ICO Governance: Six Key Factors
At CGS, we read a lot about governance system proposals for blockchain projects, both for ICO funded projects and other decentralised startups. It is a topic of paramount importance when people are participating in (and providing funds to) innovative projects that are often across the world, and where participants hardly ever know the founders personally.
Some people have asked us: how can we know if an ICO project has good governance? What aspects should we analyse?
Of course every project is a whole new world, but I decided to write this article summarising six aspects that I think make sense monitoring to check the quality of the governance in an ICO project that you participate in:
- Execution
It’s quite obvious, but the primary thing to analyse in any project in which you participate (be it blockchain or not) is the project execution. Are the project sponsors doing what they set out to do? And if so, are they doing it timely?
All ICO projects nowadays have a project roadmap with milestones (ie. MVP launch, mainnet launch, first clients). So the work should be simple if the project is relatively transparent, which takes me to the next point
2. Transparency
ICOs or other blockchain projects are often decentralised, collaborative projects, where the community is the owner of a big chunk of the project value (via tokens normally).
It is then of great importance to keep the community well informed of relevant events that affect “their” project. Given the fact that most tokens trade in exchanges, it is also important that relevant information is published asap. Even if you are not a trader, nobody likes to see big unexplained changes in the value of their tokens, hearing rumours, and later confirmation of the possible cause.
3. Community
The success of collaborative projects depends on the participation of an enthusiastic community. To this extent, the size and the degree of engagement of the community is a key measure of how the project is doing.
Every project has its own key metrics, but the amount of participants using the product, the amount of people helping to grow the product reach and the level of engagement of the community are all relevant indicators on how an ICO project is going.
4. Decentralisation
One of the main feature that defines blockchain technology is decentralisation, the absence of a central power that can overrule other participants. This feature allows two revolutionary innovations, i) the creation of robust networks that do not have a single point of failure (“indestructibility”), and ii) a more “democratic” type of enterprise, where the creator of the project is not even relevant sometimes (ie. bitcoin).
Most blockchain projects claim to target becoming as decentralised as possible. However any project that is financed through an ICO and has a “core team”, starts from a of high centralisation and concentration of power, by definition. So, the core team will have to work hard for the project to become decentralised.
The trick to create a decentralised project is to balance incentives for the whole community in order to align all participants in pursue of the common project. In ICO projects, the incentives are represented by the “tokens”, but many times there are also some privileged participants such as “master nodes” or other. So, in order to analyse how decentralised the project is one would have to analyse (among others):
a) Distribution of tokens among investors/participants
b) Percentage of tokens held by the founding team
c) Number and power of master nodes
5. Liquidity
Part of the beauty of participating in a startup via tokens is the liquidity of the tokens post ICO. Most used token standards are transferable by design, and tokens are normally allowed to trade after they are distributed post ICO.
However, being tradable does not always mean being liquid and reality is that many tokens are very illiquid despite being traded on several exchanges (centralised or decentralised). Good liquidity is something that is very valuable to people participating in a decentralised project as it provides them the freedom to enter or leave the project when they want.
Liquidity is ultimately up to market participants, but project team can help improve it through efforts to list in the best exchanges and engaging liquidity providers for their token.
6. Potential
This is a bit of a bonus item on this list, but sometime after the end of an ICO one has to stop and ponder over the project: does the potential of the idea remain intact? Has its potential increased or decreased due to any circumstance? Think of circumstances such as project execution, regulatory changes and competition, and how they can affect the future of the project.
In summary, these six factors (execution, transparency, community, decentralisation, liquidity and potential) should be monitored during the life of a decentralised project. Some of these aspects are easily quantified (such as number of users, or token distribution) and some are require of a more qualitative evaluation (transparency, potential). For the more qualitative or subjective aspects, we think that it is useful to try to aggregate the opinions of experts that can compare the evolution of different projects.
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