When a blockchain project is conceptualised, there are many steps that take place from concept to execution. Developers write code for months until the project begins to take shape. Eventually, when the code base has matured enough, they begin to simulate the blockchain in the wild using a test network, often referred to as a testnet. The testnet helps developers find bugs and replicate attack vectors, encouraging them to fix any problems they encounter before they go live with their mainnet.
Contrary to intuition, when a main network or mainnet goes live, instead of sparking a parabolic rise in price, it often causes massive token sell off. Today we are going to take a look at some of the reasons why this happens and how the “mainnet effect” can be mitigated.
Why would an investor who has followed a project from the beginning, and who has hodl’d tokens for months, decide to sell upon the launch of the project?
The way a token sale works has changed in the last year due to regulatory guidelines and legislation which have been created to protect consumers. Prior to 2018, the crypto landscape was compared to the wild west, a lawless place, where a fool and their money could be parted without any consequences for the scammers who partook in the illicit activity.
Vehicle for Speculation
This has changed with the decline of unregulated ICOs (Initial Coin Offerings), and the potential rise of regulated STOs (Security Token Offerings).
One of the factors for the mainnet effect lies rooted in the token sale dynamic itself, where private investors get exclusive pricing and access to private token sales. Subsequent rounds of token sales take place, known as a Presale, finished by a Crowdsale - with each group of investors paying a higher price than the investors in the round before them.
This creates an opportunity for early investors to lock-in profits due to their access to early investment rounds. By the time the mainnet launches, the private investors are ready to realise their gains, creating sell pressure. Apply the same dynamic to Presale and Crowdsale investors as well, and we can see that we could have a lot of people selling all at the same time. This can be catastrophic for a token’s price.
Generally speaking, before a mainnet launch, most tokens have minimal utility and are purely a vehicle for speculation on the perceived future value of the network. This is the lure for many Presale and Crowdsale investors.
Another major factor has to do with the way projects execute mainnets. Let’s face it: blockchains have been promised to be the greatest thing since sliced bread. They are expected to disrupt and restructure a multitude of industries, disintermediate rent-seeking business models, and revolutionise the way many things are done. This created a huge amount of development of blockchain projects, some of them much better than others.
During the 2017 bull market it seemed any project on Coinmarketcap would just rise in price; it didn’t matter if any developments were occurring with their technology. Investors were allocating funds to any project, despite what the proposed use case may have been. Some of the projects were implemented very poorly, had gaping security issues, or were just poorly executed. Some had failures with the teams behind the projects or how the foundations managed governance and development decisions. Others were outright scams.
A Ghost Town
We have seen savvy investors get in early and dump on the less sophisticated investors, knowing the project was poorly executed, or had major issues, while riding the wave of hype and marketing to profits. The price run-up to mainnet launch often leaves less savvy investors as bagholders.
The unfortunate reality is that most mainnet launches mean little more than an expected product deliverable. To put this into perspective, in July 2008 the Apple App Store (you might’ve heard of it) launched with 500 ready to go apps. It is totally understandable that blockchain projects do not have the resources that Apple has, however, this is seen time and time again with major platform releases by gaming, social media or other tech companies. They launch with partners on day one.
With most crypto investors being accustomed to platform launches from various tech companies, it is no surprise when a blockchain mainnet launches with minimal fanfare and a transactional ghost town that the speculative price of the utility token might not hold its value.
Humans Spot Patterns
Another reason for the token dumping is due to it being over inflated in the run up to the mainnet launch. Many people in the market know there is a pattern in the weeks leading up to a mainnet release, and as jury members in a Keynesian beauty contest they happily comply. A project will often shoot up in price and then after it will dump again. “Buy the Hype, Sell the News” is the crypto adage. Simple herd mentality leads to other humans following previously seen patterns.
Mainnet launches that didn’t live up to the hype
We are going to take a closer look at some examples of high-profile mainnet launches and the areas where they could have improved to reduce fallout and increase investor expectations. We’ll also examine why it happened, and then discuss strategies for counteracting the “mainnet effect”.
Tezos was one of the most successful ICOs in history raising an estimated $232 million USD in its token sale in total (private, presale, crowdsale). Shortly after the ICO, there began to be disagreements between the creators of Tezos and the Tezos foundation, which was created to oversee the funding, development, and release of the Tezos mainnet. The details are beyond the scope of this article, but they caused significant delays to the network’s launch and in token issuance.
Tezos also had issues with passwords and lost tokens, and implemented AML/KYC after accepting money from people in the crowdsale, then changing the terms without investor’s consent. This caused part of the community to want to fork the protocol. This was happening at the same time as a messy legal battle resulting from the dispute, which is ironic since Tezos was a blockchain trying to improve blockchain governance.
- Tezos had a 50% price run up the week before the mainnet launch.
- Tezos had significant delays in the launch of the mainnet do to a legal dispute between the foundation and the protocol’s creators.
- When the mainnet launched, within an hour, the Tezos token lost 20% of its value or $170 million USD from its market cap.
- Tezos then faced further price declines due to imposition of AML/KYC on participants of the token sale, after originally not having AML/KYC. Investors felt betrayed.
