument even if the underlying token may not be a security) does precisely that: the earlier you contribute, the higher your discount on the future token price.

However, the discount applied in a SAFT is a matter of bilateral negotiation between the issuer of the SAFT and each contributor. From what we have seen, this process is often open to favoritism or quickly deteriorates into horse trading.

To take our the human factor, in our proposed smart contract we inserted a simple bonding curve function, essentially an algorithm that sets the price for each token pre-purchase slot along an upward sloping curve, rewarding stakers with a lower price the earlier they join the queue.

In addition, when we’re ready to open our OtoCo token pre-order window to stakers, we’ll publish the slope of this curve to ensure full transparency on pricing and discounting.

Fair

Our last design imperative was to make our token issuance fair.

The transparency on price described above goes a long way in creating fairness.

In addition, using smart contracts guarantees better enforcement of whichever fairness parameters are embedded in its code.

For instance, we consider capping the maximum amount any single staker can stake, though we realize this is easily circumvented when the same staker uses several wallets.

We’re still iterating on this and our smart contract design more broadly and if you want to help please join our OtoCo’s official Telegram channel.