How Expensive Is Your Cryptocurrency Infrastructure? (Tokenisation Part 5)

April 3, 2018

This post is part of a series of articles on tokenisation dealing with general analyses such the possibilities opened up by tokenisation, what should be tokenised, to analyses of specific choices made by some tokenisation initiatives such as whether or not to be a platform play. This blog is also focussed on the nuts and bolts of an ICO by raising some of the decisions that need to be made in designing an ICO and the potential transaction cost consequences of those decisions in terms of your post-ICO token management cost. This is of course assuming your are tokenising an asset like real estate like ,, that will generate returns for token-holders.

So, you’ve decided to sell tokens for your ICO. The question then becomes what you are doing to pay for your infrastructure.

There are at least four components to the infrastructure you choose:

1. The cost of developing and maintaining your infrastructure.

2.  The cost of converting incoming money into your cryptocurrency tokens.

3. The cost of converting cryptocurrency tokens into fiat for your business use.

4. The cost of returning earnings to token-holders.

Point (1) above is composed of the cost to you of complexity and time. The more complex your architecture, the more time you need to design it, to test it, to bugfix it, to  extend its capabilities. The more your develop yourself, as opposed to using off-the-shelf components, the more cost and potential cost you incur.

Point (2) above consists of your transaction cost on intake. If you take in fiat currency, you have to factor in the cost of your banking infrastructure (i.e. any additional considerations in taking large amounts of money) for taking in funds (as opposed to storing funds). If you take in cryptocurrency for purchase, you need to think about:

a) how many stores of funds will you use – one wallet of one cryptocurrency for all your funds or multiple wallets of different cryptocurrencies?

b) carefully parse out your potential transaction cost by assessing the number of transaction steps for converting cryptocurrency intake into store.

Point 3) above consists of moving crypto into fiat currency for use by your business wherever it is, in whichever currency it is. Are you going to move the money into local currency or use an intermediary currency like USD or Euro? Will you use one exchange or multiple exchanges? How reliable are your exchanges? Some exchanges might offer slightly better transaction fees but also differing rates for the same currency pairs.  Is your bank like to reject your incoming wires from a particular exchange? This decision  is a combination of risk assessment of transaction cost and your exchange choices.

Point 4) above consists of the cost of returning funds to your token-holders. This pathway of funds can be slightly different from your intake is a few ways:

a) If you are returning funds to coin holders, those amounts are most likely to much smaller than your intake amounts.  Lower amounts naturally means transaction cost as a percentage of your transfer amounts becomes a consideration.

b) You have more control over the channel. You are naturally not going to attempt to return funds using all available cryptocurrencies. You will stick to one and therefore your steps and consequent transaction costs are going to be cheaper and fewer.

c) You may eschew the fund return model all together by agreeing to buy back tokens for a set value directly from your token-holders or from listing the tokens and buying them in the open market.

In this slightly dense post related to cost of your cryptocurrency infrastructure, I have attempted to highlight some of the cost considerations you will be taking into account when designing your cryptocurrency token infrastructure.