Recap from OST LIVE with Tokenomics Author Sean Au — Understanding The ICO Landscape
Sean Au, co-author of Tokenomics, joined us on OST LIVE to discuss the ICO landscape, how millions were raised in minutes, and where the future of the tokenized economy is heading.
Tokenomics is a new book that explores the differences between ICOs, cryptocurrencies and token offerings. Sean is also Ed Chair of the New Zealand Blockchain Association, Co-organizer of the Wellington Blockchain Meetup, and founder of talkcrypto.org.
Sean has a background in electrical engineering, software, hardware, and integration systems. In 2015, Sean quit his stable full time job to focus on cryptocurrency and blockchain technology. Without a clue to where blockchain technology was headed, Sean questioned what is money, who controls it, and where it comes from. Beginning with the 11-page Bitcoin white paper, Sean spent months studying Bitcoin, hash functions, digital signatures, and merkle trees, eventually downloading cpuminer source code, stripping it, and getting it to mine Bitcoin on his Macbook. He achieved a whopping 429 kHash.
Coin or Token?
When a blockchain is created, a network is created in which computers come together to form a network and the incentive for them to participate in the network is in the form of a payment. With Bitcoin, payment is in the form of a coin. Sean says “a coin can be described as the native digital asset of a blockchain.”
For example, Ether is the native cryptocurrency on the Ethereum blockchain. Developers can use the Ethereum platform to create another cryptocurrency on top of Ethereum. As it sounds redundant to call it a cryptocurrency built on top of a cryptocurrency, they can be referred to as tokens.
Utility Token or Security Token?
Sean says that the utility of a token comes from getting access to a system for a given purpose. Some call it an access token or an API token, Sean refers to it as a utility token. Sean says
“During the recent ICO craze of the last couple of years, all these tokens were being created, left, right and centre. Many people may know, a lot of it was on the Ethereum blockchain because it was quite easy and a very popular platform to use. When you create these tokens, a lot of people were saying, buy my token and then you can access my platform after it has been built.”
For the definition of a security token, some refer to the Howey Test by the United States Security and Exchange Commission. In summary, the Howey Test describes a security as an investment of money in a common enterprise with an expectation of profits predominantly from the efforts of others. Sean says that with security tokens “it makes it very clear that you’re putting money in expecting some sort of return.”
Rise of the ICO’s
According to Sean’s ICO tracker theicotrain.com, the first ICO took place in 2013 by MasterCoin (now known as OMNI), which raised 5,122 BTC worth $500k USD at the time. Sean mentioned that the project was one of the first to discuss stablecoins. In 2014, the notable Ethereum ICO took place rasing 31,550 BTC worth $18.4m USD at the time. ICO statistics in the first 2–3 years were very consistent across different websites. The number of ICOs increased in 2016 to over 50, followed by the ICO explosion in 2017 with over 350 ICOs.
The amount of money raised per ICO started to skyrocket in 2017. Sean points out that there are outliers in terms of money raised by ICOs in 2017 and 2018. He points out that some reports include money raised from outliers like EOS in 2018. EOS was a year long ICO that started in 2017 and reportedly raised $4 billion USD.
Top ICO Trends
Sean Au and Thomas Power evaluated over 300 white papers and categorized types of ICOs. Sean and Thomas classified them into the fastest ICOs such as Brave, which raised $35 million USD in under 30 seconds, very large ones, and very popular ones.
Along with ICOs comes the project white papers. Sean says “the length of them increased over time, one of the reasons being because the legality clause increased as well” adding that “at the beginning, it was very mathematical and hard to read for the average person.” For example, the Bitcoin white paper in 2009 was only 11 pages and had no legal disclaimers, whereas the Telegram white paper in 2017 had a length of 120 pages.
White papers began to have color, cover pages, tables of contents, roadmaps, funding breakdowns, team members, and advisors. Sean says “there was an era that I call the executive summary white paper era because back then it was an abstract. The bulk of them in 2017 were very business-like because there were sections such as value propositions and competitive landscape.” There was a lot more to read, but the white papers became user friendly.
Sean compares the ICO explosion in 2017 to a brand new Tesla, attracting attention and interest from everyone simply because it is something that has never been seen before. Sean also pointed out that a significant number of white papers used terms such as “token generation event” and “crowdsale” to avoid the negative connotations or regulatory requirements associated with ICOs.
The Relationship Between ICO’s & Regulators
The regulatory landscape around ICO’s has changed drastically just in the past couple of years. Referring to the early days of ICO’s, Sean says “Back in the early days people would do a token launch and receive money. Because the value was quite low, the regulators either didn’t know about it or didn’t understand it and they didn’t really care” But then as more attention was brought into the space, more money being poured in, and the potential for people to have lost money, Sean says this “put a flag on the regulators radar.” Sean found that a lot of countries around the world look towards the U.S. SEC for guidance. Sean also mentions that many regulators are very open to the new technology, acknowledge what it is, and seek cooperation to work together on regulatory frameworks. Sean believes rules are required as there is skipping around regulation because “if there isn’t any, people then consider it the wild west, and in that situation, anything goes, there will be scammers and that’s bad for the industry.” The amount of oversight and regulation needed remains as a discussion up for debate.
Are ICO’s dead?
Looking at past trends, there was the creation of Bitcoin, then other cryptocurrencies, then there was blockchain, then there was a smart contract revolution due to Ethereum, and most recently after smart contracts there was the ICO boom. Sean says: “I wouldn’t say ICOs are dead, I would say that they’re just going through their next evolution.”
Sean believes that the cycle where everyone is creating tokens and selling them in exchange for access to systems or a platform has shifted focus and is more circumspect as he says “token sales are still happening, but companies are no longer raising $250m USD like Filecoin or $153m USD like Bancor. Everyone has taken a step back, taken a breather, and has realized what has happened. The next phase of it will be tokenizing real world assets.”
Coming Up Next on OST LIVE: Keld van Schreven
Be sure to join us on Wednesday 3 October 2018 for our next OST LIVE with Keld van Schreven, Co-Founder of KR1, a digital assets investment firm. Subscribe to our YouTube channel or listen to the audio format on anywhere you listen to podcasts, including on iTunes, TuneIn, and Spotify. We’re also now available on Alexa! Simply add “OST LIVE” to your flash briefing.
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OST blockchain infrastructure empowers new economies for mainstream businesses and emerging DApps. OST leads development of the OpenST Protocol, a framework for tokenizing businesses. In September 2018 OST introduced the OpenST Mosaic Protocol for running meta-blockchains to scale Ethereum applications to billions of users. OST KIT is a full-stack suite of developer tools, APIs and SDKs for managing blockchain economies. OST Partners reach more than 200 million end-users. OST has offices in Berlin, New York, Hong Kong, and Pune. OST is backed by leading institutional equity investors including Tencent, Greycroft, Vectr Ventures, 500 Startups.
