# Important Update: averaging first investments, and more

• 2017-08-06

Good morning prospective Filecoin investors,

The last week has been quite a whirlwind. We've been heads down finishing preparations for the big day monday. This update concerns important sale mechanics and economics, and — though it does not address everything people have been asking about — it should mitigate the biggest concerns some groups have voiced. We wanted to get this update out of the door asap, but we needed to land it in code and test it thoroughly before we could commit to it with a public announcement.

What sale mechanic updates? Based on overwhelming feedback from you, and careful thought, we are making the following two changes.

• (1) All investments made in the first hour will be averaged, and given the same price.
• (2) Crypto (BTC, ETH, ZEC) exchange rates will be based on an HOURLY average, not daily.

Additionally, we have to make this change based on legal counsel and constraints:

• (3) The minimum investment has to be raised from $10 to$500.

I describe all of these in detail below, but (1) is the most important change and takes most of the post.

## (1) Averaging First Investments

### What is the problem?

Four different sale mechanics combined into a significant flaw. This was our fault for not foreseeing it and addressing it sooner.

The four sale mechanics in question:

• (A) The price of filecoin increases over time, incenting everyone to invest as soon as they've decided.
• (B) An investment's price is only determined once the investment payment confirms.
• (C) USD & other other fiat can be pre-funded through AngelList.
• (D) Crypto cannot be pre-funded, and is significantly slower than pre-funded USD.

#### Reasons for these mechanics

There are individual reasons for each of these mechanics:

• (A) The price of filecoin increases over time, incenting everyone to invest as soon as they've decided.

• (B) An investment price is only determined once the investment payment confirms.

• Signing the investment can be legally binding, and technically we could take it on good faith and legal grounding that the investor would then fulfill the investment (a proposition not so crazy, given these are all Accredited and KYCed investors, and we would have legal recourse).

• However, we imagined that there would be many people going through the investment flow without intention to invest, who may change their mind or be hard to chase for payment, or who may maliciously never intend to pay.

• Therefore, we moved the "fulfillment of the investment" (i.e. establishing the final price, the execution of the investment document, and making payment) into a single step: when the investor's full payment confirms.

• This avoids significant issues:

• A (malicious) investment is opened and legally signed for an enormous sum (say, $300M) just to bump the price up for everyone, with no intention to pay it. • An (honest) investor signs an investment for a certain amount but then cannot pay for it, or changes their mind before paying. • An (honest or malicious) investor signs the investment, but then takes a long time to actually pay for it, forcing us to chase them down. • But introduces others: • The price of in-flight payments is not determined. • This is especially bad for the beginning of the sale when combined with (A) above, as discussed below. • (C) USD & other fiat can be pre-funded through AngelList, though this is very slow (days). • This is a feature we got for free thanks to CoinList's banking integration with AngelList. It's a very useful thing, given moving USD is extremely slow. It takes 5-10 business days to move ACH, and it technically can be reversed for longer. It takes 1-3 business days to wire. • Without this feature, USD & other fiat would have been at a massive disadvantage for the sale open, and it would have required people buying crypto to invest in Filecoin, something we specifically wanted to avoid. • (D) Crypto cannot be pre-funded, and is significantly slower than pre-funded USD. • We looked into crypto prefunding, but we could not find a good solution for all currencies, that would work for all users of that crypto, and that we could implement given time constraints. • We looked into working with other custodian wallets or exchanges as partners, but this would be a huge time-sink to work across all major wallets and exchanges (and would be unfair to minor ones), and also would put people who hold their own crypto at a disadvantage. • We could not implement wallet functionality ourselves for two big reasons: • Legal risks: holding people's crypto for them before they've agreed to make an investment or purchase could put us into new and different categories of regulation. • Security risks: holding other people's crypto assets is very risky. We are confident in our measures, and are fine holding our own assets and take our own risks. But managing others' crypto assets securely and robustly against attacks is a much more significant endeavor. • Long term, we think this is a critical feature for CoinList and will work hard to implement something with a great UX and that allows instantaneous payments in crypto with a great user experience. #### A bad combination for sale open So, combining (A), (B), (C), and (D) creates a bad picture for those paying with crypto and for some of our staunchest supporters — those willing to invest before all others: • All prefunded USD & other fiat would get to go first, ahead of all crypto, yielding a massive advantage. • We generally like pointing out how crypto is faster & better than fiat for payments. So it is annoying that pre-existing infrastructure and our inability to get equivalent infrastructure in time would be painful for crypto investors. • There would be a strict hierarchy: pre-funded USD >> ETH >> ZEC >> BTC >> not-prefunded USD. • We generally don't mind ETH beating BTC in payments. ETH has a fast block time, and this is a great feature as a payment system. That said, we do not want to disadvantage our very first investors with this. • Payments would arrive in a large batch at the beginning, where their order would be based on luck. This order would determine the prices. • This is NOT what we mean by "investing after it has been de-risked by other investors". For that de-risking to occurr, it must be externalized to the later investors, so it impacts their decision. • We want to remove luck as much as we possibly can from our sale. We want decisions to be made entirely consciously. • This would cause a rush to click through the website just to invest. This could also cause unintentional mistakes. • We DO NOT AT ALL want to rush people. Macro time pressure (days or weeks) makes deals happen quickly, but micro time pressure (seconds or minutes) is not useful, fair, or intended. The combination of these factors is really bad when a large group of investors seeks to invest all together at the very beginning. This is something we did not design, but arrived at through a combination of other constraints. This combination of problems is indeed a big issue and we should have addressed it earlier. What we did not anticipate is the magnitude of the issue. We originally thought it might only affect a few investments before the first ETH payments arrived. But the investor response has been truly overwhelming! After talking to many prospective investors, we expect this to be significant. We've been working on possible solutions for some time. I wish we could've announced we were solving this earlier, to put you all at ease sooner, but we needed to make final decisions, to implement it in code, and to test it before sale start. It would be much worse to promise a fix and fail to deliver. ### So, what is the solution? Our solution is straightforward: average all investments in the first hour. Investments that confirm after the first hour confirm on a first-come first-serve basis, as normal. This means: • All investments whose payments are confirmed within the first hour will be averaged. • Averaging means they will be bucketed as a single investment, getting the same price. • This completely removes the luck factor for the first set of investments; they are all priced the same. • Averaging is fair: the larger the sum of the first investments, the higher the price for everyone. All are bucketed together. • This means no getting lucky and getting the lowest price in the batch, and no getting unlucky and getting the highest price in the batch. • The absolute max of the first hour bucket — even if the entire sale sells out, which we do not expect — is around$6.
• Investments still open first-come first-serve, so if the entire sale sells out in the first hour (which is very unlikely and we do not expect), then there will be a "last investment" that takes the last Filecoin, and all others will fail afterward.
• After the first hour, it is back to first-come first-serve basis. This is fine because at that point investments should be trickling in periodically, not in a single huge batch.

