ICO: Innovation that builds communities
There are different opinions on what ICO fundamentally is. To some, it is purely a variant of crowdfunding; to others, it is the path to a mystical, “decentralized” world; to yet others, it is an opportunity to make a quick buck, whether by selling tokens or by buying (and eventually selling) them. These views can all be valid to different people, depending on where they stand. However, what is innovative about this format is quite something else. In the last of the four-part series, I discuss how ICO as a community-building innovation can be a win-win solution for the project and its community.
First off, we need to mention “useless tokens”, tokens that can be transacted and traded but without any functional support by the issuer. Not all of these are scams. Apparently, the issuers in this case approach ICO purely as a means of crowdfunding. However, because there is no functional support by the issuer, there is no economic link between the token and the project. Even if the project is highly successful, there is no real reason for tokens to appreciate. These tokens are therefore purely speculative.
A spin on these “useless tokens” is “cash” token. The usual claim is that the token will be accepted by a certain industry and/or used in a certain scenario. These are, in my opinion, empty claims, because one can pay however one wants to. There is no compelling reason to use these specialized cash-alternatives. Together with “useless tokens”, they fail to appreciate the advantages that ICO provides in community-building.
With a well-designed utility token, in comparison, there are always functional supports by the issuer / the project that ties the token to the financial success of the project via a simple market mechanism — supply and demand.
In brief, as the product / service becomes more popular, the functions that the tokens support become more popular. The rise in demand then drives up the price of the tokens. At the same time, alternatives compete with the functional values underpinned by the tokens; thus, as token price surges its marginal value diminishes. There comes a point at which, given the demand and the competition, a fair market value is reached. Some of these alternatives could be direct cash payment for the services (as the benefits in paying with the token shrink, if this is part of the token design) or simply services from competitors.
Ideally, the value of a utility token can then be calculated by its present value of functional utilities (utility values). For example, suppose analysis show that a utility token will have a value of €1 million, €10 million, €100 million, €1 billion, and €10 billion for each of the first five years, and €10 billion every year beyond Year-5. Assume further an interest rate of 10% per year. The value of this token could be estimated at
0.001 / 1.1 + 0.01 / 1.1² + 0.1 / 1.1³ + 1 / 1.1⁴ + 10 / 1.1⁵ + … + 10 / 1.1^n + …
This equals roughly €69 billion.
The problem with this approach of valuation, apparently, lies in the difficulty in assessing the utility value of the token. In other words, if the project has already reached maturity such that future growths can be projected with high degrees of confidence, the value of the token can be estimated with confidence, too. However, as projects that conduct ICOs have almost never reached maturity at the point of issuance, there is a wide range of possibilities for future utility values. This comes back to a point I made in the last article: business venturing is by nature risky, but potential returns are nevertheless interesting.
Beyond the link in pricing, I believe that a well-designed utility token should also award the community in other ways — because the supply–demand mechanism cannot function properly if the tokens are not used (and only “hodled”). This comes to an issue in current / past ICOs noted by some: those who use the tokens wish the tokens can be cheaper (so that they can be purchased at lower price), while those who do not use the tokens just hold on to them. This is the sign of a poorly-designed utility token that cannot help the community grow organically.
There are many ways in which tokens can be designed to function well. The key, in my opinion, always lies in protecting the aforementioned economic mechanism. It suffices to say that IdeaFeX Token (IFX) is designed with these points and beyond in mind.
I believe the innovative quality of ICO is the most important among the issues that I have covered in this four-part series; hence, I leave it as the closing article. It is also a rather straightforward quality, if one can look at ICOs without any prejudice. Alas, when we hear people talk about ICO and cryptocurrency, we almost never hear of this: We hear the pumps and dumps. We hear accolades to “early adopters” and “influencers”. We hear the scams. And we hear fears towards regulation. It is therefore hard to be objective towards ICO.
All, however, is not lost. At IdeaFeX, we develop this innovative mechanism and introduce it to real-world assets in general in a familiar marketplace format. Targeting mature investors and serious projects who are interested in more accessible, more flexible, more liquid, and more robust approach in financing and investment, who understand the value that “decentralized records” provide but do not obsess over decentralizing everything, and who prefer a value approach over hypes, we believe IdeaFeX can cast away the stigma of ICO and bring its underlying technology to broad adoption.
This article is written by the CEO of IdeaFeX, Dr Jiulin Teng. You can follow him on Twitter or LinkedIn.
