What is a token migration?
A token migration is a process of sending existing tokens on a blockchain network to a “burn” address that is unique and inaccessible and then crediting tokens in a 1:1 ratio on a separate blockchain network. This is a method of accountability that allows users to transfer their coins without the hassle of a traditional ledger snapshot.
Token migrations are largely a result of alternative ICO funding practices that allows a market to openly trade placeholder tokens prior to the mainnet launch for a developing cryptocurrency project. Many projects have taken this approach for fundraising (primarily using ERC20 tokens on the Ethereum network), with the most notable being EOS in terms of market cap.
Why would a project want to use a token migration?
I spoke with Adam Koltun over at the Quantum Resistant Ledger project (QRL) to get more insight as to why they decided to go the token migration route for their ICO. QRL is an upcoming blockchain platform that aims to combat the legitimate threat that powerful quantum computers pose to traditional encryption methods used by other blockchain platforms.
Following QRL’s presale in April of 2017, some of the pre-sale participants requested to be able to openly trade the QRL token before the full launch of the project’s mainnet. By launching a ERC20 token that represented a 1:1 ratio to the official QRL token to be launched later, it allowed pre-sale participants to have immediate liquidity and for exchanges to actively trade the tokens.
While it can be argued that this also increased the liquidity available to the QRL team, this generally is not the primary purpose of implementing a token migration system to a project roadmap. Most projects reserve a percentage of their project’s tokens, and by making liquidity of these tokens immediately available, projects tend to fund their ICO through already liquid assets (Bitcoin, Ethereum, fiat currency, etc.).
How does a token migration work?
The first step in a token migration processis to have the initial representative tokens dispersed. In the case of QRL, the token from the pre-sale was released on the Ethereum network as an ERC20 token. This is a relatively confusing strategy to many in the cryptospace, because these types of blockchain projects are often direct competitors to an existing chain like Ethereum.
EOS is the quintessential example of this, as it has been touted as an “Ethereum Killer”, yet the EOS tokens were initially launched as ERC20 tokens. Due to the way that Ethereum is structured, any project that will eventually have its own network can take this approach to get tokens onto exchanges months, or even years, before their mainnet actually launches, such as with EOS.
After these ERC20 tokens were issued, the QRL team continued development on their mainnet and roadmap goals, allowing the market to trade the tokens in the meantime. Starting earlier this month on April 4th, the token migration was opened to the public. Token holders are able to create a QRL wallet and then generate an Ethereum “burn” address associated with the QRL wallet, thus ensuring that tokens will be burned and credited appropriately. Users are also given email confirmation, if they so desire, so that they have a record of their burned tokens.
(image from Quantum Resistant Ledger)
Once a burn address has been created, the holder of the ERC20 token can send their existing QRL tokens to their generated burn address on the Ethereum network. In the Genesis block created on the QRL mainnet, all tokens that have been sent to burn addresses will then be credited to their subsequent QLR wallets.
As time goes forward, the crypto-space will see an increasing amount of these token migrations and burn mechanics on established platforms such as Ethereum. Many traders aren’t even aware of the plans to have token migrations at all, which is why due diligence is crucial when trading. Depending on how a project structures their migration, holders may not be credited official tokens on the mainnet post-migration if they did not actively migrate their original tokens.
What happens to non-migrated tokens?
Tokens become forever lost across all blockchain networks, and token migrations are no different. Adam talked about the goals that the QRL team has for their token migration results and explained that non-migrated coins are an inevitability due to “zombie markets” from DEXs (decentralized exchanges), lost Ethereum addresses holding the ERC20 QRL token, and other external reasons.
Because of this, the circulating supply of ERC20 QRL tokens will not match the circulating official QRL tokens on the mainnet. The range in difference may be anywhere from 1-3% due to the relatively short lifespan of the existing QRL token. The longer a project has existed and traded openly, the higher the risk of lost tokens that don’t get migrated as wallets are lost, as well as holders not being aware of a projects long-term goal for migration.
Although these lost tokens would not be openly circulating on the QRL mainnet, all unclaimed tokens will still exist in a holding wallet. Critics may say that this is unfair, claiming that a project team could “steal” these tokens, but that is not likely due to the legalities surrounding it. Taking ownership of these tokens would possibly amount to theft, as they are representative of owned assets.
The outcome for this holding wallet will likely go one of two ways:
- Tokens will be held indefinitely in the wallet so that users who owned them previously as ERC20 tokens may be able to come forth one day in the future and definitively prove ownership over a set amount of tokens in the wallet.
- Tokens in the holding wallet will be burned permanently and removed from the total circulating amount in existence.
The current state of the QRL migration is that around 20% of ERC20 QRL tokens have been migrated within the three weeks since migration began. Migration will likely take place over the next year, with a majority of coins likely being migrated just prior to, or directly after, the genesis block of QRL’s mainnet. Tokens that have been migrated before genesis are essentially taken out of the market temporarily, meaning that investors are locked out of trading their tokens, which is likely why more tokens haven’t been immediately migrated.
One of the side effects of a token migration is that it creates a market ecosystem based on speculation that should reflect roadmap progress. In order for a project (particularly those with large scope goals and technical hurdles) to facilitate a token migration, certain functionality must be attained and thoroughly tested.
For instance, a project’s other features must be working in tandem, such as web wallets, online migration interfaces, and block explorers. As each of these components is completed, the market can respond accordingly, with speculative valuations rising as the project approaches the token migration period.
To put this into perspective, the QRL tokens initially sold at a value of $0.08 each. However, with market trading and speculative valuation, the ERC20 tokens reached an ATH (all-time high) of $4.17 during the bull run through mid-January, netting initial investors a potential 5200% return. When the end date of the token migration approaches, this may also cause a spike in price as investors try to gather ERC20 tokens to exchange for the official QRL tokens. As the development of the project advances, this can have a multiplicative effect on the final price of a token post-migration.
This approach is a double-edged sword, however. Any failures of key components necessary for a token migration reveals breakdowns in project development and an inability to meet proposed roadmap dates, along with causing potential irreversible damage and/or lost tokens. The following PR disaster could very likely ruin both faith in the project as well as market valuation. As such, it creates real-world pressure on a project and a level of accountability not present in many other traditionally funded projects.
The new ICO fundraiser?
The benefits of a token migration have caused it to become a component of many projects. These benefits are largely only for initial investors, speculators, and markets, however, and not for the project itself. In reality, it causes more stress for development teams, but in an emerging industry with vast amounts of capital and little in the way of liability and accountability, it can potentially lead to more stability and grounded valuations.
Setting up a token migration for a project is as simple as writing a basic smart contract and a migration tool within a mainnet wallet, while having a block explorer that can track it all. QRL was able to set theirs up over the course of a couple of days, followed by weeks of testing, which shows that it doesn’t create much work or interruption in development and roadmap goals, and that the real stress of setting up such a system is making sure it is air-tight. Actively pursuing this method, however, can improve the crypto-space as a whole, by holding projects accountable for development milestones and legitimize speculative trading.