Which Token-Economics System Works Best Nowadays?
Without a doubt, 2018 brought into being the era of blockchain technology in all its myriad forms. In terms of the previous year, Bloomberg data stated that in total, Initial Coin Offerings attracted more than $1.6 billion in 2017. This can be explained by the growth of blockchain popularity as well as easily-accessible permits for issuing new cryptocurrencies.
Increasingly, investors are paying attention to the developing cryptocurrency market, and every new project needs money for development. To attract investments, startups do not, as a rule, need to use traditional methods; instead, they can rely on an ICO launch.
Companies that choose crowdfunding as a fundraising mechanism issue tokens: digital units that represent the value of the asset. However, not all tokens have a value or are able to keep it for a long time. According to the goals and needs of the company, tokens perform different functions: they can serve as the internal currency or confirm ownership, for example.
How Many ICOs Are Valuable?
In 2017, 902 ICOs took place all over the world. From this number, 142 projects were closed at the fundraising stage, and 276 startups died because the founders simply ran away with the money (or failed to fulfill promises, and gradually ceased public activity). By the beginning of 2018, almost half of the projects (46%) that had conducted an ICO had collapsed.
Researchers counted another 113 ‘frozen’ projects that were no longer active on social networks, and their communities were too small to bring the projects to success.
Despite the fact that the fate of numerous ICOs was evidenced by signals such as a poorly-developed white paper and lack of information on the project, investors poured $233 million into them. All of this seriously undermined the reputation of ICOs as a means of attracting money.
As a result, the new generation of blockchain startups has made it more difficult to raise money. However, many ICOs have still managed to succeed.
More Security for ICOs
As blockchain projects continue to grow in popularity in Switzerland, the Swiss Financial Market Supervisory Authority, FINMA, has extended the list of demands for ICOs. This complemented the existing FINMA Guidance 04/2017. It also decreased the risk of money laundering and hacker attacks, as the decentralized system which blockchain uses allows the anonymous transfer of money without a need for intermediaries.
This regulation adopted demands ICO developers must meet in order to get financial market approval. Also, the Swiss Financial Market Supervisory Authority highlighted that each case is individual. Demands can be adjusted according to the nature of each ICO and the sphere in which it was designed.
Guidance 04/2017 presented certain fields in which ICOs can be influenced by financial market regulation. Today, there is no commonly-accepted legislation that treats all launched ICOs equally.
The key points FINMA takes into consideration during ICO evaluation are the purpose of the token, its traceability, and its transferability.
How to Create a Promising Token
Choice of token type is one of the most important factors to consider when determining an appropriate project for investment. There are different types of tokens and different purposes. In order to understand token types, you should clearly separate the concept of cryptocurrency from the token itself.
The Howey Test, created in 1946, can help you find out which type of token you are being offered for purchase. If you answer yes to any of the following, you are dealing with an investment or security token.
- Is it an investment?
- Will you profit from this purchase?
- Are there any third parties that will profit from the deal?
- Are we talking about investing in a common enterprise, which means that investors contribute their money to a project?
Payment tokens, like cryptocurrency, don’t have any additional functions and are not related to other projects. They can serve as a means of payment in financial transactions. In general, they have the same functions as fiat currency, but they are not supported by the government or any other security entity or body.
It is vital to say that FINMA does not treat these tokens as securities; it requires compliance with anti-money-laundering regulations for ICOs.
In fact, security tokens are digital shares. Possession of token shares enables you to receive dividends and participate in the management of the company.
According to an order from the U.S. Securities Commission (SEC), the following actions must be performed as part of the project in order for an ICO to run in the United States:
- the programming, development, or creation of platform functions
- the sale and exchange of system products, adding value to the system
- community voting for expanding and modifying functions
- receiving products from developers at a fixed discount
- receiving the product before the general public
Compliance with these requirements demonstrates to the Securities Commission that the company is not positioning its tokens as stocks; that is, the buyer is supporting the project only for the sake of its development. Naturally, all purchases of ICO tokens are made for the sake of profit, but such conditions, according to the American regulator, protect society from scammers.
It is necessary to notice that the concept of “ICO” is still in the development stage in terms of world legislation. If a project that violates the above requirements appears in the United States, the SEC will prohibit dissemination of information about it, and may even begin to prosecute the developers.
In addition, the SEC prohibits the positioning of a product as security during the advertising campaign. It is forbidden to promote investment growth, profits, and listing on stock exchanges.
Revenue Participation Notes
A Revenue Participation Note (RPN) is an instrument in which the generated revenue of a particular entity determines interest in payment.
This asset is among the most unregulated securities in the world. Anyone can easily register or launch it. However, this asset also offers the lowest return on investment and limitation in terms of company cash flow.
Shares provide their owners with a stake in the entity, the right to vote, and the ability to receive dividends and profit shares.
Heavy-regulated securities offer high returns: for example, the growth of equity valuation or dividends without any pressure on the company’s working capital.
Bonds provide the possibility of a fixed claim on future streams of income from the entity.
Utility tokens provide digital access to services of a project. With utility tokens, users can obtain a discount on the goods and services of the project.
Utility tokens are the internal cryptocurrency of a particular product or service. They are, in some sense, similar to fiat currency, as they can be used only in the territory of a currency’s respective service/state. The user can buy access to services or capabilities with utility coins on the product’s platform. The more services available for purchase, the more interesting the tokens are for the community, and the higher their price.
By the way, utility tokens can be more than just inflationary. Developers can burn tokens, thereby increasing the demand for the remaining coins. In this case, the economics of the tokens will be deflationary.
Consider that if utility tokens are used for economic purposes, then they are securities.
Asset tokens, like securities, give the right to receive basic assets, dividends, and interest payments. They implement a function similar to stocks’.
As a rule, stagnation tokens refer to the price of the real asset, or the value of fiat currency. Mostly, they depend upon precious metals: gold, platinum, and palladium. The price of these tokens is based upon the price of the asset, which means that it is less susceptible to cryptocurrency volatility. However, the disadvantage of this model is that tokens do not make a profit since they have a stable price.
This economic model of tokens gained respect with the second wave of ICO popularity when real economic enterprises began to tokenize. We can compare credit tokens to loans. Users provide their funds in exchange for the project cryptocurrency, which the developers promise to buy back in a certain period of time.
In fact, this is the most unreliable model, as too much depends upon third-party factors, the success of the project itself, and the economic situation in the world as a whole. Among these types of startups, there have been numerous scams.
The emission of inflation tokens is handled directly by the project team and its economists, who accurately calculate how much currency should be released and when. By analyzing the market and releasing tokens at the right moment, they can effectively regulate the supply and demand of the token. The price of the cryptocurrency varies according to the popularity of the product or service.
Deflationary tokens are issued by the ICO in a limited number. Moreover, developers can “burn” tokens: for example, those received by the service as payment for services. Thus, the currency becomes smaller, and its price grows.
In general, tokens can be mixed. Deflationary and inflationary tokens at the same time? No. If at the fundraising stage, the project founders say nothing about the economy of the token and it is impossible to determine its nature, it means the developers are not sure about the economy of their token and will adapt to the circumstances. This means that the founders of the project do not think about the future, and the project is likely to be a scam.
Understanding the differences between types of tokens is very important, because today, in preparation for ICOs, companies often cheat in order to collect the maximum amount of money. They often declare that they are selling security tokens, even when it’s obvious that they don’t belong to this type at all.
Investors will be more willing to contribute money to an ICO if they are sure that they are acquiring investment tokens.
Recently, American SEC regulations have shown an increased interest in ICOs. At the same time, it has been shown that almost 60% of ICOs are fraudulent.