The dawning of the age of the ICOs
Crowdfunding is big, and it’s getting bigger. That’s true in the real world, where a series of high-profile projects have given the idea a boost, but it’s now the default way of funding new crypto projects. Despite having some remarkable tech at our disposal, the crypto community doesn’t always do it very well. It’s time we applied some crypto rules to crypto crowdfunding.
Crowdfunding has gone mainstream. Industry figures suggest that 2015 saw some $2.5 billion in equity crowdfunding alone, with the entire sector totalling $34 billion (including $25 billion in peer-to-peer lending and another $5.5 billion in rewards and donations). With the global economy still struggling and traditional sources of credit still dry, it’s only fair to expect this to grow.
In the crypto world, 2014 was the year when the idea of the initial coin offering (ICO) took off. Up to that point, there had been far more of a culture of mining: new projects were secured and distributed on a proof-of-work basis, since this was seen to be somehow fairer than the idea of ‘pre-mining’ a coin and rewarding investors for the risk they took in funding the marketing and development of a new project.
It was a steep learning curve and the community learned pretty fast that there could be downsides to crowdfunds. Trusting an often anonymous developer with a stack of crypto came with some predictable risks. It wasn’t long (though longer than you might expect) before safeguards were built in — escrow, multi-sig accounts and the like, to ensure that funds weren’t accessed until agreed milestones were reached. More and more developers came out of the shadows and gave their initiatives a public face.
Software fit for purpose
Even with the most honest and competent teams, investors were still taking risks. We’ve learned the hard way in crypto that a chain is only as strong as its weakest link; take a trustless system like bitcoin and add a point of trust (like MtGox) and you introduce a serious vulerability.
The reality has been that a lot of ICO software is shaky and potentially downright dangerous. In many cases, ICOs are still a black box, with tokens being allocated on a database that is not only opaque but is potentially vulnerable to hacking or deletion. There is room for considerable professionalisation in this respect alone. Peter Godbolt, lead developer for the loyalty programme Incent, explains. ‘In setting up the Incent ICO we reviewed a few software applications, largely based on the traditional web app model of running a PHP application with a MySQL database. We were uncomfortable with this stack given its inability to scale without significant investment in sysadmin tasks, and also security issues — it simply didn’t feel right.’
There is an obvious solution, though — to use the blockchain itself as a ledger and support this approach with software that would not only scale well but prevent even the issuing organisation from tampering with balances. ‘We determined to use Google Firebase, bringing a higher level of security and scalability, and we also decided to use the bitcoin and Waves blockchains as an open ledger for all investment — any investor can quickly and easily see the status of their payments via the many publicly available blockchain explorers. It’s a “trustless” system for confirming whether or not you made the latest discount level, or whether your payment arrived as expected. In the case of Waves investors, the security level is even higher, with Incent tokens being issued directly back to the address which sent the funds.’
Incent is now making this software available to other ICOs that are using the Waves blockchain to host their assets. For a nominal fee, businesses will be able to use the software as a turnkey solution. In addition, Incent will be distributed to their investors as a primary use case for the reward currency and as a secondary reason for ICO investors to deposit — Incent is ‘baked in’ as a bonus to investors. There are a series of benefits to this for ICO issuers (security, an off-the-peg solution and added incentives), for Incent holders (buy pressure and adoption), and for Waves holders (transaction volumes, exposure and marketing). Incent has signed up its first customer for its ICO software, even before its own ICO ends — meaning there will immediately be real, non-speculative activity on the Incent market.
This approach doesn’t solve all of the problems involved in crowdfunding, but it does move towards the limits of what is possible using a traditional approach. To go beyond this, it’s necessary to shift paradigms and look at what a fully decentralised platform can offer.
Waves native crowdfunding functionality
In due course, Waves will add further functionality that will make it a powerful crowdfunding platform in its own right. Since full nodes have now been released, along with token creation, it is possible for anyone to launch their own CAT (custom application token). One of the primary use cases for these is fiat gateways — organisations like banks and other financial institutions that will act as intermediaries between the blockchain and the traditional financial system. They will issue fiat-backed tokens — such as WavesUSD tokens that are given value by the same amount of actual USD, held in an insured and audited account. (This is the approach already taken by Tether.) In theory, anyone will be able to issue fiat-backed assets, but only the most reputable and transparent organisations will gain the trust of users.
These gateways and fiat tokens will provide a way for ordinary retail investors to participate in crowdfunds with regular money. Having the Waves blockchain working on the inside means that it becomes possible to hold global crowdfunds without the inefficiencies and problems of the fiat banking system (high costs, delays, reversed or blocked transactions). Tokens issued for crowdfunded projects would be transferable, allowing them to be sold to third parties after purchase — unlike regular crowdfunding platforms, where no such mechanism for transferral exists.
This also opens regulatory issues, since depending on the nature of a project it may act like a share or other form of security. This is a matter for the project issuer, the Waves platform simply functioning as a toolkit to enable whatever activity the issuer wants. However, further functionality can allow some protection from this. For example, it would be possible to issue tokens that can only be exchanged with the token issuer, instead of trading freely on the open market. As well as mitigating against the problems relating to the issuance of securities, this would also find application in the music industry, where it could be used as protection against ticket touts buying up tickets/tokens for an event and selling them on at inflated prices on the secondary market.
Looking ahead
Beyond gateways, Waves’ decentralised exchange (DEX) will allow for further security and convenience. Asset-to-asset trading in Waves’ core enables some powerful features. To date, it has been the norm that crypto projects raise funds in bitcoin, Ethereum and other cryptocurrencies. This has the advantage of being as borderless as crypto, but is not ideal from the perspective of budgeting. Volatility could hamstring a project that had apparently raised enough to be viable. Asset-to-asset trading means a business can set a given number of tokens for sale at a dollar value.
With the API acting as a kind of advanced financial toolkit that provides building blocks of various kinds, a ‘Waves Inside’ approach gives crowdfunding organisations a series of new options to reach new audiences and provide greater efficiency and advanced security features. Organisations like Incent can integrate this into familiar customer-facing crowdfunding platforms, including whatever functionality they want from Waves as well as their own features, such as direct altcoin deposit for crowdfunding in a range of crypto coins, with different pricing and bonus structures for each. There is a high degree of flexibility whilst, at the same time, a far greater degree of protection for users. Add some smart contracts and you even remove the limited element of trust from escrow arrangements.
With the rapid growth of both the crypto and crowdfunding sectors, the intersection of the two is a foregone conclusion. We’ve already seen a number of multi-million dollar ICOs; with software fit for purpose, it’s likely that many more will occur, as well as countless smaller offerings. And so while the future of crowdfunding may not look very different to how it’s done now, under the surface, everything will have changed.
For more information about Waves, visit www.WavesPlatform.com.
