4 min read

Que bono? Who profits?

Que bono? Who profits?

[ - by Linus Naumann]

In September 2023 the IOTA Foundation announced its unilateral decided to mint new IOTA tokens through a hard fork, resulting in a total supply increase of about 60% over the course of the next four years (~12% inflation per year). Most of these new tokens go to the IOTA Foundation itself and its offshoots in Switzerland and the United Arabian Emirates (~75% of new tokens) with the rest going to, so far undisclosed, contributors and to the Assembly-stakers. Although these funds will all be minted at day 1, they will reside inside time-locked UTXOs and will only be released in small bits every 2 weeks.

But what does it mean?

The IOTA Foundation
IOTA originally was famous for having no pre-mint and no insider allocation of tokens at the start of the project. 100% of all tokens were publicly sold, to the point that even the founders themselves needed to buy with their own, private funds. This decision looks good on paper, but left the IOTA Foundation without any meaningful warchest with which it could compete against other crypto projects. They were left without resources to start certain big partnerships, could not employ market-makers and stood locked-out of certain exchanges, because many of those kind of deals required a certain percentage of the token supply offered away.

The situation was even worse, because these low funds also meant that the IOTA Foundation was also not able to pay large teams of expensive, top-level developers, leaving it with smaller teams of mostly idealist, that voluntarily accepted to work for salaries below market-rate. Even though dedicated and highly professional individuals were ready to push IOTA technology regardless, this situation in the end slowed down development of everything from the core protocol to wallets and smart contracts.

This newly announced, very large token inflation that mostly benefits the IOTA Foundation and its sub-organizations has a chance at solving these problems. Now they can grant certain percentages of the token supply to key partners and they can sell tokens fund their teams of highly skilled developers.

However, this forced approach might also leave a bitter taste with many, potentially reducing trust in the project and the token. This in turn could scare off new investors, lead to hesitant future investments and protest sells, which would diminish the value of the newly minted tokens.

Sentence: Even though risks regarding investor trust are involved, the IOTA Foundation and its related organizations largely profit from the newly minted tokens.

IOTA token holders
On first sight it might seem clear: If the total supply of tokens in the network is increased, but you as a token holder don’t get an equal share of these new tokens, then your piece of the pie gets smaller. You own a smaller share of the network.

However, the story is in fact more complex.

Firstly, not all new tokens will hit the market at once and increase sell-pressure. Since these tokens were minted inside time-locked UTXOs they will only be freed, and potentially used, in small steps every 2 weeks.

Secondly, and more importantly, these tokens will presumably be used with the intention to push the IOTA technology and ecosystem into serious growth. Important partnerships and a stable financial situation at the IOTA Foundation have the potential to offset the negative effects of the token inflation and additional sell-pressure.

The deciding question is: Will the newly printed tokens grow the IOTA ecosystem well enough to increase the token price by MORE than 12% per year? If that is the case, then the average IOTA token holder profits.

Sentence: Token holders will benefit if the newly minted tokens give IOTA a positive future. Quantitatively speaking, holders profit if the IOTA price rises more than 12% per year because of how the newly minted tokens are used.

Potential Investors
For all investors, market makers and partners that were interested in IOTA but could not receive a sensible token offer to join the ecosystem, the new token mint is very good news. They might now get offered inviting entry-conditions into the IOTA markets, either through OTC buys or other kinds of special deals. Once they hold IOTA tokens they have a vested interest into the success of the project and will further the network will full attention, simply because their very own financial outcome is at stake.

On the downside, the main worry for these potential partners could be that this one-sided decision by the IOTA Foundation will make it hard to sell the vision and market potential of IOTA to more people and other investors.

Sentence: Potential ecosystem partners largely profit from this new token inflation, with a certain risk that this new token inflation soured some peoples opinion about IOTA.

My personal opinion
I think the IOTA Foundation tried for many years to work with their very limited funds to do as much as they could. This lead us slowly falling from the top 10 projects by market capitalization to barely surviving in the top 100. Just sticking to this strategy might satisfy our idealistic wishes, but would not have been sustainable and would not have lead to IOTAs big success. This means I agree with increasing the IOTA supply and giving most of the new tokens to the IOTA Foundation and its partners – there is no other player in the our ecosystem that could do more good with these tokens. I would rather turbo-charge our efforts with more tokens – even at the risk of devaluing my own holdings – than seeing IOTA moving at a snails pace out of the spotlight of the crypto market.

Should this decision have been discussed with and decided by the IOTA community? I am of mixed opinion here. I am a fan of community participation, however I also see that such a strong decision could probably not have happened (and especially not have happened that quickly), when a full, years long, governance process would have taken place. Other ways, like a party-community driven decision, for example by giving the community two options of how many tokens should be printed and let them decide by on-chain vote, seem like a good middle-way to me, but might have created a similar large outrage, drawn out the process too long and might have left the IOTA Foundation with again too less funds to finally really thrive.

We live again in exciting times for the IOTA ecosystem. I wish to see these new tokens put into action by onboarding new, big partners and accelerate development on all fronts. If that happens, I am sure all players in the ecosystem profit.