How to raise funds in the cryptoeconomy

Contents

  • Cryptocurrency
  • Table 1: Comparison of Different Blockchains
  • Crypto-economy Market Capitalization
  • Ethereum Blockchain
  • Initial Coin Offering (ICO)

Cryptocurrency

A cryptocurrency is a store of value that can be transferred between parties without any third party’s approval. This exchange is enabled by cryptography and blockchain technology. Public-private key encryption feature of the technology enables the decentralized exchange by creating a distributed ledger that records every exchange between every participant. Thus, blockchain is a publicly transparent ledger that has a record of every transaction that has ever occurred between its nodes and any node can check the balance of its counterparty from the public ledger.

While the public blockchain is suitable for personal transactions and investment, the corporates have so far been reluctant to accept the fully decentralized, public blockchain. Instead, they have developed private or permissioned blockchain technology for inhouse use. The following table outlines key features of different blockchains.

Table 1: Comparison of Different Blockchains

The key feature that brought blockchain technology to the forefront of everyone’s attention is the public transparency and immutability feature of public blockchains. Once a party establishes a private blockchain ledger, a single party is in control of the records and it diminishes the advantage over traditional centralized databases.

Crypto-economy Market Capitalization

The cryptocurrency market is considered to be the “Wild West” of finance and the values of these currencies are very volatile due to the number of currencies available and speculative trading based on their perceived upside potentials. Currently, there are over 850 different tokens with combined market value of $152.9[2] billion.

While there are lots of investors who purchased cryptocurrencies to benefit from the speculation, there hasn’t been many business opportunities to spend these currencies. The market leader Bitcoin has appreciated in value from few cents/coin at launch to its current price of $4,187.7/coin with market cap of $69.2 billion. Since there will be only limited number of Bitcoins ever in supply (similar to gold), Bitcoin has acquired similar characteristics of real gold and has turned into a valuable crypto store-of value due to its demurrage nature. However, the arrival of Ether and Ethereum blockchain has changed the rules of the game.

Ethereum Blockchain

When Ethereum blockchain was found in 2014, the potential of blockchain was elevated furthermore with the introduction of smart contracts. Ethereum has turned cryptocurrency from a store of value to a distributed code with value. The advent of smart contracts enabled Ethereum based token to be pre-programmed and be uploaded to the public blockchain for users to access 24/7 without any human involvement. Once the application is live, the founding team can modify and update its protocol by sending transactions with specific instructions. These features of Ethereum blockchain has allowed business models such as Blockchain as a Service (“BaaS”), Decentralized Apps (“DApps”), and Decentralized Autonomous Organizations (“DOAs”), all of which operate without human interference.

Initial Coin Offering (ICO)

The latest spectacle of the Ethereum blockchain is the Initial Coin Offering process that allows crypto-companies to pre-fund their projects and develop it to bring to the market by issuing their own tokens. While ICO sounds familiar to Initial Public Offering (IPO) in the stock markets, in an ICO, the companies are issuing their own crypto-tokens that will be used on their platform. Start-up companies have raised $1.3 billion to date in 2017 from ICOs and there are lots of concerns for speculative bubble in the ICO market.

However, this decentralized and preprogramed nature of Ethereum blockchain is allowing companies to raise record funds in record times and is even enabling Jurisdiction as a Service (JaaS) as a new service that was previously impossible. One prime example is Estonia, which is the 1st country in the world to offer e-Resident program that offers governmental services to citizens of the world who register with the government to take advantage of its fully-online services. The Estonian Government is currently researching the possibility to issue government-back Estcoin token sale to its e-Residents to further enable cooperation and build a community with common interest. Another interesting example of “JaaS” business model is the BitNation initiative, which has a vision for global nation that adheres to higher ethical standards on a voluntary basis and is open to anyone in the world.

The procedural part of an ICO is quite similar to how traditional companies raise fund from the capital markets. Below are the undeniable similarities between a securities offering (in this example, bonds) and token offering.

During my 5 years of professional career in Mongolia, I worked for a government-owned development bank (Development Bank of Mongolia) and have raised $2.9 billion dollar for my employer and Mongolian sovereign during this timeframe. Each fundraising campaign took 3–6 months of preparation and involved many counter parties to legally complete the securities issuance process, which is very highly regulated.

The inaugural bond offering I’ve worked on was Euro Medium Term Note programme (Euro MTN Programme), which is shelf programme where the issuer and counter parties agree on the parameters of the securities offering. This allows to place the necessary documents in place and issue the underlying securities in short period of time when market conditions are favourable. The EMTN programme was established for $600 million and the Development Bank has issued $20 million 1-year private notes and $580 million 5-year public notes. As the fundraising through public offering notes was a novel process for Mongolia, we had to establish every parameter with approval from the government and the whole grueling process took 9 months. The pricing process lasted over 24–48 hours each time we issued bonds and actual transfer of funds took place 3 (T+3) to 5 (T+5) business days after pricing.

While on the other hand, ICO process can be prepared in 3 months and the actual fundraising efforts can be priced and settled in minutes, if not seconds. Thus, one can see the advantages of fundraising through token sale over traditional investors without necessarily giving out equity ownership.

Conclusion

I believe the Initial Coin Offering of the Ethereum Blockchain is a bleeding edge innovative platform that contributes greatly to development of the crypto economy ecosystem. While in the earlier stages, blockchain technology and cryptocurrencies attracted the first adapters and enthusiasts, the ICO market is allowing ambitious start-ups to develop their business with pre-funded investment.

It is perhaps too convenient for crypto start-ups to raise too much capital and it’s ominously similar to the DotCom crash we experienced in early 2000s. However, as we know today, once the bubble bursts, there will “Apples” “Googles” of the crypto economy with proven value proposition that will emerge as clear winners post the bubble.

While Bitcoin and blockchain technology have been hyped for some time now, I believe the Ethereum blockchain is indeed an innovative platform that might turn out to be more of a creative destruction than disruptive innovation.

[1] PBFT — Practical Byzantine Fault Tolerance consensus mechanism

[2] Source: www.CoinMarketCap.com (as of 23 August 2017)