So you want to do an ICO/ETO?
Insights from five blockchain experts
I’ve got a chance to talk with blockchain experts about token design and the future of ICOs at the LongHash Crypto Festival and here are my takeaways:
- Automated fundraising with automated ownership allocation are the future, barely somebody will go back to a single platform or paper contracts after this
— Fabian Vogelsteller, Author of ERC-20 standard & founder of Lukso - In 2018 you should have a product to show before ICO, a white paper alone probably won’t do for your investors. You should save at least 300–400k $/€ on your bank to get you started on the legal, structural and PR topics to get “ICO-ready”
— Adrian Krion, CTO of the Chainwise Group - Make sure that your token has utility and is able to sustain value in the long-term
— Bruce Pon, Founder of Ocean Protocol - For enterprises designing a token makes sense to create smoother ways of accounting across borders, for multiple suppliers and potentially also on a data marketplace. In a machine-to-machine economy, tokens could be used to help monetize IoT data, e.g. by providing such real-time data to advertisers
— Simon Schwerin, Director of Business Development at Xain - When you are designing a security token, putting an asset on blockchain is only a start. The real cornerstone of discussion is the linkage between government-run databases (and regulations) and the chain.
— Igor Plahin, VP Business Development and Strategy EMEA at AERGO
If this talk about token design didn’t scare you off, then you should dare to go down the rabbit hole with me in the interview below.
Fabian Vogelsteller, Ethereum pioneer & founder of Lukso
Pavel: Fabian, you proposed the original ERC-20 token concept. Over 100.000 ERC-20 tokens were created on Ethereum in the past years, but we don’t see much adoption of token-driven products and services. What’s the main reason for this problem?
Fabian: Many of those tokens were created for projects yet to be released, so it’s too early to tell. Some tokens like DAI and ZRX and REP are quite used. But not much in ways, the mainstream would notice, as they are required for decentralized systems, and some of these do serve an important function in those ecosystems.
The main thing ERC 20 did so far is to make people think about token economics and spur a revolution in the funding space. Automated fundraising with automated ownership allocation is the future, and barely somebody will go back to a single platform or paper contracts after this. But we need to improve on how this money is raised.
For this, I proposed the RICO (reversible ICO) concept, an ICO where the funds flow over time to the project and every investor is able to stop the flow of his money, should he not believe in the project anymore.
Pavel: Which solution do you propose for the better working token models?
Fabian: Working token models are hard. And impossible if your system doesn’t require one by design. But tokens allow for communities to come together and align interests. It can function as an incentivization or punishment around a protocol. Though the token must have a useful function, otherwise it shouldn’t be there.
Token models are hard. And impossible if your system doesn’t require one by design.
I have seen that voting rights are a good use for a token, as only Ether won’t allow for an easy way to assign entitled parties and their voting weight.
I would like to see more non-monetary tokens, like reputation tokens that anybody can mint based on his own amount of received reputation tokens. Those use cases are more important and bring real value to the ecosystem, than just another payment/coupon token.
Adrian Krion, CTO of the Chainwise Group
Pavel: Adrian, as a full service provider your are supporting other companies who want to design their tokens. There is a lot of criticism towards the pure utility tokens, even from the founder of Ethereum Vitalik Buterin. Do we see a shift towards security tokens or any other token models in 2018?
Adrian: The term utility token is rather broad, so we have to differentiate a bit. If we’re talking about pure coupon tokens that a startup company forces its customers to pay their services with, I’ve always thought that they’re boring (from an investor’s point of view). However, they’re even hindering the adoption of the product or service from a customer’s point of view, so there’s very little reason why this would be better than just paying with fiat.
Security tokens will surely not be a replacement of utility tokens in terms of network effects and forming communities, but most likely in terms of funding.
When we speak about utility tokens in a sense that is “anything that’s not a security”, then there surely are interesting applications when it comes to forming micro-economies that jointly benefit or malefit from the workings and the success of this economy. There aren’t many really good examples of such tokens, yet, but what comes to mind surely is the MKR token. Governance functions play a big role there, because they are the most obvious (but not the only) way of directly or indirectly influencing the token price and therefore the value of the stake of stakeholders.
Security tokens will surely not be a replacement of utility tokens in terms of network effects and forming communities, but most likely in terms of funding. The most interesting security tokens, however, are ones that make rather illiquid assets more liquid (e.g. real estate); for equity in a company, the traditional way of liquidating that was an IPO, so STOs for equity in companies will probably start resembling small IPOs more and more.
Pavel: If I would plan to do an ICO in 2019 — what would be your most important words of advice for me?
