Hard Cap is the term used to refer to the upper limit of the number of tokens that can be sold for an initial coin offering. Hard Cap relates to the maximum amount of funds that token developers are willing to raise. It can also be referred to as the limit that the blockchain places on the absolute maximum supply of a particular cryptocurrency. Hard cap is used during an ICO to mean that the maximum supply has been reached and tokens should no longer be sold.
The upper limit of the hard cap depends on the token developer team and is proportional to the scarcity of tokens. The hard cap indicates the sales limit defined through the cryptocurrency protocol. The hard cap prevents assets from being created or circulating above a certain amount. To exceed the hard cap, the fundamental properties of the cryptocurrency must be changed. In other words, new cryptocurrencies need to be created to exceed the hard cap. The hard cap is a parameter monitored by the project community.
Why Is Hard Cap Necessary?
Hard cap is necessary for three important reasons.
- Hard Cap
- Being Realistic
- Restraining Whales
Hard Cap
One of the factors that determine the value of a cryptocurrency is that it has a limited supply. A project with a hard cap follows supply and demand. A delicate balance must be struck to determine the hard cap. In general, the value of cryptocurrencies decreases as the amount of cryptocurrencies increases, or increases as the number of cryptocurrencies decreases.
Being Realistic
Hard Cap depends on the roadmap of the project. The project must therefore always clarify the purpose of the funds raised at each proposal stage.
Restraining Whales
Investors decide to invest a significant amount of money in a new project only to unload cryptocurrencies after the ICO. Whales can sabotage a project's credibility and cause huge short-term price fluctuations. A hard cap can help keep big investors away from sabotaging cryptocurrencies.
What Is Soft Cap?
Soft Cap is a concept that refers to the amount of funding needed to start the development of a particular project.
A soft cap is speculative. It is the opposite of a hard cap, which is the maximum amount of funds a project is willing to raise. In other words, a soft cap is the opposite of a hard cap, which is the minimum amount of funding a project needs before it can start. The level of the hard cap is usually higher than the level of the soft cap. This is because the hard cap aims to raise maximum funds.
The soft cap is not strictly enforced as it is a general idea of the amount a cryptocurrency startup needs or expects to raise for a project. Analyzing cryptocurrency-related information such as soft cap and hard cap helps to understand the experience and goals of the development team. The soft cap is the lower limit of fundraising for an ICO. If the funds needed for the soft cap cannot be raised, the funds are returned to investors and the ICO is canceled.
When evaluating the success of an ICO, it is important whether or not a target amount is set. There are two types of ICOs depending on the target amount:
- Limited ICO
- Unlimited ICO
Limited ICO
A limited ICO means that a limit is set on how much funds can be raised during a cryptocurrency sale. After the close of trading, any excess funds raised are returned to investors.
Unlimited ICO
Unlimited ICO refers to as much funding as a project can raise. The advantage of an unlimited ICO is that the development team has more funds to work with and more investors can buy cryptocurrencies. However, an unlimited ICO can become a problem at some point. The price of cryptocurrencies with a large supply will be low.
As a result, soft cap and hard cap can be defined as fundraising targets.
What Is the Difference Between Hard Cap and Soft Cap?
Soft Cap refers to the minimum funding for a project to start development. Hard Cap refers to the maximum number of tokens that can be sold during the ICO. The hard cap can be set higher than the soft cap.
