ICOs will move away from ETH

Ether, or ETH — the native cryptocurrency of Ethereum, has been the dominant currency used by those raising funds through ICOs over the past several years. Virtually all token presales, from big to small accept it;. however, with high-profile hacks such as those that occured with the DAO or Parity, perhaps it’s time for ICOs to find a new means to facilitate their capital raise.

Native coins vs secondary tokens

There are two major types of tokens in the cryptocurrency space: native coins and secondary tokens. The first type has been around the longest and includes bitcoins, ethers, ripples and so on, native coins used by their respective systems. BTC is the native coin of the Bitcoin network, for example. Those coins are not controlled or created by anyone but the protocol itself. Secondary tokens on the other hand, are tokens created on top of existing networks by other people, such as tethers, OMGs, or golems. They are created by the use of smart contracts or other types of separate protocols (such as issuing trust and debt on Ripple). Most importantly, they exist within a given cryptocurrency network, but they don’t run it — USDT can crash and burn, but Omni Network will continue, for example.

While native coins can be seen as “the hard currency” of the crypto world and are virtually essential to running any public, distributed blockchain, secondary tokens do have a few key advantages.

Firstly, secondary tokens can be custom made to meet any requirement and don’t require much effort to bootstrap,tokens can be easily launched on Ethereum without fear of a 51% attack on your network. Secondly, they can be tied to or backed by real-world currencies, goods or services; that is the business model behind Ripple Gateways, for example. Lastly, they can impose much stricter constraints on their users than the native coin, enabling one to restrict ownership to only those who have been KYC verified, or provide the token issuer with the ability to destroy and issue new tokens at will.

But okay, what does all of this have to do with ICOs and ETH?

ICOs for IOUs

IOUs are a type of secondary token that are backed 1-to-1 by a reserve of fiat, other currency or goods. The Ripple network has introduced and popularised the term and today you can find many IOUs being issued and used on that network. The various IOUs are issued by Gateways that act like banks — holding fiat deposits and issuing tokens upon deposit that are backed by the reserve and can later be redeemed as fiat.

The IOU issuers can also exert some control over the tokens they create, restricting use to people that have passed a KYC check, for example. The issuers can also freeze accounts to combat theft, and should worse come to worst, tokens can be re-issued to rollback any damage caused.

While those features run against the core principles of cryptocurrencies such as Bitcoin (“be your own bank”, strong anonymity, etc.), they can be quite desirable for ICOs.

ICOs by their very nature are almost always not decentralised. They are run by known actors, created to raise money for a specific project, and have no value if the team and the project do not deliver. With the increasing need for securities regulation compliance for many projects, ICOs will become even more centralised, meaning that they won’t benefit from crypto anarchist principles. They can, however, benefit from IOUs.

Firstly, coins that are issued for IOUs would be protected from the fluctuations of ETH price. Token buyers wouldn’t have to turn their fiat into ETH only for ICO issuers to turn ETH back into fiat, they could raise directly in fiat-denominated IOUs and not have to worry about trying to cash out millions of dollars at their local exchange where daily volume may be too low to support that. Similarly, if they require the funds to be held for a long period of time, they don’t have to worry about the price of ETH dipping (the Ethereum Foundation itself had this issue when it raised a lot of money in BTC, only to have the price of BTC dip down while it was still developing Ethereum).

Secondly, if the ICO, its website or its wallet is hacked and funds are stolen, it’s much harder for a hacker to liquidate those assets without running into trouble. It’s easy to steal ETH and put it into an anonymous account, it’s much less attractive to steal USD IOU that must be put into an account tied to one’s real world identity, which can then be frozen by the IOU issuer. If the IOU issuer is on the ball, they can freeze all the stolen funds and refund the ICO issuer as soon as the account is secured again — in the end a few days or weeks may only be lost, rather than millions upon millions of dollars.

Thirdly, as a number of projects have shown, smart contracts are not bug-free. Even if you are not hacked you can end up accidentally locking up your money and not being able to access it. If you’re dealing with ETH, you are pretty much out of luck. But with IOUs, you could ask the issuer to freeze / delete your old funds and reissue those tokens back to you.

Conclusions

While native coins are an integral part of the cryptocurrency networks, protocols and ethos, it may not be long before ICOs begin raising funds with IOUs instead of coins. The benefits of doing so will greatly reduce the technical risks associated with holding large amounts of ETH securely. We will still have to wait for a reputable fiat IOU Gateway to appear on the Ethereum network, one that can be trusted with large amounts of money and can also be compliant with various regulations. ICOs may eventually move away from using ETH in favour of IOUs, but it may not be anytime soon.