Based on the analysis of issuance time and price, is Grin, known for its fairness, worthy of its reputation?

Grin was finally launched in early January this year after years of anticipation, but it quickly faced criticism from some Bitcoiners who called Grin a "VC coin" and compared it to projects from the 2016-2018 ICO era. This article argues that this criticism is unreasonable because Grin's issuance and distribution are quite fair.

What constitutes a fair launch?

Philosophers have debated fairness for thousands of years, so we won’t discuss fairness per se. Instead, we’ll focus on what the criteria for fair issuance have been in the short history of private currency markets.

We observe that the fundamental principle is that a fair launch provides equal opportunity for investors to acquire cryptocurrencies 1) over a longer period of time 2) at a relatively fair price, rather than for investors to achieve a fair outcome. This can be broken down into two aspects: launch period and price equality.

(1) Issuance Period

A longer issuance period is very important to give the market enough time to understand the project and discover a reasonable price. When 100% of the token supply is sold in a month, we can't help but wonder if the market can really make proper price discovery? On the other hand, we found that for projects that extend the issuance period to decades, the market is able to digest the supply well and discover a reasonable price.

(2) Price equality

The second aspect, price equality, proposes that no group or individual can acquire tokens at a massive discount to the market price. Both Zcash and Beam had a portion of pre-mine tokens locked up (as a founder’s reward), some of which were sold to accredited venture investors. Like Dfinity (and many other ICOs), early investors paid 1% or less of what investors in the public offering would have paid. It can be argued that these discounts are justified because these investors provide the needed credibility to the project and accept longer lockup/illiquidity periods than public investors. Whether the market agrees with this view remains to be seen.

Our goal is not to provide a prescriptive view on what projects should and should not do, but simply to describe the market realities around fairness. The view that venture investors take on significant risk (including whether the project will launch) is not necessarily correct. We believe that the longer the illiquidity period a project requires from pre-sale backers, the more early investors will benefit through discounted prices, which can be seen as proof of work for the investors themselves.

Pre-sales with venture capitalists are distinct from the concept of pre-mining or pre-allocation. While we believe that pre-mined cryptocurrencies have price discovery issues, they do not have an inherent negative impact on price equality.

Comparing ICO projects and PoW projects

Generally, the longer an ICO project is open, the fairer it is. Although EOS's ICO has been criticized by the market, it is relatively fair because it took more than a year. This long-lasting ICO is actually similar to proof of work, auctioning a portion of the cryptocurrency to the market every day, giving the market ample time to understand the product and its details. This allows investors to conduct very reasonable price discovery in the secondary market.

Expanding on this idea, proof of work can be thought of as a perpetual ICO, where a fixed amount of cryptocurrency is auctioned off on the market every day and the proceeds are destroyed. Proof of work is sometimes criticized when discussing fairness, as mining farms with large amounts of power resources can use economies of scale to gain a competitive advantage, but this argument is easily refuted. Large-scale mining operations currently operate in a highly competitive environment, which also ensures that mined cryptocurrency has immediate access to the secondary market as miners need to sell their cryptocurrency to replenish their liquidity. Millions of crypto market participants have the opportunity to purchase these cryptocurrencies at a time when miners have very low profit margins (or even no profit at all in many cases). Mining competition is so fierce that it is as if the cryptocurrency is directly released to the secondary market.

Based on these two aspects, time and price, we can plot on a graph the different distribution models we have seen so far.

Since ICOs and pre-mined cryptocurrencies usually sell most of the token supply in a very short period of time (unequal opportunity to buy) and ordinary investors are also known to offer large discounts to some early investors (unequal prices), the market will consider it even more unfair in terms of both time and price. Projects that only raise private initial financing and hold a large ownership stake in the project, such as Dfinity, are at the other extreme of "unfairness".

Evaluating Grin’s Release

So how is the fairness of Grin's issuance? Let's take a look at the characteristics of Grin's issuance:

The project is highly transparent. The project specifications, including its technical features, monetary policy, etc., are made known to investors in advance before issuance, giving the market ample time to understand them.

The hashing algorithm used in Grin's PoW is also well known, and important decisions are made publicly on the project's public forum. To ensure that the launch is open to as many participants as possible, the community provides a dual PoW system for the first 2 years, with one hashing algorithm targeting general-purpose hardware and the other supporting ASICs. This is a pragmatic choice, after all, the development of ASIC chips on the Grin network is considered inevitable. The team chose to gradually expand the portion allocated to ASIC-friendly hashing algorithms over a period of more than 2 years, allowing small-scale amateur miners to participate.

The total supply will be released gradually over a long period of time, which ensures reasonable price discovery throughout the issuance schedule. Although Grin's long-tail issuance is not as strict as Bitcoin, it allows investors (miners) to participate permanently.

Arguments against Grin

Bitcoiners have raised two main arguments against Grin.

The first argument is that the majority of the initial hashrate is provided by mining companies, which are primarily funded by venture capital money, which is somehow no different than a pre-mine offering. This argument is a red herring. As mentioned earlier, the more competitive the mining market, the fairer the distribution will be, because competition ensures that the cryptocurrency is delivered to the market with the smallest possible margin. Venture capitalists are like other speculators, and when they invest in miners, they are rewarded in proportion to their risk in operational execution and market acceptance.

The second argument is that Grin’s launch attracted a lot of attention, while Bitcoin’s launch received almost no attention. We think this argument (i.e., because more people are interested, the launch is no longer fair) is inconsistent with the free market perspective. In fact, we think the opposite is true: the launch is fairer when more potential buyers are aware of the project. This does not apply to Bitcoin, because the only people interested in non-sovereign money at the time were a small group of cypherpunks. However, if you quietly launch a project today, many people may instead think the project is a scam.

in conclusion

In the spirit of free market competition, we believe that all distribution models are good. The theoretical "fairness" of a distribution model is different from the question of whether the project has achieved what was advertised. All cryptocurrency projects are nascent experiments with varying degrees of success. Assuming that markets are reasonably efficient, providing investors with full access to transparent information - allowing market participants to discern reality from fiction - is more important than the accuracy of the project's own description. Discerning whether a project's vision is misleading is more for the market, and has no correlation with the fairness of the distribution model.

In summary, we think Grin’s launch is excellent in terms of launch timing and price justification. While the concept of “fairness” is ultimately subjective and “perfectly fair” is a pipe dream, these are factors that the market currently considers very important.