Scow Crypto 101 — Part 5 — Initial Coin Offering (ICO) vs. Security Token Offering (STO)
Plus a World’s First in the Blockchain Industry
Blockchain tokenization — converting the rights to assets into digital representations — is a growing practice.
Cryptocurrencies are more than a decade old. And now that we have a taste of what they can do, how they can revolutionize the way the world exchanges value, we continue to innovate.
To help you grasp what blockchain tech already does for us, here’s an article covering use cases in the real world:
The Innovation Never Stopsmedium.com
Now, a healthy majority of the blockchain projects we know and love began with an ICO.
Staying true to what blockchain does best — rattle cages! — the ICO business model transformed the concept of crowdsourcing.
No longer restrained by expensive, over-regulatory IPOs, companies — or even an individual developer — can kick off an ICO to raise funds for their project.
And if you haven’t heard, we’re conducting an ICO of our own. Our Stone utility token is currently in the seed funding stage:
Now, before we dive into how the STO crowdfunding model is a natural progression for the blockchain industry, let’s define ICOs in the first place.
Crypto’s Original Fundraiser: The ICO
The entire point of an ICO is raising investor funds to use as fuel for propelling a project forward.
Startups use ICOs to sidestep the traditional, highly regulated, time-consuming process of raising capital
Although they exist to fund diverse projects across multiple industries, ICOs follow the same basic formula: Ideation, Generation, Sale-abration…
The Big Idea
Every legitimate ICO begins with a whitepaper.
To give potential investors an indication of where collected funds are heading, projects must have a whitepaper. Feel free to ignore projects lacking this critical document.
Whitepapers not only capture the spirit of what a project aims to accomplish — they also serve as an easily shareable document
Whitepaper distribution is crucial to an ICO’s success. Savvy investors demand specific details of where their funds are going. Plus, there’s nothing like a well-written, informative whitepaper to get the project’s hype-train in motion.
After all, humanity’s greatest idea is useless if no one knows it exists.
The Big Minting
Supply and demand influence the value of every asset. As such, projects must decide in advance how many tokens to create.
One inherent beauty of most cryptocurrencies is their limited supply.
Compared to limitless resources, assets with fixed supplies realize much faster spikes in value whenever demand increases
Yes, government-printed fiat, we’re looking squarely at you. Nobody can just keep on printing bitcoin whenever it’s convenient for them.
Now, before blockchain startups accept crypto during their ICO, they first settle on how many tokens they’ll generate now, and how many they’ll create as the project progresses.
And just like price, the number of tokens minted also varies from crypto to crypto. It boils down to how many tokens a project feels they’ll need to achieve operational efficiency.
Bitcoin, for example, has a maximum supply of 21M coins. And since coins are still in the process of minting — via miners’ block rewards — the current circulating supply is a bit over 17.5M coins.
Bitcoin will never realize the maximum supply its mysterious creator(s) originally intended. Between lost private keys, forgotten wallets, recycled computers — one poor soul is still searching his local landfill for a hard drive containing a fortune — millions of coins are gone forever.
In contrast to the Bitcoin network’s 17.5M coins, the current #157 crypto by market cap, Kin, has a circulating supply of 756B tokens.
The Big Sale
Token sales are pretty straightforward.
During the actual token sale, projects collect cryptocurrencies — usually bitcoin or ethereum — in exchange for tokens.
Projects define a price per token, then tie that to another asset’s price. A single token may cost 0.000588 $ETH or 0.000021 $BTC or 0.08 $USD, for example
Now, since the majority of ICOs build their blockchain products on top of the Ethereum network, most ICOs transact in $ETH.
The ICO host creates crowdsale addresses where investors can deposit crypto. Once an investor’s funds reach an address, a smart contract activates and sends the corresponding tokens to the investor.
The entire sale is decentralized, and investors usually receive tokens in their digital wallets without any human intervention.
Certain token sales last for weeks or months — EOS conducted a $4B ICO lasting an entire year.
Others sell out at breakneck speed, leaving slow movers in the dust. The Tron project’s BitTorrent ICO during January 2019 is a prime example.
Taking place on the Binance Launchpad, nearly 60B $BTT tokens — $7B worth — sold out within 15 minutes
Now, there’s an underlying reason behind this particular ICO’s extreme success: An established base of actual customers.
Like Scow’s upcoming DataBloc project, BitTorrent tokens link to an up-and-running company, in business for years.
BTT tokens represent more than just an idealistic whitepaper. Holders of $BTT are backing a profitable service that people already use.
A pre-existing user base of customers — a true rarity in the ICO landscape— gives any blockchain project a notable jump on the entire market.
