A Fascinating undercurrent of business funding is currently shifting to a new model. This model is sometimes called a token sale or as some call a pun on the IPO process, the ICO or Initial Coin Offering. This term ICO has become a bad word in some circles, with others preferring ITO or token sale to remove the term from the possible correlation with the regulators. Don't worry if you haven't heard of this, but you probably will in the coming years, and hopefully below will shed a bit of light.
How and Why
This finance process is accomplished by raising money by issuing a cryptocurrency token via an initial cryptocurrency offering crowd sale. Generally, the guidelines of the sale are put in place by the capital raising group, although there have been a recent flurry of suggestions and new off-shoots to help guide both the token creator and the purchaser.
These companies and their tokens are blazing ahead with incredible traction leaving regulators wondering what to do. There are already hundreds if not thousands of tokens issued and while there are some big hits, there are also many failures. Fred Ehrsam of Coinbase wrote "Some token models don't make sense. For every 1 huge hit there will be 3 minor success and 100 failures, so we shouldn't be surprised when some fail. However, the fundamentals of the token model are valuable and powerful. They allow communities to govern themselves, their economics, and rally a community in powerful ways that will allow open systems to flourish in a way that was previously impossible." A common correlative example is that this now allows the ability to fund a large distributed project, something like Linux, which before there was no direct mechanism to do such a thing.
Another good point to keep in mind if you are skeptical about this is that the history of venture capital faced very similar issues. At one time, stocks were considered a new asset class just as cryptocurrencies are today and the very idea of venture capital required re-engineering of the financial regulatory infrastructure.
The tokens are coming (what to do about it)
On the Distributed panel, a lot of focus was placed on what to do if you were interested in offering, funding or purchasing token offering. The first thing is to make sure you understand the risks, this is high-risk, bleeding edge technology. Now that we have that out of the way, read about the different types of tokens that are being offered (realize this is a fast moving space, and even that article is a bit dated).
Once there is a basic understanding the things to look for include:
- Team Quality, this is the most important piece, they should have a business team
- A distinguished product
- A legible and clear whitepaper that directly calls out the case for the token
- Should take an international perspective
- Should have a good advisory board with leading experts in the space
Things that to watch out for:
- If this is a new network token, why?
- Does it seem speculative and only for profit?
- Does it have a ceiling in place for the raise
- If it is complex, it is a red flag
If you are looking to create an offering there were some good points brought up as well:
- Ensure that you have a good product that fits the model
- Enable information access about the offering
- Build a large community for the product and the offering
Clearly, there are many taking a deep hard look at what is going on here, venture capitalists among those. The blockchain space is clearly bleeding-edge. It seems as if the technology is something similar to the early days of the internet and it is difficult to develop a filter for what is fiction at this point. The use cases are numerous and at times obvious, yet it is unclear how and when we will see adoption. That said, it is exciting that we can fund blockchain projects in a way we never could before and hopefully open up new possibilities that we have never seen before.
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Read Part 1 Here: Blockchain Part 1: Cross-Border Payments and Remittances
Read Part 2 Here: Blockchain Explained: Debt Markets and P2P Lending (Part 2)