Adrian: ICOs in general look like they will move closer towards the traditional financing channels, meaning that investors will want to cover their risk and keep some leverage when it comes to financing the company further. In 2018, we’ve already seen stages pre-sales for ICOs at different valuations / discount, and it’s likely that trend will continue, even when the entire market starts picking up again. Therefore:
- If I ran a company looking to ICO, I would view ICO as *one* possible means of financing. As there’s very little data regarding post-ICO funding (who funds a company that has burned through millions of dollars but still isn’t profitable?), it seems an ICO is kind of an all-or-nothing move
- Think about how much crowd is viable for you. Test the market for your project (in terms of investment) by talking to private investors early on
- Make sure you have a viable business model. It still sounds weird to many people, but sophisticated investors won’t invest (I really mean “invest”, not “speculate”) in anything that doesn’t have a long-term vision on how to pay for the team and organization to keep the project running
- Have a product to show before ICO, a white paper alone probably won’t do
- Ideally, show a path for adoption of your product (kind of a go-to-market strategy): existing users, partners, potential customers, active community, etc.
I suppose that 300–400k $/€ should be enough to get you started on the legal, structural and PR topics, basically to get “ICO-ready”. You can then start raising money in a private round, further exploring the projects and adding details to the concept and white paper as you go. Most importantly: Make sure you don’t run out of money in the middle of your fundraising process. This will put you in a very weak position to negotiate deals. There’s been many reports of investors expressing interest, but finding excuses to actually sign and actually *pay*. Don’t let them exploit your situation by being short on cash for your operations.
Bruce Pon, Founder of Ocean Protocol
Pavel: Over 50% of the coin offerings failed to reach their target in 2018. Ocean Protocol was one of the best exceptions, with a successful pre-sale. What is your recipe for a convincing token model?
Bruce: Our mission of unlocking data to kickstart a new Data Economy resonated with the community. We also worked hard to be as inclusive as possible by reaching out to a global audience, working with corporates and lining up strong VCs.
Pavel: Your company is one of the very early blockchain pioneers, why did you decide to do an ICO so late on?
Bruce: It’s clear that there is no need for a token for every use case so we put a lot of thought into ensuring that Ocean tokens would have utility and be able to sustain value in the long-term so that people would feel comfortable holding it.
The Ocean network will emit token block rewards to agents that provide useful services to the network, be “programmable” for staking on datasets and act as a means of exchange for buyers and sellers. For the block reward, agents need to validate transactions and serve data, algorithms, and computation. Over time, staking allows for Ocean tokens to be locked up which helps reduce token velocity, adds stability to the token price and de facto makes Ocean token a reserve currency for the Data Economy, much like Bitcoin is the reserve currency for the crypto-economy.
Simon Schwerin, Director Business Development at XAIN
Pavel: Simon, Xain is well-known for the collaborations with renowned enterprises. In which cases would it make sense for enterprises to design their own crypto token?
Simon: If an enterprise would use or design their own token it would make sense to create smoother ways of accounting across borders, for multiple suppliers and potentially also on a data marketplace.
Pavel: What could be a role of tokens in a machine-to-machine economy, where machines are paying each other autonomously on the blockchain?
Simon: Tokens are used to bridge industries and help to monetize IoT data, e.g. by providing such real-time data to advertisers.
Igor Plahin, VP Business Development and Strategy EMEA at AERGO
Pavel: Igor, you have a background in banking and investments. From the old-school finance and VC world, we hear a lot of criticism towards ICOs, especially in regards of the projects being way too immature and the crypto market being an unregulated mess keen to the pumps and dumps of a few insiders. Do you think there are many exceptional ICOs which could be interesting for institutional money and classical VCs?
Projects that I have analyzed over the 2017–18 ICO boom varied significantly in terms of quality, execution and use cases. We will definitely see a lot of project pivot or disappear. Others will deliver strong thought-through products and solve real world problems. In my view adoption will be the key decision factor for institutional investors/ VCs to enter the space “full time”. The teams that can design real products and facilitate the adoption will ultimately succeed. The industry is still immature, but it will get more institutionalized and regulated. In my view these developments can provide strong support for “early innovators” to move into “early adopter” category.
Pavel: We have seen some interesting concepts for tokenizing real estate, equity, gold, and other assets. Will we enter a future where every thinkable asset will be tokenized?
Security tokens are one of the 2018 trends. I see the topic being tackled by many teams worldwide. If you dive deep into the use cases you will find out that putting an asset on blockchain is only a start. The real cornerstone of discussion is the linkage between government run databases (and regulations) and the chain. Imagine you were to tokenize a flat ownership on blockchain, but transferring the ownership and being in-sync with land registry is a bigger problem to tackle. I see security tokens as a long-term evolution process where tech is driving selected regulatory processes. Ultimately, we will see selective use cases of tokenized assets short term. Longer-term adoption will depend on the smart ways to work with non-blockchain registries, vendors and legislators.
Missed the LongHash Crypto Festival in Berlin? Check out the recap video below:
