Interactive Coin Offerings, and what they bring to the crypto-space
ICOs (Initial Coin Offerings), which refer to initial fundings of new cryptocurrencies through crowdsales, spread like wildfire in the last months. From 2014 to 2016, 300 million dollars were raised through ICOs. Since the beginning of 2017, more than 1 billion dollars were raised, outnumbering now the venture capital investments into the crypto-space. This ICO wave raises issues: Ethereum network congestion and bad investment quality (highly speculative investors starving for quick wins as ICOs are “trendy”).
Key take-aways:
- Vitalik Buterin and Jason Teutsch released on September 24th a white paper introducing a new kind of Ethereum-based ICOs: Interactive Coin Offerings.
- As these 2.0 ICOs allow investors to submit bids that are cancelled when the token valuation exceeds a personal cap (also decided by the investors), everyone can successfully participate to the ICO, and without hurting the Ethereum network.
- Despite the advantages, the protocol makes these Interactive Coin Offerings uncapped by design, and it’s unclear whether new companies are willing to lose control of the amount raised through this process. But Interactive Coin Offerings are moving one step forward in designing ICOs that are transparent, harmless for the network, and accessible to all investors.
Initial Coin Offerings VS Interactive Coin Offerings
As of today, 2 types of ICOs are mostly used.
Capped ICOs: The company chooses to cap the money they want to raise. Either first come first served, either everyone can participate and the company decides a individual cap based on the total number of participants. For this kind of ICOs, investors are not sure to be able to participate, or at least not as much as they would like to.
Uncapped ICOs: Everyone can participate in the ICO, with no individual cap. This results in a uncertainty of valuation for the investors.
None of these two ways can ensure to the investors certainty of valuation AND certainty of successful participation.
To tackle this problem, Vitalik Buterin (co-founder of the Ethereum network) and Jason Teutsch (founder of TrueBit) released on September 24th a white paper explaining a new kind of crowdfunding, through smart contracts. They relax one constraint: if we allow at any time of the ICO token buyers to place bids for each potential valuation, then every potential investor is able to participate to the token sale.
For instance: you want to invest in an ICO. You truly believe that the project is great, but you don’t want to invest a lot of money into the ICO if the valuation goes beyond 100k ETH (let’s say you are willing to invest 3 ETH). But you are willing to put 10 ETH if the valuation goes below 100k ETH.
Your investment profile is described below:
In this case, you only need to place two bids: one at 3 ETH for an infinite personal cap (let’s say 100 million ETH), and one at 10–3 = 7 ETH for a personal cap @ 100k ETH.
This way, if the valuation (which is the sum of all bids) stays below 100k ETH at the end of whole ICO process, then you will automatically invest 7 ETH + 3 ETH (because the valuation also stayed below 100 million ETH).
If the valuation goes higher than 100k ETH, then your 7ETH bid is canceled and you will invest the remaining bid @ 3 ETH.
With this kind of logic, more complex investment profiles can also be translated into a table of bids and personal caps.
If you are allowed to place bids for different valuations, whatever the valuation at the end of the ICO, the amount invested corresponds to your “investment profile”.
ICO Protocol
Interactive Coin Offerings are separated into two phases:
- Inflation ramp: All investors have the ability to place bids for chosen maximum valuations (or “personal cap”). During this phase, early investors can be rewarded with bonus tokens, and bids placed can be voluntary removed during this period.
- Withdrawal lock: After a certain amount of time, voluntary withdrawals are forbidden. But bids can still be placed into the ICO.
For every block (step) during this process, the valuation is updated with the new bids that are placed into the ICO. Bids placed at a cap that is lower than the current valuation are considered inactive. And this continues again and again until the end of the ICO, into total transparency: everyone can access all submitted bids.
The equilibrium found at the end is interesting: because every potential participant succeeds in investing following his investment profile, whatever the final valuation, investors have less incentive to buy tokens when they hit exchanges. This means that the market equilibrium after introduction to exchange platforms should not be far from the token valuation at the end of ICO (considering that the project didn’t release anything between the end of the ICO and the introduction on the exchanges).
What does it mean for investors, for the network, and for companies?
For crypto-investors, Interactive Coin Offerings may result in a healthier environment.
As the valuations at the end of the ICOs should be close to the equilibrium found on the markets as soon as the tokens are tradable on token exchanges, there is no more incentive for speculative investors to invest into an ICO and sell as soon as the tokens hit the exchanges, to make some quick profit. Investors who will invest in interactive coin offerings will then be focused on the product the company might offer rather than the potential gain brought by the token introduction to markets.
Also, the Ethereum network can benefit from Interactive Coin Offerings. The network can get easily saturated during capped ICOs as investors are in a hurry to submit bids. This new type of ICOs ensures that investors can successfully participate in the crowdfunding without any time constraint. There is no more incentive for them to submit bids as quickly as possible at the first second of the ICO, and thus jeopardize the Ethereum network’s stability.
But benefits for the companies of the crypto-space that need to raise funds are unclear. 2017 ICOs are very often capped, and Interactive Coin Offerings are theoretically uncapped by design. It is hard to believe that the majority of new companies of the crypto-space will accept to lose control of the funds they raise.
Despite the uncertain adoption, Interactive Coin Offerings are taking a step towards more transparent, open, and healthier ICOs.
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