A few blog posts were recently published (here and here) about the genesis token allocation, which is the perfect opportunity to geek out on numbers. And it just so happens that geeking out on numbers is going to give us insight into when the ICP price may stabilize. Let’s do this.
The goal here is to do a deep dive on the numbers to better understand why the price of ICP has dropped considerably since launch. I’m not trying to blame anyone for the price of ICP, but I am trying to figure out the incentives in order to better understand how low the price of ICP may fall and when it may rebound.
For this analysis I am going to focus on the seed round participants. This is because there is the most public information about seed round participants, and the story is probably pretty similar between other early contributors and seed round participants.
Seed round participants from Feb 2017 purchased at a price of $0.03 per token. DFINITY was going to do another round in the summer of 2017 but ran into some potential securities laws (and didn’t need money yet because of the great crypto boom of 2017), so instead they raised VC money early the next year and promised 24.72% of the genesis supply to the seed round. There were 370 seed round participants.
This means, on average:
469,213,709 (total supply) * .2472 (seed round portion) / 370 (# of seed round participants) = 313,485 tokens (average tokens per seed round investor)
(469,213,709 * .2472) / 370 = 313,485
This means on average, each seed round investor gets 313,485 tokens. That is a LOT of tokens. They raised $3.9 million at a $16 million valuation, which means each seed round investor, on average, put in ~$10k.
At the current price (~$50/ICP token) each investor turned their $10k into $15.7 million. Not a bad investment. That’s a 166,666% return! And that is at the $50 price point. Neuron #1 was probably sold with price in the hundreds essentially doubling or tripling the return.
For each investor, their seed round tokens were split into 49 neurons, which is ~6.4k tokens per neuron. Each neuron was pre-aged to 1.5 years. Each neuron had a dissolve delay of 30 days more than the previous neuron (plus or minus a few days to spread it out a little bit). So the first neuron had a dissolve delay of 0 days, the second neuron had a dissolve delay of 30 days, and so on, until the final neuron had a dissolve delay of ~4 years. All neurons had automatically been configured to vote on NNS proposals.
Now let’s calculate the rewards that seed investors are receiving right now.
49 neurons. Pre-aged at 1.5 years. 30 day incremental dissolve delay. Automatically set to vote on NNS proposals (presumably by following ICA or Dfinity Foundation). Let’s do it!
The APR (based on current staking as of June 2021) ranges from 16.4% on neuron #8 (just over 6 month dissolve delay) to 22.9% on neuron #49 (~4 year dissolve delay). Neurons 1-7 do not earn rewards by default as their dissolve delay is set for less than 6 months.
Across an entire year (assuming APR of staking doesn’t change and they don’t stake their rewards), seed round participants get 52,769 newly minted ICP in rewards per year (!!!!). That is a LOT of newly minted ICP. The 52,769 ICP (using current price of $50/token) is worth ~$2.6 million! And that is for those that don’t do anything and just keep the defaults across the board. If they crank up the dissolve delay on all of their neurons to 8 years, then the yearly reward ICP is 123,434 ICP, worth ~$6.2 million!
$6.2 million per year is $514k per month or $16.5k per day. Those are big numbers. Talk about a single investment to live off of for the rest of your life.
Difficulty Managing Seed Round Neurons
It is important to note that there is no GUI for seed round investors. It is all dfx and command line. Here are the seed round instructions for anyone who is feeling especially technical. So there is likely a small delay (maybe days, maybe weeks) in dissolving neurons, changing neuron dissolve delay, and general neuron management due to the difficulty of the process.
I know you are probably thinking that ICP inflation must be terrible because of the seed round investors. Well, let’s look at it. If we take the yearly token rewards for each seed investor (assuming default neuron conditions), we get ~53k ICP * 370 seed investors = ~19.6 million newly minted ICP per year. If we divide by total supply, we get 4.18%. Ethereum inflation right now is 4.5%, so 4.18% is not a bad inflation percentage.
The astute reader may have picked up on the fact that this is only 24.7% of the supply, but there is about 51% of ICP currently staked. This means the inflation rate is ~8.5%.
An 8.36% inflation number isn’t terrible, as we have to consider that not very many cycles are being burned right now because the public mainnet just barely launched (June 2021). Once more people start using applications on the Internet Computer, burned cycles will be deflationary and will decrease that inflation percentage.
Seed Round: Is It Fair?
I know someone out there must be wondering how they could possibly get such a good return on their money. A 166,666% (or even higher depending on when they sold) return is insanely impressive, and making $2.6 million per year for the rest of your life (assuming APR for staking is constant, which is not true in real life) for investing $10k in an early stage company might seem unfair to some. Why do we have to buy ICP at $50/token (or more if you bought early) when the seed round got in at $0.03/token?
But you need to remember that early stage companies fail 90% of the time (according to Small Business Administration). There is a large risk in investing in early stage companies. In fact, the Internet Computer is still early enough that if it failed right now, seed investors wouldn’t really make that much money. If the Internet Computer failed right now (which it most likely will not and there are no indicators that this is the case), then the price of ICP would inevitably fall to 0. This means seed investors would only get what they had already converted to cash and the rest of their ICP would be meaningless. Assuming they dissolved their first 2 neurons right at Mercury genesis and sold the ICP, this would give them 64x on their investment ($10k to $640k). This is good, but isn’t even close to the 166,666% if the Internet Computer succeeds. So there is still some risk in their investment.
Now imagine trying to pick the next Dogecoin, which is up 124x in the past year (June 2021). You have hundreds or thousands of meme coins to pick from. One of them will inevitably 100x-1000x. If you could pick one hundred, maybe you would pick one, but maybe not. I guess all I am trying to say is that the seed round investors deserve a nice reward for the risk that they experienced from Feb 2017 until May 2021 (and beyond).
Seed round participants have a very large incentive to sell their ICP right now. Even at the $50 price point that we used above, it is still extremely attractive for them to sell the first few neurons of their ICP. They could even keep 42 of their neurons staked earning rewards and only dissolve the first 7, and this would give each investor ~$2.24 million. I don’t know about you, but if I could sell 1/7 of my investment and make $2 million I would probably do it too.
So this probably means we are in for another few months of ICP selling. Depending on the demand for ICP, this may mean the price will continue to go down for the next 2-4 months. (This is not investment advice and I own and stake ICP). And even further, on the app https://ic.rocks it shows that in 6-12 months we will see more ICP dissolved from neurons than in the first 6 months since genesis. So buckle up for some potential price volatility.
Now we haven’t even looked at employees, VCs, early community members, or early contributors. There is much less public information about those groups, but I imagine the story is basically the same. Lots of ICP, locked away in many neurons, relatively few (hundreds) of contributors, lots of incentive to sell (at least a little bit), etc. In fact, in the DFINITY blog post they said, “Unfortunately, a significant portion of the irresponsible token divesting stemmed from former employees”, which adds credence to the fact that there are probably multiple parties responsible for the sell off right now.