So Many Tokens, So Few Wallets
For many, the rise of cryptocurrencies represents a new chance at wealth creation. Instead of relying on a small, elite group of investors, blockchain firms can raise money through initial coin offerings (ICOs) by issuing and selling their own tokens to the masses. In return, these early supporters -- project enthusiasts, retail investors -- are rewarded with increasingly valuable tokens.
But it turns out that many cryptocurrencies, even those that raise ICOs, have distributed the majority of their tokens to just a few wallets. In fact, for many top market capitalization coins, over 60 percent of their total token supply remains concentrated in 20 or fewer wallets.
For instance, according to blockchain analytics firm Trivial, which pulled wallet addresses from the Ethereum blockchain, about 94 percent of all tokens for Mithril -- a decentralized social network with a market capitalization of over US$146 million -- are held in 20 wallet addresses.
Other well-known tokens, such as those issued by exchanges like Huobi Token and Kucoin Shares, have distributed an overwhelming portion of their token supply -- over 95 percent -- to 20 wallets as well.
Polymath Network, a blockchain project that aims to facilitate securities trading, has about 70 percent of all POLY tokens sitting in a single wallet. That’s about US$230 million at the time of writing.
Of course, wallet addresses do not necessarily link to individuals or Lamborghini-owning whales. They could also belong to a cryptocurrency exchange or a company account, like one that belongs to the founders of the project. In fact, by checking Etherscan, which also pulls data from the Ethereum blockchain, it’s clear that exchanges like Bittrex and Binance are often among the top token holders for many cryptocurrencies.
There are other reasons for seemingly unbalanced token ownership. Many blockchain projects dedicate a large portion of their tokens for future product development or other ongoing costs. For instance, social messaging app Kik is allocating 60 percent of its Kin tokens to the Kin Foundation, which will use it for marketing, operational costs, and rewards to encourage people to build and use digital services inside Kik. According to its white paper, 10 percent will be sold to the public.
It also matters whether the company is building a blockchain application or protocol, says Jason Fang, managing partner of Sora Ventures. If the application isn't fully launched yet, it doesn't make sense to start distributing tokens to a wide base of users, he explains.
"With protocols, because you are building a community and you are heavily dependent on the developer community, you do want a really large [token] distribution from day one so developers are incentivized to build on your infrastructure," says Fang.
The choice to conduct an ICO can also affect how the distribution of a company’s token supply. Polymath Network, for instance, did not launch a token crowdsale. Neither did Maker, IOSToken, and Mithril. That might explain why 84 to 95 percent of their token holdings are concentrated among 20 wallet addresses -- that could change once their products are more mature and see more users.
Globally, the appetite for ICOs seems to be cooling, as regulators clamp down on token crowdsales, which raised US$6.1 billion last year. Many blockchain projects are also opting for private token sales, which, similar to venture capital, only offers tokens to a select group of investors.
Some projects, such as Telegram, are able to raise enough money through private sales alone, while others hold ICOs after the so-called presale. In markets like China, which banned ICOs last September, private sales are particularly popular.
"In the past, the best way to distribute tokens was through a public sale," says Fang. In the future, companies may opt to airdrop -- where users receive tokens for free or after meeting certain conditions, such as signing up on an email list -- either on their own or through other organizations.
Sora Foundation, the non-profit affiliated with Sora Ventures, for instance, helps portfolio companies with token airdrops, which not only alleviates any legal concerns the company has around airdropping, but also saves them the hassle of conducting know-your-customer due diligence checks on token holders.
Still, the current trend does not bode well for projects that benefit from distributed token ownership, such as those that use tokens to incentivize verification of data on the blockchain. And everyday investors, like those looking to turn around their fortunes with crypto, may be missing out too, as the data suggests that a small group of people are the main beneficiaries of today’s token economy.