Initial Coin Offerings (ICOs or also known as token generation events or token sales) have gained a lot of popularity recently. With multiple articles being published in leading journals and media, many people are interested in jumping onto the ICO bandwagon. However, a statistic of ICOs launched between July 2017 and September 2017 shows a marked increase in percentage of ICOs failing to meet their goal in recent times.
At Ideas2IT, we have been investing in Blockchain and Cryptocurrencies for the last 2 years. In our experience, ICOs take a lot of time and at least $300K which includes consulting for legal, token design and marketing. So unless your company is a very good fit, don’t do it. In this article we will share what we learnt about ICOs, when to do it and what it takes.
A lot of ground work and analysis needs to be done before launching an ICO – what kind of companies can it be used for, whether your project absolutely needs an ICO to be launched, and what are steps involved in launching an ICO.
Disclaimer: This article is not to be considered any form of legal advice. This article highlights what sort of projects can use ICO, its benefits and what you should be thinking about when launching an ICO.
What is a BlockChain?
Blockchain is an invention by a person or a group of people, known as Satoshi Nakamoto. It allows digital information to to be distributed and maintained in a decentralized form without being copied.
Some of the key properties of a blockchain are as follows:
Decentralized: Every node gets a copy of everything that happens. Every transaction is stored across multiple servers/users in the form of an ever growing blockchain. Hence, there exists no central party such as a government authority or financial institutions that charges hefty transaction fee. The power does not lie in the hands of a single party.
Immutability: Since decentralized systems are maintained across distributed users, they have a better chance of surviving malicious attacks.
Security and Authenticity: Since blockchains use the underlying principle of hashing, it is almost impossible to find the original data that was hashed. Additionally, since one input can produce only one hash and these hashes are collision resistant, matching the original hash with the hash of a file whose authenticity needs to be deduced can allow us to determine the originality of the file.
Does your project need an ICO?
Some of the most important questions you need to answer when starting to think about ICOs are:
- What is a token?
- Is it absolutely necessary for your company?
- What function would it perform?
- Why would the project need to be run on blockchain?
- Is there a sustainable economic model that will run the business?
You need to confirm whether your application absolutely needs to be built on a blockchain. Building an application on blockchain is much more cost intensive than building one on AWS and you need to check whether there is a strong reason behind doing so e.g. centralized vs decentralized, etc.
Blockchains offer many advantages. Below are some advantages along with possible use cases for them as well.
- Evolve trust without involving a third party: Filecoin is currently working on a project that allowed decentralised storage of files instead of being maintained by a single party. Miners are paid to store and retrieve files. This allows historical versioning of files, removing duplicates and allowing people to save on bandwidth as files are downloaded from multiple systems.
- Maintain independent ledgers: Some use cases for maintaining independent ledgers such as those for gift card, crowdfunding, loyalty points, etc. can leverage this benefit of blockchains. Peer to peer trading between asset managers who are not in direct competition is another use case that is gaining a lot of attention in recent times.
- Projects that mandate security and immutability: Often trades are settled after T+3 days which means that after the trade is performed, it takes 3 days for the trade to be settled. Currently, this timeline can be brought down without using blockchains but not without affecting security. Blockchain will allow us to bring this settlement down to T+0 while keeping the data secure.
- Projects that involve obtaining consensus voting on something: Enabling voting on union membership, leadership, and structure could allow members to register their inputs on contract negotiations. This would improve the negotiation process as it would allow members to vote iteratively and in real time with proposals from management.
- Any task that involves finding identity or confirming authenticity: Identity Frauds are estimated to cost the industry around $18.5 billion in terms of cost. i.e. for every $3 spent, $1 is consumed by ad frauds. Blockchain will reduce such identity frauds. Some of the use cases for identity confirmation using blockchain are
- Wedding certificates
- Birth certificates
Some Industries that could use ICO to transform themselves
Many industries apart from the Banking and Payments, which is the currently predominant user, can benefit from the use of blockchain. Here are a few industries that could benefit from the use of ICO.
Networking and IoT:
IBM and Samsung are using a concept called ADEPT which uses a blockchain like technology . The blockchain serves as a distributed ledger for an astounding number of devices which communicate through the blockchain instead of communicating through the central hub. In absence of a central server, various devices can independently communicate with each other performing automatic software updates, bugs and energy management.
