Cryptoindustry is rapidly developing, which includes its part that seeks to replace venture investment and public capital markets altogether. Even projects that have nothing to do with blockchainsometimes use ICO as a way to raise funds via issuing their own token.
In his exclusive feature for ForkLog, bits.capital partner Stepan Gershuni explores the roads that this cryptomarket segment might take in the next three years.
In recent years, the phenomenon of crowdsales aka ICO has helped startups and open source projects raise around $400 million (150 million of which account for the notorious The DAO). We are obviously in the Wild West where a Silicon Valley venture fund and a factory from Russia have an ICO the same month.
What’s the thing with this method of fundraising, and, most importantly, what will become of it in a few years? I have some thoughts and speculations in this regard which I’d be happy to share with you.
I think it’s a mistake to think that the main value of ICO is about financing business projects. It’s but one of many other crowdfunding models, which include private, angel or venture investment models as well. Certainly, it’s more efficient for platforms with circular economy or cryptocurrencies. From an investor’s or a regulator’s point of view, ICO is a non-transparent and non-regulated method of investment. There’s nearly nothing to protect investors from scam or failure to fulfill obligations. The most prominent difference, however, starts when an ICO is over, and the company gains non-monetary profit from decentralizing their business and investors.
What I call a company is very rarely one: usually, it’s decentralized corporations that are not incorporated whatsoever, and consist of a few developers scattered around the planet. Such a company runs a cryptocurrency fundraising, pays the employees and shareholders with cryptocurrency, and gets profit in cryptocurrency as well. This has little to do with strictly regulated IPO. It’s more like an incubator or an early-stage venture fund.
Decentralized corporations dissolve boundaries between users, founders and investors, while blockchain-powered governance methods allow for way more efficient solutions to be made by much more people with aligned economic stimuli and motivation. Crypto-offering is a way to make businesses and its stakeholders closer to each other. It entails several synergies, including:
- Management and strategic development. Interests of founders and customers usually lie in long-term success of a company, while investors are more about short-term profits. Blockchain and smart contracts empower real models of liquid democracy, and therefore make it easier to organize token holders’ voting even on minor issues. Economic incentive for shareholders of such a DAO is always about making the most reasonable and long-term profitable decision.
- Involvement of users in product development. Google and Facebook have shown very successful examples of using crowd-sourcing to solve product-related problems like localization, data collection and moderation. Your motivation to help a product with a review, translation, like or referral would be much higher if you hold tokens of said product.
- Audit. If a company works with blockchain and cryptocurrency, financial audit is just collation of several transactions and their signatures, which saves thousands of dollars a year for a pre-ICO company. However, even if the company uses fiat currencies for accountancy and financial operations, a tradable token would reflect business efficiency much better that quarter-year reports of public companies. For instance, if Ethereum hosts more and more smart contracts, it would spend more and more gas which would raise the demand for the cryptocurrency, and therefore its price. Investors can get that information not during an earnings call once a quarter-year but in real time through the network node they control.
The Future of Crowdsale
Let’s imagine the hypothetical and wonderful internet of tomorrow (say, in 3 to 5 years):
- Cumulative capitalization of decentralized corporations’ tokens exceeds $100 billion, excluding bitcoin and other cryptocurrencies, for which I expect the same.
- Companies undergo a more standardized and strict process to offer crypto-tokens. It seems futile to me to use cryptotokens only to finance projects. Without pegging the token to financial or product-related metrics of a company it would be impossible to predict the price of assets it represents, and therefore investors have no economic motivation. This problem may have numerous solutions.
- Equity tokens: a token is pegged to a share in a real company. Owners of such coins have all shareholder rights like a right to vote or get dividends. In three years we’ll see much more countries that adapt their regulation framework for corporations who store their shareholders ledger on blockchain.
- Appcoin: the most successful way to link a token to a business where the token is used in its circular economy. Investors get their revenues from increase of the token’s price thanks to fixed issuance, multiplying of users, and, therefore, growth of token demand.
- A newly created token may have an opportunity of listing and potential liquidity immediately upon the final of the ICO. Active development and popularization of decentralized exchanges would play a big role here. Essentially, converting your business into a publicly traded token would be exclusively your decision. Nobody would be able to prohibit or allow one to sell decentralized tokens at a decentralized exchange.
- Most ICO freely accept fiat investment, at least in the world’s most prominent jurisdictions like the U.S. or the E.U.
- Most projects that run an ICO are actual businesses that offer working products, not some pre-seed projects as it happens now.
- Most blockchain projects imply the possibility of recurring coin offerings. For that purpose, a small share of the project’s tokens is offered during a crowdsale. It makes the average offering smaller but helps assess the capitalization more precise and enables the company to raise funds only when it deems it necessary.
- The procedure of coin offering includes formal audit and project analysis, which is covered by independent rating agencies and cryptofund analysts.
Notwithstanding the radiant perspectives and wanton growth of the industry, we’re still at the early phases of cryptoeconomy’s development, whose future heavily relies on consciousness of market players and wisdom of regulators.
Lack of standards for project reporting make the methodology of cryptoprojects’ capitalization evaluation questionable as evidenced by Ripple. Lack of comprehensible investor protection prevents a new class of classic investors from entering the economy.
Each technological revolution takes the same path that YC founder Paul Graham has described. This path, or ‘startup growth curve’ always starts with too high and futile expectations that shatter over time and give way to steady long-term growth. In case of ICO, we haven’t even reached the peak of the initial hype, which means that before the rules of the game have settled we’ll be able to see both brilliant and dubious projects popping up all the time. For that reason, you’re advised to be cautious and research the projects you’re about to invest in.