Ethereum creator Vitalik Buterin, who is so influential even rumors of his mortality can swing that cryptocurrency’s price, has come up with a way to revolutionize his industry’s hottest trend: the phenomena known as ICOs.
An ICO, or initial coin offering, is a nascent fundraising method that has become both extremely popular and controversial in recent months. ICOs, in which companies sell their own digital tokens in exchange for the cryptocurrency Ethereum, have raised about $1.3 billion this year through the end of July, according to data from Smith & Crown. That’s nearly quadruple the amount of traditional venture capital raised in the same period.
Meanwhile, the top U.S. markets regulator, the Securities and Exchange Commission, has announced its intention to treat ICOs, and the tokens created by them, like any other security. Last month, the SEC cracked down on ICO pump-and-dump schemes, a tactic previously associated with the penny stock market by which scammers artificially inflate the price of an asset. Promotion of ICOs by celebrities from Paris Hilton to boxer Floyd Mayweather have added to regulators’ concerns.
Now, Buterin is attempting to address some of those issues. In a 15-page white paper published this week, Buterin and his co-author Jason Teutsch, the founder of blockchain verification project TrueBit, outline a different kind of ICO that they call an “interactive coin offering.”
Essentially, the authors are proposing a way to bring fundamental principles of market value to ICOs, which have so far suffered from a lack of rational free-market economics, allowing hype and promotion to wield outsized influence.
Here’s what they mean by a lack of rational economics: When a new company prepares to offer stock through an initial public offering or IPO, as Snapchat maker Snap (snap) did earlier this year, it releases its financial data and shops the deal to investors to arrive at a stock price. But nothing like that exists with cryptocurrency. For one thing, ICOs sell tokens that have never existed before, and which have unproven functionality, so there is no way to come up with an appropriate valuation—or as Buterin and Teutsch put it in the paper, “traditional analysis fails.”
The duo recommends solving this in two key ways. First, ICOs—which the authors call “token crowdsales”—would have no upfront cap on the amount of money raised, as is common among current offerings. That stipulation aims to avoid the stampede mentality that has overpowered rational buying behavior in certain capped ICOs, such as one in June that raised its maximum $35 million in just 30 seconds, with only 130 people able to buy tokens. “Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated,” the authors write.
Secondly, the authors’ proposal would allow ICO investors to do something which has so far not been possible in token sales: cancel their purchase. The ability to withdraw offers in an ICO should help ensure that the law of supply and demand plays a healthy role in the process. That’s where the “interactive” component comes in, the authors write: “Potential buyers may enter and exit the crowdsale based on behaviors of other buyers, and in doing so tend the valuation towards a market equilibrium.”
To make this happen, Buterin and Teutsch’s new system introduces the concept of a “limit order,” something that has long existed in stock trading, to the ICO market. Instead of asking investors to buy tokens at an arbitrarily set price, the new method would allow buyers to enter bids for how many tokens they would be willing to purchase at different valuations. The buyers could also set a maximum price, or limit, at which they are comfortable participating. In effect, the system is not wholly unlike the one used at auction site eBay (ebay).
Practically speaking, Buterin and Teutsch aren’t suggesting creating a new blockchain altogether; ICOs structured the way he proposes would still originate from Ethereum. But ideally, these simple tweaks, which the authors break down in greater detail in their paper, would make token prices more reasonable and fair, deter deep-pocketed investors (or “whales”) from gobbling up huge swaths of the market, and also prevent a lot of buyer’s remorse.
If Bitcoin—which famously sprung to life from a white paper in 2009—is any guide, it may not take long for this idea to catch on.
This article is part of Fortune’s new initiative, The Ledger, a trusted news source at the intersection of tech and finance. Click here for more on The Ledger.