Why The ICO Is A Bad Idea For Real Adoption And Success In Crypto
Karmaship is flipping the script with its OCI or Offering Coin Initially.
The ICO or Initial Coin Offering made popular by Ethereum and other corporate alternatives to the more traditional open-source community coins like Bitcoin and its offspring (Litecoin, DigiByte, etc) is a novel approach to fundraising for new businesses. It combines crowdfunding & public equity ownership (like a stock) with token ownership that is unique and empowering depending on how it is setup. We saw a a massive explosion in ICOs in 2017 that led to the inflation of a micro crypto bubble that rapidly approached the $1 trillion market cap by year’s end. Of course that popped as soon as the elation and greed was exploited. Was the ICO completely at fault? Probably not, but this reality did highlight many of its inherent flaws which we will uncover here in this post.
One of the biggest issues with ICOs is in the way the equity ownership is understood and represented. Most ICOs attempt to combine equity ownership with utility tokens or spendable coin. This combination can be confusing and specifically damaging to core productivity or use case for the actual token or coin. For example, if buying into an ICO that rewards its ‘investors’ with a utility token that is also supposed to be used within the platform, why would users spend the token and sacrifice their investment? Is this digital asset supposed to be a representation of equity ownership or just a reward for believing in the project and if so, why spend it? One can’t have the best of both worlds but most projects attempt to do this. Security tokens have become the rage because of this issue but even those suffer from the inescapable reality that these tokens can be easily traded and manipulated on centralized exchanges. This brings us to our next point, the exchanges.
Until we have a truly decentralized marketplace for these new digital assets, the probability of manipulation and even fraud is high. This is inherent to any system that is centralized and lacking proper regulation. Of course many advocates for the current exchange system simply like to say ‘regulation is the answer’ but anyone who is truly conscious of how global finance works should know that concept is a slippery slope at best since regulation in and of itself relies on centralized actors with their own agendas. The reason Bitcoin was created in the first place was to provide sovereign financial freedom to the individual, independent of centralized regulation. Talk about putting the cart before the horse! Proponents of regulation are taking us far away from the original intention of this thing to begin with.
And even if we were to assume that centralized exchanges were fair and un-manipulated we still have the problem of flawed token evaluations and speculative greed driven by FOMO (Fear Of Missing Out). Many of these projects suffer from pump and dumps and market manipulation easily achieved thanks to low liquidity and lack of oversight. The big holders (and often ICO founders) benefit financially while the investors and projects suffer. On top of that, because these projects and their founders are paid up front in Bitcoin or Ethereum and also still hold a big chunk of the generated coins, they are highly leveraged without much risk. If they fail, oh well, they have already been paid up front! This takes away the economic incentives many traditional start-ups receive with traditional VC.
So understanding that the typical ICO token structure is flawed in that it can detract from the actual use case of the token or coin and that the centralized exchanges these assets are traded on are inherently corruptible, it seems like a rational conclusion that this is not a healthy way to go about developing a successful new blockchain project if one’s actual intentions are adoption and growth. This is why we have flipped the ICO on its head with our OCI!
What is an OCI?
Offering Coin Initially is a completely radical idea that may just be the answer to crypto’s current speculative bloat. — T3Q, Karmaship Co-Founder
Part 1: The Initial Blockchain And Token/Coin
We coined the name OCI because we tend to reverse engineer a lot! An OCI or Offering Coin Initially is a way in which a new crypto project can distribute coin without taking money up front. The concept goes like this. First and foremost the new project needs a basic working blockchain and coin. This can be achieved in a number of ways at a very low cost these days. While some initial up front capital or donations would be needed, the ability to do this is what sets the foundation for actual healthy and responsible business development. Once the basic coin or token is setup, the new project offers coin for free to users who choose to take part in their new emerging economy or platform. Much like current ICOs, these projects will need to be developed over time into their actual end visualization and are just using this current initial blockchain to distribute the coin. While we are not huge fans of Ethereum, this process is agnostic to whatever platform a project decides to start with, whether it be Ethereum, EOS, a Bitcoin clone or whatever.
Part 2: The Offering
Next is the actual offering. In our case, since we are an experiential blockchain project, we offer a genesis event for these new users to attend. Upon arriving at the event, they receive an airdrop of tokens that will allow them to start earning coin dividends on every new block which they can then spend at the event. Vendors at the event are incentivized to accept this new mined currency with a buyback program (our new coin for BTC or USD) and thus create an immediate value and use case for the new coin. The buyback cost is covered by the vendors fee to sell at the event. It is a win win for the vendors because not only do they cover their vendor space fee but they will also receive free marketing, increased traffic and overall more exposure for their business. Meanwhile, the new users are experiencing a real-world use case for this new technology while the event’s initial costs provide the market cap valuation.
Other startup blockchain projects focused on P2P transactions can use this same concept but with whatever initial offering that makes sense for their chain. So for example, a gaming coin could offer free coin to any participating users on partner game consoles. The users are airdropped coin once they purchase the new console and are immediately able to use this coin to access options that would normally cost traditional fiat. The gaming partners receive a buyback for this and are also benefiting from the additional advertising and promotion.
Part 3: The Internal Economy
As we stressed in the beginning of this paper, the speculative nature of the current crypto market is extremely damaging to the growth of new projects. This is why the OCI depends on the maintenance of a secure internal economy with no outside influence or coin access on centralized exchanges. (Decentralized Exchange protocols or DEXs are a different matter and something to be discussed in an upcoming article!). As these initial airdrop recipients begin to use these new coins and receive real-world value for them, the network effect will start to kick in and the value will increase. Because users cannot simply buy into the coin on an exchange, they will need to find a way into the internal economy by joining it (each project once again will define these terms) or by having someone already inside send them coin. This is the ‘Outside In’ strategy which creates its own FOMO of sorts but for the proper use of the coin or token. Furthermore, thanks to the law of Diminishing Marginal Utility, the economy is limited to what is actually offered, so most users will in effect be forced to either save it or send it to someone else, thus increasing the network effect and organic growth of consensual value.
The goal of the internal economy is to provide true value and strength to a new coin or token while allowing for real organic adoption and distribution. This we feel is a much more holistic approach to building a new decentralized public project or economy. The market cap will at first be evaluated according to the costs of the project and its partner companies and vendors’ offerings. As the ecosystem develops and is distributed enough to where the network effect takes over, then the economy can be opened up to outside liquidity, ideally in the form of DEXs or other decentralized mechanisms. In this way, we now have a responsibly developed ecosystem that is incentivized to mature based on actual adoption and good product development!
Take Part In The First OCI!
Our first Genesis Event will take place this month in the mountains of Santa Barbara, CA at Outside In Equinox, Sept. 21–23. You can purchase tickets to the event here or volunteer here. Many more Genesis Events and Experiences to come!
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