Everything about EOS has been larger than life. For starters, it had a year long ICO that raised over $4 billion USD. It was backed by Brock Pierce, an eccentric crypto billionaire who is no stranger to controversy. It was also heavily hyped, and had a dramatic 20% run up in price the week before its mainnet launch, much like Tezos. Also much like Tezos, its mainnet launch was extremely problematic, if not worse.
EOS had many issues, but some of the major ones were things like terrible execution of the network’s launch, failures in governance, gaping security vulnerabilities, flaws in the code, a poorly designed “constitution”. It also had colluding block producers rolling back transactions and bad wallet design. I could go on, but you get the point. EOS had so many issues that it took a week after the mainnet “launch” for the network to actually go live.
- The EOS launch was full of technical issues which prevented the network from going live for over a week.
- Block producers made an arbitrary censorship decision against the wishes of the community and the philosophy of the protocol causing a community split.
- There were many security issues allowing for loss of funds as hackers were able to take control of the official Block.One Zen desk and were able to phish investors.
- EOS has faced criticism of being centralised, of both the block producers and the fact that a few wallets hold the majority of the tokens.
- EOS lost 50% of its value in the two weeks after it launched its mainnet.
Tron is another very visible blockchain project that has its fair share of problems. For Tron, the drama started with the white paper, which was plagiarised. Eight pages of the whitepaper were copied verbatim from other projects like Ethereum, Filecoin and the Interplanetary File System. Leading up to the mainnet launch, Tron was plagued with scams and fake token airdrops. Tron is also highly centralised with 3 wallets owning 50% of the tokens which make up its $1.7 billion USD market cap. Researchers have discovered security vulnerabilities as well.
Justin Sun, the founder of Tron, has been criticised for his sensationalism in marketing Tron despite the obvious shortcomings and issues with the project. This has continued after the mainnet launch, up until as recently as within the last few weeks. He was criticised for giving away a Tesla automobile, and then rescinding the prize, and giving it to a different contest “winner”. He ended up giving away two Tesla cars to quell the backlash he faced on Twitter.
- Tron suffered fake airdrops and scams leading up to the mainnet launch.
- Tron began a decline in price in the days before its network was deployed.
- Immediately after its mainnet launch Tron suffered a continued decline of 20%.
- Tron is centralised with half of the token supply held by 3 wallets.
Icon was a blockchain project launched out of S. Korea, and was marketed as S. Korea’s Ethereum (similar to how NEO was marketed as the Chinese Ethereum). Due to S. Korea’s positive regulatory climate for blockchain, high-level of adoption, and overwhelming enthusiasm for the technology, ICX was heavily hyped. The ICO raised $42 million USD. Anticipation surrounding the project was very high, as the crowdsale took place in September 2017, the peak of the ICO frenzy.
- The ICX mainnet was very hyped and was expected to provide a boost in token price. Nothing could have been further from the truth.
- The mainnet launch was rocky, and had several delays before it actually launched.
- When it did finally launch, instead of a boost to token prices, it kicked off a major selloff.
- A few months after the launch, an amateurish bug in the code for Icon’s smart contracts sealed the demise of investor confidence.
- When the mainnet launched on 1/24/18 the ICX token had a price of $8.38 (usd), it is currently $0.38 cents.
- ICX has been in freefall ever since, never fully recovering from the back to back bad news announcements, exacerbated by the “crypto winter” bear market.
What can Blockchain teams do to avoid a mainnet disaster?
Launch with meaning
One of the most crucial elements that projects fail to highlight during mainnet launch is why it is important. Technology is fundamental to any blockchain project, but as much as some developers would like to believe, it is not the only factory for success.
Launching with initial partners, users, products or any route that indicates adoption is one sure fire way to show that your projects is more than speculation and has real meaning. At mainnet launch, this is your time to show the world what your potential really is. The clear path to adoption is one way to avoid launching with a damp squib.
Show what you are made of
A mainnet launch is usually something built up to over months or even years (See Dfinity). When it does finally happen then why not build up to it properly, release your best business development, ecosystem, client, team, tech or other announcements. Much like the point above about launching with meaning, take some time to stake your ground as a serious project and your audience will respect you a lot more.
This is a way to separate yourself from the numerous scam or vapourware projects who never actually planned to do anything with their blockchain projects.
Proof-of-Stake is the first thing that springs to mind here and there are various takes on staking by this point. The great thing about staking is that it can reward believers in your project upon a mainnet release. They support the security of the network and they get rewarded for it. You now have yourself a HODLer.
But the reality is there are numerous ways to encourage HODLers. You can implement programs that reward people for holding, using, staking, spending, lending, borrowing, gifting or burning - all are ways to foster real utility in your network, which is what HODLers want.
Let it be
The final approach to impending mainnet launch disaster is just to let it happen. You can have the perfect launch with 500 dapps, huge proportions of your tokens staked. The fact is, a mainnet dump may still occur.
The markets are fickle and there will always be some element of pattern bias. A project can only put their best foot forward and the rest is with the Gods of supply and demand.