Stabilizing ICOs Through Bear Markets
The traditional Venture Capital (VC) route to raising capital provides startups with a clearly defined set of funds, terms and expectations. As the startup hits its checkpoints and objectives, investors may agree to put in additional funds or the startup may run subsequent fundraising rounds to facilitate further growth. While this method does not prevent teams from budgeting poorly or allocating resources inefficiently, it does provide a good deal of clarity; a type of clarity that has been taken for granted until the introduction of the Initial Coin Offering (ICO).
The ICO Problem
ICOs have radically altered the fundraising process, turning fund management from an afterthought into one of the easiest routes to failure. With over $16.6 billion raised through ICOs since the start of 2017, fund management has become an increasingly costly problem and has caused many ICOs to fail before ever getting off the ground.
Since most ICOs raised money in Ethereum (ETH) instead of fiat, they greatly exposed themselves to the volatility in the price of ETH and other crypto assets. Instead of converting their ETH into fiat, ICO teams sought to benefit from the expected price appreciation, never truly preparing for the prolonged bear market that was to come.
For example: A team that raised $100 million when ETH was at $1,000 would now find itself with just $10 million. If their overhead and overall expenditure relies on having $100 million, product delivery becomes unfeasible.
This sustained downturn in the price of ETH has led to massive layoffs even in some of the biggest companies such as Consensys. Steemit also recently revealed that it has laid off 70% of its staff, while Ethereum based SpankChain has gone from twenty people to just eight this year. Meanwhile, Sirin Labs announced that it only has sufficient funds to see it through another six to twelve months despite raising $158 million in 2017. These woes are also reflected by Bitmex’s research, which noted 20 ICO projects that have seen millions in losses.
Although not as immediately destructive, the reverse can also be an issue. A team that raised $100 million at $100 per ETH would have found itself sitting on $1.4 billion at the beginning of this year. A company being too well-funded can be as problematic for investors as underfunding. Who does that money belong to? What should it be used to achieve? Some crypto startups have turned into quasi-VC firms, investing in other projects or launching funds designed to encourage development in the ecosystem. Ultimately, this can lead to a lack of focus on delivery of the product original ICO investors gave their money for.
An Unwanted Burden
By raising funds in a speculative asset, teams have been forced to adopt a more market/trading focus, with treasury management becoming key to avoiding an untimely demise. How much of the capital raised should be kept in crypto? Are employees paid in crypto? Wholly or partially? Should it be converted to fiat immediately? If so, how much of it? Even deciding who is responsible for converting ETH to fiat, whether or not to use an exchange or a broker and other mundane tasks began to consume a lot of time and energy.
Although some of these issues are common to all startups, ICOs have even less margin for error as they can realistically only raise funds once. While there are exceptions such as MakerDAO, which had a small ICO and then raised money through VC investors this year, most start ups do an ICO to raise funds and sell off the entire token supply. There is no VC firm backing them to ask for additional funds — what is raised initially must be enough to let them deliver on their promises.
De-risking ICO Treasury Management
While the obvious solution to these woes is to simply convert all ETH to fiat immediately upon ICO conclusion, this is often not desirable. For what are often globally distributed teams, using fiat does not make much sense. Fees can be high, payment slow across borders and other additional regulatory problems may come up given the transmission of large sums of money.
One potential solution for ICO teams is to use Jcash, which offers a number of fiat pegged currencies. These currencies take the form of an ERC-20 token, same as our JNT token, retaining the benefits of crypto assets like swift, cheap and permissionless transactions. Most importantly, they act as stablecoins since they are pegged to fiat currencies and are backed by collateral. The current offering includes JUSD, JEUR, JKRW and JGBP with more fiat backed coins possible in the future.
Stablecoins are largely (if not exclusively) pegged to the dollar, meaning that teams take on the risk that their own nation’s currency could fluctuate against the dollar. Other projects may be distributed worldwide, and therefore, desire to convert to multiple different currencies. Offering a range of fiat options is critical with many projects and employees based outside of the US. As long as these fiat backed coins remain ERC-20 tokens, they can still be used like other tokens. This brings two further benefits:
- As they are auditable on the blockchain, investors and partners can view the team’s balance and transactions. Such a trail reduces the chances of fraud or theft while simultaneously increasing investor confidence in the project team.
- Smart contracts can be used to secure funds, including multi-signature contracts, which require multiple people to move funds from the team’s token address. This helps to increase security by reducing the burden on individual employees to oversee millions of dollars. It also allows for smart regulation, which enables AML and KYC compliant token transfers.
This is one example of how Jcash can help companies take advantage of the benefits of crypto assets without jeopardizing their business operations. As the usage of crypto assets and blockchain increases, non-crypto firms will begin to seek to manage treasuries through on-chain digital assets.
Jibrel provides traditional financial assets such as currencies, commodities, debt instruments and securities, as standard ERC-20 tokens, on the Ethereum blockchain. To learn more about Jibrel, please visit us at https://jibrel.network/