DFINITY Foundation

Internet Computer Association

ICP Maximalist Network

cycledao.xyz

ICDevs.org

This motion proposes that DFINITY includes an initial token swap in the SNS milestone Carbon.



### What we vote on
This motion proposes that DFINITY includes an initial token swap in the SNS milestone Carbon.
More details on the initial token swap canister design and how
it can be used in the process of converting an existing dapp on the
Internet Computer into a decentralized dapp controlled by a SNS DAO can
be found in [this forum post](https://forum.dfinity.org/t/sns-initial-token-swap/13591).

### Objective

To decentralize a dapp, developers can hand over the control over their dapp to
a community. There are of course many ways to do so. The aim of the Internet
Computer’s SNS is to allow this in a very simple way: developers can hand over
the control of their dapp to the Internet Computer that will then launch an SNS
for them with a governance system and a token ledger according to the
specification of the developers. A crucial part of launching an SNS is how the
newly created tokens are distributed and how they are staked into neurons for
the SNS’s governance ensuring proper decentralization.

**To achieve this, we propose an initial token swap
where participants can exchange ICP tokens for SNS tokens to provide
funding for a dapp and explain how this initial token swap can be
leveraged in the launch of SNSs.
As it is essential for projects that the launch of their SNS distributes
its voting power over many different neuron holders, we propose to
prioritize the work to realize such an open initial token swap and to
include it in the Carbon milestone.**

### Proposed design
To ensure that tokens can be distributed to independent parties during an SNS launch, we propose an initial token swap, which is implemented by a newly introduced swap canister.
We first explain the proposed design for the swap canister and then how this swap canister can be integrated into the flow of an SNS launch to achieve decentralization.

#### Swap Canister design
Each SNS will have a separate swap canister that only exists for the duration of the SNS’s launch.

* The swap canister is set up at start with a defined amount of SNS tokens to be distributed publicly.
* During the swap, participants can send ICP to the swap canister to contribute to the dapp’s funding.
* At the swap’s end the collected ICP are swapped for the SNS tokens: the
  swap participants get SNS tokens and the SNS gets the collected ICP. Each
  user will receive their portion of the pool of SNS tokens, pro-rated by their
  % of the overall number of ICP contributed. 
* The swap achieves that a) a market price for the SNS token is set and b) every swap participant receives SNS tokens at that price.

To ensure that the focus of this process is on distributing dapp governance
and less on speculation, all tokens will be given out in neurons.

The following parameters can be set for each initial swap.
* **Maximum amount of ICP tokens**: The maximum amount of ICP that the swap collects as funding. If this amount is achieved, the swap ends. Together with the next parameter, this determines a minimum and maximum SNS token price.
* **Minimum amount of ICP tokens**: The minimum amount of ICP that the swap needs to collect to be considered successful. Together with the first parameter, this determines a minimum and maximum SNS token price.
* **Swap deadline**: The deadline when the swap ends. As mentioned above, the swap may end before this deadline if the maximum amount of ICP tokens has been collected.
* **Minimum number of swap participants**: The minimum number of swap participants for the swap to be considered successful.
* **Minimum and maximum amount of ICP per participant**: The minimum and maximum amount of ICP that each swap participant can contribute. The minimum achieves that each participant has a minimum investment while the maximum guarantees that no principal can get too large of a share of the initial token distribution.

If a swap is successful, neurons are created for each swap participant containing the amount of staked SNS tokens as determined by the exchange rate described above. If the swap ends but is not successful, for example because not enough ICP have been collected, all collected ICP tokens are transferred back to the swap participants.

#### SNS launch
We can then use the initial token swap to launch SNSs.
The proposed design of the SNS launch aims to achieve the following goals:
* The developers handing over a dapp to an SNS community should get some voting power in the launched SNS
* A share of the initial voting power of a launched SNS, that is neurons after the launch, should be owned by independent parties and the swap should be decentralized
* A launched SNS should have some initial funding that the SNS community can use to pay contributors, pay for cycles, and pay for usage rewards
* Prior to the swap’s end, no one can transfer SNS tokens
* At any time, the dapp can be upgraded to evolve it and address bugs

To achieve these goals, we propose that an SNS launch goes through the following stages.


* **Initializing the SNS**: When developers initialize a SNS to which they want to hand over the control of their dapp, they choose a portion of tokens that are allocated to the developers, to the initial token swap, and to a treasury, which is an account that will be owned by the SNS governance canister and can be spent by the SNS community according to their needs. Possibly they can also specify a portion of tokens that are allocated to other predefined parties, for example to "airdrop" some tokens to known dapp users. The developers can also define the conditions for the swap, for example how many ICP tokens should at least and at most be collected (see details above).
  As the SNS is not yet decentralized, the swap canister is controlled by the NNS.
  There are only two ledger accounts with liquid tokens during the SNS launch, the treasury that is owned by the governance canister and preallocated tokens owned by the swap canister. To ensure that no one can transfer tokens prematurely, all initial tokens from developers or "airdrop participants"
  are locked in neurons. Moreover, to ensure that these initial neurons cannot modify the SNS before or during the swap and cannot transfer the treasury tokens, the SNS is deployed in a pre-initial-swap mode with limited functionality.
* **Dapp control handover**: Between the SNS initialization and the start of the swap, the developers hand over the control of their dapp to the SNS. As there are already initial neurons (from Step 1), the dapp can now be upgraded via SNS proposals. The initial neurons can not do other things, such as changing the SNS parameters, as the SNS governance canister is still in pre-initial-swap mode. As the developers were already controlling the dapp before the SNS initialization, they effectively do not have any additional privileges compared to the state before the SNS initialization.
* **Starting the swap**: The swap is started by an NNS proposal. This means that during the launch, the developers that originally controlled the dapp hand over the control of their dapp to the NNS that then initializes the swap for them. When voting on a NNS proposal to start a swap, the NNS neurons should consider whether the swap parameters make sense and, most importantly, whether the dapp’s control has been handed over to the SNS already (that is Step 2 was completed successfully). The NNS proposal thus also serves as a safeguard where the wisdom of the crowd can detect potentially malicious SNSs before they trick users into investing in them.
  If the NNS proposal is adopted, the swap is started by the NNS. If the NNS proposal is rejected, the SNS launch is aborted and the dapp’s control is handed back to the developers.
* **Initial swap**: When the swap starts, the swap canister holds the number of SNS tokens that were specified at initialization (see Step 1). End users can participate in the initial token swap by transferring ICP tokens to the swap canister.
* **SNS genesis**: When the swap ends, it is first established whether the swap was successful, e.g., enough ICP have been collected.
  If the swap was successful, the exchange rate is determined as explained above and all tokens will be given to the swap participants in neurons. Once all neurons are created, the SNS is under decentralized control and the governance canister is set to be fully functional.
  If the swap was not successful, the decentralization attempt failed. Thus, everything will be reverted to the state before the SNS launch, including that the dapp’s control is handed back to the developers and all collected ICP are refunded to the swap participants.



SNS initial token swap and launch | Design proposal