Music and Entertainment Rights and Intellectual Property Rights:
Entrepreneurs in the entertainment industry are turning to blockchain through the use of smart contracts to disseminate the revenue on purchase of creative works to predetermined licensing parties.
Ascribe.io, a product of BigchainDB, works in this direction by providing a trackable, verifiable record of ownership between artists and their IP.
Ride applications like Uber, Ola and Lyfe, currently work based on a centralized system which controls a network of drivers. These applications act as a dispersal hub which establish ride fares and control their fleet through an algorithm. However, the total power lies with a central authority.
Startups like Arcade City, can facilitate all riding transactions through a blockchain system. This will appeal to all drivers who want to run an independent business and not be controlled by a central authority. Arcade City works similar to other ride sharing applications but allows drivers to establish their fares (taking a predetermined percentage of fare in the process).
The immutable and complete records of transactions available in the form of blockchain could act as a foundation for research, analysis, consulting, and forecasting. It could also provide a strong foundation for machine learning algorithms and targeted prediction and insights.
Elections require authentication of voter’s identity, record keeping to collect votes, and tallying to confirm the total number of votes. Additionally, there arise the potential problems of voter fraud and foul play during the counting.
Capturing votes as transactions in a blockchain could provide a trusted decentralized solution by maintaining distributed ledger of votes, verifying authenticity of voter’s identity, and maintaining a verifiable audit trail that ensures that votes are not removed or altered in any way.
Initial Coin Offering
An ICO is quite different from raising funds through VCs. In this form of fund raising, you don’t give out equity but you go public on the launch day. A huge investor community will constantly question you on the product. In case your project is not open sourced, there might be a huge backlash to open source the code since blockchain projects are expected to be open-source.
Once you are committed to an ICO, you will need to focus on the offering, whitepaper, token design, legal precautions against hackers, and finding multiple avenues of communication (slack, social media, press, interviews, etc.)
Some of the most important questions to ask at this stage are
- How much capital do you plan to raise through ICO?
- What do you want to accomplish with the launch? Do you plan to establish a network of potential users who will be interested in using your product, or are you interested in raising capital? Are you planning to incentivise developers to build on the platform?
The whitepaper is the single most important piece of your ICO journey. This document should put the whole application together. It should describe how the system will work and how the token will be used within the system. Your whole team will need to work towards writing this document. Editors can help edit the document but you would need to write it yourself. Technical whitepapers could easily take around 200+ hours from the whole team in a very short period of time.
You will also need a reputable law firm to advise you through the process of incorporating blockchain and running the whole process of ICO. The most important question you will need to answer is whether your token in a security or not. Will you be using a SAFT? Will you be geographically limiting the offering?
Strategy for your ICO
When launching an ICO, you need to have a clear strategy in place that takes you through the pre-ICO and ICO phase. Some of the points to focus upon are:
- When stepping out with your ICO, make sure that you sell at least 50% of your tokens.
- You need to start with discounted SAFTs, then proceed with pre-ICO for accredited investors and then ICO.
- You need to confirm whether you plan to set up a cap and if so what would it be? This depends on the amount you plan to raise.
Since a lot of investors would have invested in ICO, you would need to decide on how you plan to buy, freeze, spend, discount and burn tokens. Will you be creating all tokens at once or would the creation be ongoing? Additionally, how would you maintain the tokens. If a lot of tokens remain in your treasury, it will lead to panic among users as to whether the rest of the token would be released suddenly into the market. If people are paid in tokens without being vested in it, then they could unexpectedly dump the tokens in the market. Additionally, if large institutional investors have invested in your token, then there is a chance that they might offload it quickly. If you allow institutional buyers to invest, then it would be better to device a lockup period for them. These concerns need to be addressed and communicated to end users.
Additionally, you would need to think about the compensation plan for the employees and advisors. How the tokens will be taxed for the team, investors, and advisors needs to be communicated.
Following the above steps won’t make your ICO launch a success but hopefully it will give you an overview of the various aspects involved. Launching an ICO is not that different from obtaining fundraising through investors. However, you need to carefully consider whether you want to stride down that road. If you get into an ICO for the wrong reasons, the consequences might stick around for a long time.