What Is a Token Sale and How Does It Work?

Token sales, also referred to as token offerings or token generation events, are a type of funding that blockchain projects offer to their users in exchange for cryptocurrencies such as Bitcoin or US dollars. In this guide, we will dive into what a token sale is, how it works and what are the main components of the process.

Definition of a Token Sale

A token sale is a fundraising mechanism one of type of blockchain project can utilize to raise capital through selling digital tokens to the public. They generally imply the right of ownership, utility in that specific project, or whatever rights and privileges are set by the project community. 

A token sale is generally done during a Security Token Offering (STO) or Initial Coin Offering as a way for projects to raise funds to help with development, operations, and growth.

How Does a Token Sale Work?

Key steps in the process of running a token sale generally include:

Project Preparation

Most projects would have a whitepaper developed by their team that would detail the vision, the technology, some use cases, the tokenomics, and the roadmap before they launch their token sale. Hopefully, it is going to serve as an in-depth manual for all those people who would like to regard the project and the linked token sale as a viable investment opportunity.

Token Creation

Here the product team creates the digital tokens that are going to be sold during the sales. These tokens are typically created by a smart contract protocol and distributed on a blockchain platform, most commonly Ethereum. 

The smart contract manages token sales for the entire process, distribution, pricing, and vesting schedules for tokens.

Token Sale Announcement

Once the project is complete, the team announces the token sale to the public through a number of mediums: the web, social media, forums, and of course, cryptocurrency news outlets. 

The announcement contains specifics about the token sale as the official date it starts, ends, the price of tokens, the goal of the ICO, and what, if any, bonuses or deals there are for early investors.

Contribution Phase

Cryptocurrency Investors to Buy the Tokens in the Project using another cryptocurrency (BTC/ETH) or fiat currency (USD/EUR), which they will also send their money to during its crowd sale. 

Investors contribute to the project through a special website or platform created specifically for the project, where investors send money to the specified wallet.

Token Distribution

When the token sale is over, the project team allocates the tokens that are already bought to the investors by their terms. Tokens can represent a value or a stake in the project but will be issued either instantly upon sales completion, or some feature a vesting schedule or lock-up period.

Post-Sale Activities

Since they have just accumulated funds through the token sale, the team can then start working on post-sale activities such as listing the tokens in exchanges, developing and releasing the project platform or product; and also more activities to update and consult with the community.

Key Components of a Token Sale

Tokenomics

The tokenomics of a token sale is an overview of the economics and distribution model of the project's token such as total token supply, token allocation and distribution, pricing mechanism, and use of proceeds from the sale.

Smart Contracts

As technology has improved smart contracts have emerged, which are self-executing contracts with the terms of the formal agreement directly between the seller and the buyer the code. 

In the context of a token sale, smart contracts automate the distribution of tokens, escrow, the sale of tokens themselves, and even so-called regulatory compliance.

Whitepaper

The technical document describing the project goals, technology, use cases, tokenomics, and roadmap. It has it all to be a guide for an investor to understand the project and its initial sales of a token.

Legal and Regulatory Compliance

The sale of Tokens can also be subject to regulatory requirements and compliance obligations depending on the jurisdiction and nature of the Tokens. 

Where a project is subject to the aforementioned laws in relation to securities, crowdfunding and/or consumer protection, it must ensure that it is in compliance.

Conclusion

Blockchain projects use token sales as a means of raising money by offering investors digital tokens in exchange for cash.The process goes through a few central stages: project preparation, token minting, launch, token distribution, and post-sale activities. 

Having an understanding of the various elements of token sales and how they all come together helps educate investors regarding the status quo of token sales and enables them to make educated decisions when contemplating whether or not to participate in a specific token sale and contribute to a promising blockchain project.