ICO, Initial Coin Offerings or first token sale, has become a new way to bootstrap a community, through pre-selling tokens that give users access to the future services that the network will deliver. In an ICO, a quantity of the crowdfunded cryptocurrency is redistributed to investors in the form of “tokens”, in exchange for fiat currencies or other cryptocurrencies. These tokens become functional units of currency when the ICO’s funding goal is met and the project launches. The first token sale was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014, raising approximately $2.3 million in just 12 hours. Today first token sales have become hugely popular within the blockchain community. At least 400 ICOs have been conducted as of August 2017. According to Cointelegraph, companies raised around $6 billion via ICOs in 2017. Already by February 2018, an estimated 46% of the 2017 ICOs had failed; proving how risky an investment they are. Ethereum is (as of early 2018) the leading blockchain platform for ICOs with more than 80% market share. Tokens are generally based on the Ethereum ERC20 standard.
In contrast to initial public offerings (IPOs), where investors gain shares in the ownership of the company, in ICOs, the investors buy coins of the company, which can appreciate in value if the business is successful. These coins are sometimes “pre-mined”, eliminating the need for proof of work. Often contributions are capped at a certain value. ICOs are a way for self-funding a project by selling future access to the service the network will deliver, as such they can be seen as an extension of the crowdfunding process, but different in important ways. How do ICOs differ from IPOs or issuing shares? When you’re investing in stocks what you’re doing is you’re taking a piece of the equity, a piece of the operating company, all the cash flows; the holder of the equity owns a part of all of the profits that the company makes. Generally speaking, tokens are different you’re not buying a part of an operating company you’re buying the money supply of the future technology project. With tokens, one is buying the tokens before the company has built the technology, but if the technology grows and if it’s well used then the value of the tokens will correlate with the value of the company. Most tokens do not actually provide any sort of claim to an underlying asset and that is different from traditional securities.
The token may start as “magic internet money” but as the ecosystem matures and becomes more valuable in use the tokens start to look like and feel like “real money” to their end users. Anyone or group of people can launch a project where ever they see an opportunity for value creation through the coordination of people’s activities. At first, people come together and define what the future service of the network will be and then create a token that will be the medium for accessing and exchanging that service. At first, the project is nothing but an idea and a little bit of code on the blockchain for minting some new tokens during the initial offering. Often when a token is first issued it has essentially zero value. The value of the token at this point is largely dependent upon people’s perceived future utility of the network, thus the early purchasers of the token are both believers in the network and risk takers, but they give the token value through their belief in its potential and willingness to pay for it. Over time as people contribute to the project the network starts to materialize and at a point, it can be opened up to the community and start to deliver a service to the end user.
At this stage, the tokens that were previously just crypto equity now become utility tokens which are used to benefit from the services in the ecosystem. Anyone who has contributed to the community, in the beginning, can now use the crypto-equity to benefit for free from the service that is provided. Those that did not contribute have no tokens and they now need to purchase those tokens which gives the token more value as more people use the network and it matures. At this mature state, the token should shift from being an object of speculation to the actual use-value determining its price. So money which starts as “magic internet money” becomes “real money” as the community materializes and starts to deliver a real service that people would otherwise be paying for with fiat currencies; the token actually starts to feel like real money.
Part of what blockchain technology enables is for our newly formed network systems of organization to mature and become greatly more autonomous; ICOs are a way for these networks to become autonomous in their initial financing, to become self-funding. Token offerings can provide a very agile development model. As with this model to funding it is now possible to set up an organization rapidly wherever there is a perceived business opportunity and for anyone to invest in that organization with limited friction. Unlike in traditional venture capitalism, contributors can transfer their assets instantly and easily to other people. Whereas previously only projects that could pass through the formal financial system and look like profitable enterprises received financing, with token offerings people can finance the things that they value directly peer-to-peer.
Take for example the blockchain project ImpactPPA that uses blockchain technology to provide a direct vehicle for people to invest in energy projects in developing economies. ImpactPPA tries to use the power of the blockchain to bring together capital and consumers in a way that is direct, responsive, and expedient. Energy financing and distribution are currently bottlenecked by large, centralized NGOs and government agencies that have established a lengthy financing system that can take years from proposal to product implementation. ImpactPPA offers a system that permits anyone, anywhere, to create a proposal for a project of any size enabling the funding of clean energy microgrids in emerging economies around the world. ImpactPPA CEO Dan Bates explained that the current funding process with centralized NGOs is “too cumbersome and costly for many developing nations… ImpactPPA’s use of the blockchain and the crowd dramatically changes this paradigm, tapping into the vast potential of the socially minded impact investor and concerned citizen, looking to benefit the well-being of others while mitigating climate change.”
With token offerings suddenly it’s possible to create all these business models that didn’t exist before which allow us to monetize open data and open networks in a completely new way. ICOs have the potential to unlock huge amounts of untapped resources and fund projects that would otherwise fall outside of the mainstream financing system as they can be used to provide resources for any kind of project. Building a new park in your neighborhood could be funded through an ICO. People come together to form a plan for the park, they then create park tokens on the blockchain, inform everyone in the area of the project and that to access its services they will need park tokens. Tokens are distributed and used to remunerate those creating the park and maintaining it. There doesn’t even necessarily need to be any fiat money involved; people who contribute receive tokens that they then use later to avail of the park’s services.
Although we often think about ICOs in terms of investment and monetary increases the token offering can be used to fund any project that may or may not have monetary value. It is simply a way of recognizing the contributions that people have made to the development of a project and rewarding them with access to the service that the system delivers at a later date, thus creating a self-funding, self-sustaining system, that can be completely independent of traditional market financing or government support. This model supports the idea of multi-value as it actually becomes now possible to have a variety of value systems in the sense that every organization can have its own tokens and those tokens are actually representing what is the value system of that community. While it is always possible to exchange the token for a particular fiat currency it also becomes possible to create enough systemic exchange by which certain communities that see value in the token of another community can start exchanging between them and eventually you can actually create a really sophisticated system of exchange that could almost bypass the fiat currency.
1. Wikiwand. (2018). Initial coin offering | Wikiwand. [online] Available at: https://www.wikiwand.com/en/Initial_coin_offering [Accessed 23 Mar. 2018].
2. YouTube. (2018). Panel: Alternative Economies and Reputation-Based Systems – COALA’s Blockchain Workshops. [online] Available at: https://www.youtube.com/watch?v=aM57WEl0cDI&t=1058s [Accessed 23 Mar. 2018].
3. Bitcoin Magazine. (2018). Bringing Renewable Energy to the World Using Blockchain Technology. [online] Available at: https://bitcoinmagazine.com/articles/bringing-renewable-energy-world-using-blockchain-technology/ [Accessed 23 Mar. 2018].