We think this will create a fairer and clearer sale open for the earliest investors, and will satisfy those who have been frustrated by these issues.

However, we know there is no perfect solution. This change may disappoint some: (a) people who prefer the odds of getting the first investments and the lowest prices, (b) people who liquidated crypto to get USD/fiat and invest that way to gain an advantage, and (c) people who prefunded in USD/fiat and were looking forward to beating all crypto. Of these, we feel sorry for group (b), who played by our rules and were ready to maximize their value potential. In the end, however, we concluded that making the change is really important for the broader community, specially for small investors, and even for you — so that you don't get unlucky. We are sorry if you dislike this change, but we have weighed the alternatives and this maximizes the "investor fairness" measure.

### What do you need to do?

If you plan to be among our first investors, just proceed to make your investment in CoinList as normal. If your payment confirms within the first hour, then it will be averaged with all other such payments. We highly recommend making your investment in the first 15 minutes to leave plenty of time for payments to confirm or network traffic to clear (especially if paying with Bitcoin).

SLOW WALLETS WARNING: some custodian crypto wallets may take a long time to move large sums of money (we have seen as much as 12hrs). Initializeing a BTC, ETH, or ZEC payment does not finalizae your Filecoin investment it has to be confirmed within the first hour to qualify for the averaging. Please make sure your wallet service does not have big delays for your intended investment amount. We recommend trying to move this money first, or move it to a wallet that will immediately submit the transaction to the network.

Confirmations needed:

• BTC: 2 confirmations (~30 min: 2x ~10min block time + buffer)
• ETH: 6 confirmations (~2 min: 6x ~15s block time + buffer)
• ZEC: 4 confirmations (~15 min: 4x ~2.5min block time + buffer)

## (2) Hourly Exchange Rate Averages

Our prior Private Placement Memorandum (PPM) described that we would use daily rolling averages. Some prospective investors voiced concerns, wishing that CoinList would respond to crypto prices faster. They (and we!) fear significant rises or crashes of the price could make it unfair or prone to BTC/ETH/ZEC arbitrage. We managed to improve our system and now have hourly averages, determined from many exchanges. This was mentioned on our PPM, so we are updating that document and a new version will be available on CoinList's Filecoin page.

We think this is a fairly uncontroversial change, as it only improves accuracy of our exchange rates.

## (3) $500 Minimum Investment We really didn't want to do this. We previously had a nominal$10 minimum investment, but based on legal constraints and counsel opinion, we had to increase the investment minimum to at least \$500.

If this increased minimum impacts you, please reach out. We want to be as inclusive as we (legally) can… I know this may sound ironic given the (legal) requirement for accredited investors, but it is indeed true. We wish we could take everyone, around the world, for as little as they would like to invest. Unfortunately we legally cannot. :(

We hope at least changes (1) and (2) address your concerns, and that change (3) is not an undue burden.

Thank you for all your support, and for voicing your feedback. We especially thank those of you who opted to email us with well reasoned, civil, and compelling arguments. We are excited to build the future of Filecoin together.

Thanks,

The Filecoin Team