Initial Stake Pool Offering (ISPO)

An initial stake pool offering (ISPO) is a way for a crypto project to raise funds without selling tokens for money. Holders of a proof-of-stake coin delegate their coins to a stake pool run by the project. The pool earns the usual staking rewards, but instead of passing them to delegators, the project keeps them as funding and gives delegators its own new tokens in return. The delegators' original coins never leave their wallets, so they can withdraw their delegation at any time.

The model originated on Cardano (ADA), where delegated coins are not locked and there is no penalty, or slashing, for pool misbehaviour, which makes it easy for holders to switch pools. Several Cardano projects used ISPOs in 2021 and 2022 to fund development, and the idea has since been tried on some other networks. It resembles an initial coin offering in that people receive tokens of a new project, but participants give up future income rather than paying upfront.

Imagine a savings account that pays a little interest each month. A start-up asks savers to point that interest to it for a year. The savings stay in each person's own account, and they can stop at any time, but while they take part, the start-up collects the interest and gives them shares in its business instead.

An ISPO works the same way with staking. Coin holders keep their coins, but the rewards those coins would earn go to the new project. In exchange, they receive the project's tokens. If those tokens turn out to be worth less than the rewards given up, the holder has lost out, even though their original coins are safe.

1. The project sets up one or more stake pools and announces how many of its tokens it will distribute, over what period and at what rate per coin delegated.
2. Coin holders delegate to the project's pool from their own wallets. Their coins are not sent anywhere.
3. Each epoch, the network pays staking rewards to the pool. The project keeps the rewards that would normally go to delegators.
4. The project records each wallet's participation and, after the campaign or at intervals, distributes its tokens, often subject to a vesting schedule.

The cost to a participant can be estimated as the staking rewards forgone:

For example, delegating 10,000 coins for half a year at an annual yield of 3% gives up 10,000 × 0.03 × 0.5 = 150 coins. Whether the ISPO was worthwhile depends on whether the project tokens received end up worth more than those 150 coins.

• Principal stays with the holder. Participants never transfer their coins, so they avoid the risk of sending funds to a fraudulent sale address.
• Wide participation. Small holders can take part without minimum purchases, and distribution is linked to time committed as well as size.
• Network effects. Delegations add stake to community pools, which can support decentralization of a network's staking pools.
• Regulatory framing. Because participants do not hand over money, some projects have argued the model is different from a token sale, although regulators may look at the economic substance.

• Token value. The new tokens may fall in price or never become tradable, leaving participants with less than they would have earned from ordinary staking.
• Project risk. Projects can fail, be delayed or abandon development after collecting rewards, which carries some of the risk of a rug pull.
• Concentration. Very large ISPOs can pull a big share of stake into a few pools, which works against the spread of stake that proof-of-stake networks rely on.
• Tax. Receiving project tokens may be treated as income in some countries, even though no staking rewards were paid out to the participant.
• Limited funding. The amount a project can raise depends on staking yields and on the price of the base coin, so funding can fall sharply in a market downturn.

The ISPO is one of many alternatives to the classic token sale that emerged after the ICO era, along with the initial exchange offering, the initial decentralized offering and the airdrop. Its distinctive feature is that it uses the yield of an existing network, rather than new money, to fund a project. It works best on chains where delegation is flexible and safe, which is why it remains most associated with Cardano and with projects building during the Goguen phase of that network.