The soft cap is one of the financial goals that should be met during an initial coin offering (ICO). The next level after the soft can is the hard cap. The difference between the two is in the size of capitalization – a hard cap aims to achieve a larger financial goal.
What Is Soft Cap?
It is the lower limit of fundraising for an ICO. If the ICO does not reach a soft cap, it is canceled and the money is returned to the investors. For example, an SC can be $8 million whereas a hard cap can be $50 million.
When evaluating the success of an ICO, a threshold for fees or its absence plays an important role. There are two types of ICO's according to the establishment of this threshold: a limited (capped) and unlimited ICO.
A capped ICO it means that a limit is set on how many funds can be collected during a token sale. All surpluses found after the close of trade are returned to investors. An unlimited ICO suggests that the project will take as much as it receives. The advantage is that the team has more funds for work and more investors get tokens. But this is also a problem. More common tokens will cost less, unlimited emissions make the cost of the token unclear, and a team, stunned by success, can spend than they would do with a limited budget. Thus, the soft cap and hard cap are fundraising goals.
There is some ambiguity regarding the SC. For example, the project may not return the money and try to work with what it has. In general, both the soft and hard cap should have a real basis in a white paper. When the gap between these two indicators is too large, you need to pay attention to the following:
What would be the plans with different funding?
Will the project still be meaningful with a small return?
How much will the team earn?
How long will the development take in different cases?
How to Implement Soft Cap
There are several variants of how to implement capping in practice. This refers to how the respective soft and hard cap are achieved, which could also be interesting for investors.
Capped First & Come First & Served First
Here, the maximum number (cap) of the tokens are set, which are sold in return for a fixed price. Those who were too slow and only want to invest if the can has been already reached, do not get any tokens. In some cases, the caps are achieved a little faster. This is because, for example, extra bonuses could be spent on investment during the pre-sale. It is the most common method to achieve a hard or soft cap.
This is a less common method that also carries many risks for investors. Its purpose is to issue an unlimited number of tokens over a long period of time. As a result, there is no soft or hard cap, which means that it is impossible to evaluate the direct market value of the project under the ICO.
Capped or Uncapped Auction
During a capped auction, investors have the opportunity to offer a certain price. A variable number is then spent in relation to the offered price, which is why lower bids are served. During an uncapped auction, which is rarely used, investors place their bid both in terms of price and the number of tokens desired. Then they proceed in descending order until the number of tokens is exhausted.
Capping with a Redistribution
Because of the complexity and the effort, this is a rarely used process in which investors offer the desired output. Later, the number of tokens will be displayed according to the total amount of the required editions. However, with very popular ICOs, this results in a number of tokens that are fewer than expected. The difference to the bid and the payout of the tokens is refunded.
Capping with a Limit Per Buyer
In this case, buyers can purchase only a certain number of tokens at a fixed price. The "Come first, served first" principle applies here as well. Customers are typically identified through the Know Your Customer (KYC) process to ensure that a single buyer does not purchase too many tokens.