What Are Bounty Programs?
Bounty programs are incentives offered to an array of participants for various activities associated with an initial coin offering (ICO). An initial coin offering (ICO) is the cryptocurrency industry’s version of an initial public offering (IPO). A company looking to raise money to create a new coin, application, or virtual currency service launches an ICO as a way to raise funds. A bounty program doles out rewards or tokens for participants completing specified tasks that help promote the ICO.
Bounty programs have their origins in the digital video gaming world. Various types of perks are sometimes offered to gamers who help with game development—specifically those that identify bugs in the game.
- Bounty programs are used by crypto-coin developers to incentivize actions before the initial coin offering (ICO) by developers and marketers.
- After an ICO, bounty programs may be used to get feedback on the project's code from external developers or to reward promoting the coin in media channels.
- Bounty programs operate in a legal gray area between marketing and pyramid-scheme-style fraud. The SEC has used ICO bounty programs as proof of criminal wrongdoing.
Understanding Bounty Programs (ICOs)
Bounty program participants are spread across various stages of an ICO, ranging from investors to ICO promoters and developers. The incentives can take the form of cash rewards (although this is rare) or free (or discounted) tokens that can be cashed in later when the tokens are listed on an exchange.
The collapse of the ICO market in late 2018 and 2019 dramatically reduced the number of active bounty programs. Furthermore, bounty programs that are focused on marketing were used during the heyday of the cryptocurrency bubble to promote fraud, which should make crypto-coin developers wary of using them.
Broadly, an ICO consists of two stages: pre-ICO and post-ICO.
In the first stage, which is also known as the pre-ICO, the offering is marketed to prospective investors and people willing to do tasks to make the ICO more profitable. Computer programmers, social media influencers, blog writers, marketers, and other interested parties work to create awareness about the project and the upcoming ICO. In this stage, bounty programs generally focus their resources on social media platforms.
Developers receive a sizeable chunk of tokens as payment for their participation in coding the project. These tokens can be redeemed for fiat currency when the tokens are listed on an exchange. For example, Ethereum and Zcash both had substantial bounty campaigns in place for developers who helped set up the blockchain.
Social media influencers and blog writers make videos, write articles, or spread the word about the ICO on popular platforms. They get paid based on their content’s engagement with the audience. Bitcointalk Signature Bounty marketers are members of bitcointalk, a popular discussion forum for crypto enthusiasts.
After the ICO, bounty programs can be used to incentivize developers to find bugs or give feedback on other design elements. Coders who test and detect flaws in the blockchain are given a type of reward that is specifically known as a bug bounty.
The focus after an ICO shifts to fine-tuning the released blockchain. So bounty rewards may also be offered to translators, who help ensure a global reach for the blockchain by translating documents associated with development and marketing.
Criticism of Bounty Programs
In the wake of the bursting of the Bitcoin bubble in 2018, some ICO bounty programs began to be scrutinized for their similarity to pump-and-dump schemes in over-the-counter (OTC) stock markets. Many companies use bounty programs because they want to capitalize on the opportunity to outsource marketing to regular people, thereby taking advantage of an inexpensive and efficient way to spread the word about their ICO.
Critics claim that pretending to be a disinterested party, while promoting the value of an investment of any kind (and being secretly paid for that promotion) is unethical, even if it isn't illegal.
In 2018, after investigating a fraudulent ICO, Robert A. Cohen, Chief of the Security and Exchange Commission’s Cyber Unit, issued a warning to investors and potential fraudsters: "Investors should be alert to the risk of old-school frauds, like oil and gas schemes, masquerading as innovative blockchain-based ICOs."
The SEC's investigation found that David T. Laurance and Tomahawk Exploration LLC attempted to raise money to fund oil exploration and drilling in California through the sale of a digital currency called “Tomahawkcoins.” Although the ICO didn't raise any money, Tomahawk issued tokens in exchange for promotional services through a bounty program.