How a Variable Security Token Offering (VSTO) capital raising model can revive decentralized blockchain projects
The demise of the ICO model, whether from fraud, scams, bad project management, or all of the above, doesn’t look like it’s going to change in the foreseeable future. Essentially, no matter how great a project and its founding team might be, there is almost no chance they will be able to raise capital through an ICO — in this market climate. There are many entrepreneurs — extremely talented and creative people — who believe that the way to change the world, or at least significantly impact it in a positive way, lies in harnessing the power of decentralization. These entrepreneurs are building powerful blockchain platforms and projects, many of which are in essence decentralized (even though the exact definition of decentralization is still up for debate).
On paper, the ICO model had sound, innovative financial principles behind it, but is unfortunately not a real option now, and may never return as a viable form of raising capital. In this post-Apocalyptic climate, it has become increasingly difficult, almost prohibitive, to raise capital for a decentralized project. We have seen some attempts at developing new mechanisms (DAICO’s), but these are often problematic and have not gained popularity. Many teams are opting for a hybrid model, raising capital through a mix of equity and, usually in the future, token generation. This model too is problematic, in that it becomes almost impossible to ensure that the project will eventually be decentralized.
To alleviate the pain and cost of capital raising for decentralized projects, and to inject a much-needed sense of trust and confidence into the market, we have developed the Variable Security Token Offering, or VSTO (pronounced Vesto).
The underlying philosophy of VSTO is that to build a successful decentralized project, it is best to begin through a centralized organization structure. The company itself belongs to its founders, but to raise money to grow their businesses, founders and investors agree on a set of parameters and conditions under which their project will in the future be decentralized. These parameters and conditions — things like time elapsed after launch, number of active users, number of validators/nodes, monetary value of transactions, and other similar waypoints — automatically move the project toward decentralization once they are achieved. But for all the reasons the ICO model failed, a VSTO project starts off as a centralized company, raising its funds through a Variable (once conditions are met) Security (centralized digital asset) Token (means of exchange) Offering (an initial sale of tokens), the terms of which are agreed on between founders and initial investors before the offering begins. This will become an integral part of new project’s “White Paper”.
The terms of investment are to be proposed by the founders, and all investors that agree to these terms can choose to invest. Terms would include initial valuation, investor rights and responsibilities (such as voting rights), a project roadmap and, crucially, the conditions under which the project becomes decentralised. We believe this model injects strong corporate governance into VSTO projects, the type we would see in typical investment deals by venture capitalists.
It won’t always be smooth sailing though, and reality often thwarts even best laid plans. To be sure, many initial roadmaps and budgets will not meet their goals given market realities, and that adjustment mechanisms need to be put in place.
VSTO allows for pivots through a voting mechanism where founders would need investor approval for significant changes to budgets and roadmaps before they can carry these changes out. The voting mechanism ,clearly defined in the investment terms, sees each investor’s voting power represented by the number of tokens they hold. The essence of VSTO is that once the pre-agreed conditions for decentralization occur, the project automatically reverts to a self-governing, decentralized organization. At this stage the security tokens are burnt, and the holders of these security tokens will receive newly generated utility or governance tokens, at a conversion rate pre-agreed to at the initial investment stage. It’s like your shares vesting in a traditional corporate structure. The economic incentives (to investors) need to be defined up front in the economic model of the project. This tokenomics model is hybrid, “valuing” the inherent economic value of the security token (for it’s given life-span) and the utility or governance token.
This process allows talented entrepreneurs, dreaming of building a decentralized blockchain platform, to manage the initial, risky stages of early development and roll-out in a much more governed and professional environment. We also believe that VSTO will make VC and sophisticated investor funding in decentralized projects a significantly more attractive proposition.
A more detailed exposition of the VSTO model and its objectives is here.
Eli Mizroch is Founder and CEO of Silver Castle, a Digital Currencies Investment House, offering asset management and advisory services. He is a leading Blockchain economics thinker and lecturer, and an innovator in the Crypto finance industry.