ICOs are excellent vehicles for selling utility tokens used for goods and services within decentralized economies. However, you may have heard people liken ICOs to the Wild West.
And if that’s the case, there’s a new sheriff in town: Security tokens.
STOs: Adding Accountability to the Blockchain
Theoretically, your grandma’s social club could launch an ICO, opting to use Pinochle Token for all transactions within card tournaments.
Good for them! Blockchain tech facilitates innovation within every corner of society.
However, if granny’s club raises investor funds but fails to launch a real product, fails to live up to their promises… sorry, sonny, that’s the way the oatmeal raisin cookie crumbles.
Token holders are mostly powerless, and repercussion options are minimal.
On the other side of the coin, STOs, by their very nature, hold token issuers accountable for their actions.
STOs are fundraising tools that generate security tokens which operate within pre-defined legal boundaries
Unlike ICOs that generate tokens usable within internal economies and are mostly illiquid outside of crypto exchanges, security tokens are investment contracts representing legal ownership of a physical or digital asset. Fractional ownership of real estate, for example.
Imagine security tokens as ‘smart’ stocks. Similar to the Ethereum network improving traditional contracts by making them programmable, security tokens redefine the concept of ownership.
That’s because security tokens are invalid unless verified and recorded on a blockchain. And, since issuers of security tokens must wade through an alphabet soup of regulations — in the US alone, Reg. A+, D, and S are all required — STOs have plenty of watchers staring at them.
Government agencies may turn a blind eye to Pinochle Token, but anything involving securities faces heavy scrutiny. By default, all blockchain projects must clear regulatory hurdles before they can legally issue security tokens.
Regulators are currently struggling with how to handle digital assets. Cryptocurrencies’ borderless nature complicate jurisdictional rules.
Ripple ($XRP) is a prime example. Some investors love its potential to streamline cross-border payments; others won’t touch it because there’s a chance the SEC may one day classify the token as a security.
The regulatory gray area is causing uncertainty in the market. And to date, not may security tokens have transacted.
However, the blockchain industry contains a number of projects working towards standardizing the issuance of security tokens.
One of the frontrunners is Polymath.
Polymath’s protocol aims to facilitate the creation and distribution of legally compliant, token-based securities. Polymath is building a platform to connect token investors, KYC providers, smart contract developers, and legal experts who help lay the foundation for new securities tokens.
As STOs surge in popularity, similar projects continue to appear.
Now that you have a basic understanding of the difference between utility tokens and security tokens, let’s discuss a new breed of token… ours!
World’s First RTO — Royalty Token Offering
In conjunction with an innovative service provider, Scow’s project DataBloc is creating the Airbnb of the data services industry.
DataBloc’s self-service, cloud-integrated software platform enables data centers to profit by leveraging dormant assets — their unused data storage and services capacity.
A more in-depth look at DataBloc is on its way, but for now, we’ll reveal the basics of our royalty token — RBC.
A Double Crypto Ecosystem
Our native utility tokens — Stone — are available for purchase during our ICO, currently in the seed funding round.
Following the completion of our ICO, we’ll conduct an RTO in which accredited investors may purchase our royalty tokens — RBC.
Customers and service providers on the DataBloc network conduct transactions with Stone tokens.
And, like a security token tied to real-world assets, RBC tokens entitle holders to a cut of the action.
Through smart contracts, RBC owners will earn Stone in real-time by receiving 10% of every payment made on the DataBloc platform.
Did you catch the real-time part, there?
Whenever enterprise-caliber organizations complete payments (frequently!) using Stone tokens, RBC holders get their share of a 10% royalty.
Plus, rather than monthly or annual royalties seen within the realm of traditional finance, royalty token holders receive immediate compensation at the conclusion of every network transaction.
While utility tokens are similar to an airline’s frequent flyer miles — spendable within a closed-loop ecosystem — security tokens represent ownership of non-crypto assets holding value in external markets.
And, as you can imagine, STOs are on the rise. Discerning investors and startups have a lot to appreciate about security tokens:
- Similar to professional stock options
- Tied to real securities which mostly represent tokenized assets
- Already compliant — probably won’t suffer from government interference in the future
- Easily segment assets into smaller sub-divisions — making it possible for investors to own fractions of the asset
- Backing by external assets creates value as soon as they issue
- Reduced costs compared to traditional IPOs
And with our RTO model, we’re essentially creating Security Tokens 2.0.
Like ethereum did for bitcoin, we examined existing models and sought to make improvements.
From ICO to STO to RTO, the cryptocurrency industry has come a long way. And we’re excited to offer the next step in the evolution of tokenized securities!
Data services and blockchain tech are a perfect pair — and our future tokens are set to streamline the exchange of the world’s dormant storage capacity.