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The 4 Stages of a Token Sale

Token sales have emerged as a fundraising alternative to traditional venture capital. To this day, $380+ million have been raised through public token sales — 60% of which occurred in the past 2 months.

Being a new fundraising mechanism, a blueprint for executing a successful token sale doesn’t exist yet. This makes planning and implementing a successful token sale difficult.

At Open Zeppelin we help companies issuing and selling tokens to build smart contracts and audit code. Based on our experience, we’ve identified 4 stages every company conducting a token sale must undergo to be successful. This post will provide an introduction to the specific steps in each stage, and the best practices we’ve adopted and recommend at Zeppelin Solutions.

1. Design and Plan

Token Model Design

Well-designed tokens have utility in a network beyond a simple store of value or indication of ownership. Tokens that have additional functionality create network effects, drive adoption, and align incentives to encourage network participation and coordination — all of which are key requirements for many decentralized networks.

Token utility can vary depending on its use case — for example, payment, access, fee, contribution, block creation, and governance. But fundamentally, tokens with utility create incentives for protocol-specific interactions between users. Using game theory, a well-designed token model encourages mutually beneficial actions for both users and the network.

For example, the token could be used as a governance mechanism (to vote on key decisions, allocation of funds, etc.), to signal reputation (more tokens indicates better service), or a reward people to answer customer support tickets. In summary, this creates value for the service provider in the form of a token that can be exchanged for currency, and value for the network through more robust services.

Of course, the interactions could become quite complex, well beyond the simple exchange of services for tokens between users, or basic governance decisions. You’re creating your own economy. This requires a deep understanding of game theory, and an examination of possible interactions between users.

Token Model Communication

The standard and most effective way to explain your application’s token model is through a whitepaper. This was the way Satoshi first introduced Bitcoin in 2008 and how Vitalik introduced Ethereum in 2013, and has since been adopted as the best practice for introducing projects in the blockchain community.

Of course, not all whitepapers are created equal. A strong whitepaper should include technical details, economic incentives, and use cases. Here are a few whitepapers that we found well-written and organized: Aragon, Golem, Augur, and Storj. We recommend using these whitepapers as a guideline to explain your proposed token model.

2. Develop

Tokens are a new asset class created, distributed, and governed with smart contracts on the Ethereum blockchain. Hence, developing smart contracts is a critical stage in preparing a token sale.

Using established standards (i.e. the ERC20 token standard), newly minted tokens are easily integrated into major wallets and exchanges. For example, the ERC20 token standard is used by projects like Brave’s Basic Attention Token, Aragon, Storj and Gnosis.

In addition to token standards, organizations can use existing frameworks and libraries to reduce the time and effort of development. Rather than reinventing the wheel, frameworks like Truffle make it efficient to create smart contracts and decentralized applications. And libraries like OpenZeppelin provide extensive and well-tested smart contracts that adhere to security best practices.

Here’s a guide on how to create a token and token sale using Truffle and OpenZeppelin.

3. Stay Secure

Projects issuing and selling tokens must take cautionary measures to ensure the software, business processes and funds are protected. This is important not only to foster trust in the project, but in the blockchain community at large. Prior to the token sale, security measures must be in place to ensure that:

  1. Smart contracts and applications involved in token issuance, distribution, and sale behave as expected.
  2. End-users have the tools and knowledge to securely buy and store tokens.
  3. Funds raised from the sale are securely stored and protected from potential bad actors.

There are a number of best practices emerging in the space to mitigate the risk of software malfunction or attack. For example, to mitigate the risk of having errors in software, project teams are using standard modules for smart contract development (such as OpenZeppelin). In addition, projects have increasingly performed independent code audits by ([security professionals] and implemented bug bounty programs — both to mitigate security risks.

Another concern is the risk of theft from individuals involved in the project. No individual, founder, investor, or developer on a project should have full control of funds. To prevent this, projects should hold funds in multi-signature wallets and employ escrow partners to hold the keys to the wallet (both security measures outlined in the CCSS security guidelines).

4. Raise Capital

There are a number of different token sale structures projects can implement to raise capital, each with advantages and disadvantages. Despite the variety, we think that there are a consistent set of principles projects should adhere to, including:

  • Token Sale Education — Prior to the token sale, project leads should clearly communicate the token sale structure and provide thorough documentation on how to participate. Specifically, buyers need to know where to receive official details on the sale, how to purchase tokens, the cap mechanism, and the sale start time.
  • Transparent Ownership — Projects should clearly explain the allocation of tokens to founders and early investors. Investors need to know that the project team has sufficient skin-in-the-game without too much centralized control of the token. In addition, details on founder vesting schedules and cliffs should be clearly communicated.
  • Planned Fund Allocation — The project team should provide details on their intended use of revenue prior to the token sale and plan to transparently provide budget updates following the token sale.

To ensure liquidity, it’s also important for projects to integrate their tokens on exchanges. This allows for the token price to be set in a free market, mitigates investor risk, and prevents artificially high prices due to a constrained supply.

Concurrent Processes

In addition to the 4 stages of a token sale, there are two additional processes that should occur concurrently: 1.) legal research and due diligence, and 2.) community engagement and marketing.

From a legal perspective, it’s important to determine if your token is a security or not — security classification requires that specific regulatory measures are met. Coinbase’s legal framework is a useful document for determining if a token is a security according to US laws (Howey Test). Another important legal consideration is incorporation. As you prepare for a token sale, projects must determine where to incorporate a company or foundation.

Community building is also a key aspect. Successful token sales have an active community of early adopters. These are people that are passionate about your project, plan to purchase tokens, and participate in the system. Using online forums and communication platforms like Slack and Reddit, projects can create momentum around their application — leading to more token purchases. We know of a few dApps that do this really well, and as a result had successful token sales: Aragon, Golem, and Gnosis.


Following the stages and best practices outlined in this article, you’ll be on track towards a successful token sale. Of course, this is not a comprehensive list of specific steps to take prior to a token sale. Instead, this outline serves as a general framework for preparing a token sale.

Of course, the initial token sale is just a fundraising mechanism. It’s important that you continue to build your network/product/system while you prepare for selling tokens to the public. Token sales are just the first step in a long and exciting journey.

At Zeppelin Solutions help organizations build smart contracts and audit code. Feel free to reach out for additional information on our consulting and auditing services.

Thank you to Manuel Araoz, Francisco Giordano, Ari Meilich and Max Mersch for reading and providing feedback.

This article does not constitute legal or investment advice. It is designed for general informational purposes only, as a guide to certain of the conceptual considerations associated with the narrow issues it addresses. You should seek advice from your experts who are familiar with the particular facts and circumstances of what you intend and can give you tailored advice.