2017: A Year in Review - Initial Coin Offerings

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The Good, the Bad, and The Ugly of ICOs and What’s to Come

Intro

Every year around this time, I visit Mexico City, the city I grew up in before moving to Canada in 2010. I usually take cabs or Uber to get around the city, and talk to the drivers. I find this is a good way to hear about the city from their perspective, and how it has been evolving. The conversation usually turns into a discussion of our respective professions.

What made this trip different from previous years was that every driver I talked to had some understanding, or at least had heard about cryptocurrencies. It was both amazing and disconcerting. The general idea everyone had was that investing in cryptocurrencies or Bitcoin was the way to make money quick. None had a firm understanding about wallets or the underlying technologies that make cryptocurrencies exciting, but they were all vaguely familiar with the idea.

The reason this was pretty unsettling is that making investment decisions without having any understanding of why it’s a good investment, or how long it will take to pay off is a quick way to lose a lot of money. And while accredited investors may have the capital to take those risks and accept the hits, this is not true for the vast majority of the population in Mexico, or anywhere in the world, really.

This year has seen the largest amount of companies fundraising through Initial Coin Offerings. More than 50 companies now ICO every month. We have also seen the largest amounts of funding ever raised through ICOs, over $4B according to Coinschedule, and Coindesk. We have also seen the largest amount of scandals, and hacks related to ICOs, and hundreds of millions of dollars of scams and class action lawsuits.

The purpose of this blog is to demystify the field and shed some lights about the good, the bad, and the ugly, of ICOs. In this article, we will take a look at the past, present and future of the technology. We have a personal goal to educate the public in the benefits and risks associated with investing in ICOs.

2013–2016: The First 4 Years of ICOs

We figured that in order to explain and summarize 2017, we have to explain the history and context for Blockchain applications, and how those naturally evolve into ICOs.

Youtube Video: What the ICO market looked like in 2014–2017, by Justin Wu, Elementus, Blockchain Growth (LinkedIn)

Background — The Pioneers

In 2013, a company by the name of Mastercoin (now called Omnilayer) became one of the first applications built on top of the Bitcoin Blockchain. It was an effort to create the ability to perform more complicated financial transactions on the Blockchain, and was the first ever project to ICO.

Much like a seed stage or crowdfund investment, the founders of Mastercoin believed that their token would appreciate in value over time and so allowed a month long “fundraiser” where people could buy Mastercoin using Bitcoin, thus creating what is now known as an ICO (Initial coin offering). Mastercoin raised what was then worth $500K USD, thus making it a very successful ICO at the time. By 2014, Mastercoin had appreciated in value to make the initial investment worth $5.5M USD, proving the validity of the investment model and paving the way for further ICOs.

2014 — Ethereum

In 2014, a 20 year old University of Waterloo student by the name of Vitalik Buterin developed a new Cryptocurrency and Turing-Complete framework. This new framework enabled others to easily and quickly deploy Cryptocurrencies. The name of this framework was Ethereum.

Full disclosure: One of the staff at Best of ICOs was a classmate of Vitalik’s during 2012 at the University of Waterloo. We wish to inform our readers in case they believe certain views represented in this section do not appear neutral.

Initial Coin Offerings were made possible due to a combination of new technologies in Blockchain. More specifically we look at ICOs that were made possible with the introduction of Ethereum.

That same year the first implementation of the Ethereum platform and its corresponding token sale occured. This was a large step in the future of ICOs because Ethereum allowed a much easier way to create tokens and offer them for crowdsales.

In its simplest form, Ethereum is different than say Bitcoin, because it also has an inbuilt scripting language that is much more powerful than the scripting language that Bitcoin came with, thus making it easier for someone to create a token on the Ethereum Blockchain rather than the Bitcoin Blockchain. A big step towards allowing multiple companies to adopt Blockchain technology.

2015–2016: Scaling ICOs

Image originally from: https://www.coindesk.com/2016-ico-blockchain-replace-traditional-vc/

These events did not go unnoticed, and a lot of companies started taking note of Ethereum, and the amounts of money raised. From 2014–2016 over $300 Million dollars were raised by ICOs including:

• Ethereum: $18M
• ICONOMI: $10.6M
• Golem Project: $10M
• SingulardTV: $7.5M
• Digix DAO: $5.5M

These ICOs did not go unnoticed; A lot of companies took note of the effect of ICOs and started to experiment with creating their own currencies (not cryptocurrencies) to test the effects that an ICO would have in their platforms.

2017: The Good, The Bad, and The Ugly

In 2017 Waterloo company Kik decided that their experiment creating their own Token was successful and they would move forward with a cryptocurrency. The result of that was one of the most exciting ICOs, KIK’s KIN.

The reason we find KIN exciting was that the creators “KIK” had an opportunity to test their own version of a token, called KIK Points. These Points were traded through their platform, and enabled people to create apps and receive payment through them. They also enabled users to purchase the points or win them through apps or by watching ads.

They ran the experiment from 2014–2016 and were able to demonstrate a higher transaction volume than Bitcoin (per unit). Convincing them that creating a Blockchain / Classic token hybrid would give them the best results.

KIK Points v. BTC Number of Transactions, from the KIN White Paper found here.

Since KIK already had over 300 Million users, it made it one of the first ICOs that came from an already established company, with hundreds of millions of users, giving ICOs legitimacy, but also a playfield with real users, and a great environment for testing. KIK was able to raise over $100M USD through their ICO. This opened the doors for many more ICOs, creating the incredibly healthy environment that we see today.

What the ICO market looks like, by Justin Wu, Elementus, Blockchain Growth (LinkedIn)

Largest ICOs of 2017

Some of the largest ICOs of 2017 year were:

1. Filecoin: ~$257 Million USD
2. Tezos: ~$236 Million USD (Lawsuits)
3. EOS: ~$200 Million USD
4. Bancor: ~$153 Million USD (Lost Most Value)
5. Paragon: ~$120 Million USD

The Good

Besides the large amount of people who have generated a lot of money through ICOs. The amount of information, technology, services, and general viability of ICOs, has been a very positive change in crowdfunding this year.

In fact, ICOs have been so instrumental to crowdfunding that about 30% of all funding this year at the Seed stage came from ICOs.

If we take a look at the Investment environment, a lot of promising companies with good initial seed rounds struggled to raise series A and B money purely based off of investor perspectives even if their network effects were quite strong and they had a chance to be profitable. (Investors look for very large ROI and don’t want a company to just become a small profitable business).

This created a sizeable number of companies that had raised some seed money but were struggling to continue growing in their markets due to lack of belief and funding from institutional investors, a scenario that left the initial investors without any ROI and the companies slowly burning capital and collapsing.

However ICOs turn this problem on their head and are a perfect solution to bridging the gap between two funding rounds. If the company can prove that its product is able to generate sales, then their customers will only benefit from investing in an ICO performed by the company, since they benefit not only from the products but also from their investment in the company’s currency

The Bad

Blockchain technology still has a lot of problems and questions. The technology has still a series of flaws that make any large scale real-world implementation incredibly impractical. The most common problems are:

• Expensive Transaction Fees: The more miners on the network, the more you have to pay for their electricity
• Slow Transactions: As the network increases, the constant throughput struggles to keep up with transaction verification
• 51% Attacks: As the Blockchain grows, fewer people can mine, so more and more of the total pool is controlled by the few who own the mining pools
• Irreversibility: If you are scammed, hacked, or mistakenly buy something, the money is gone
• Technical Requirements: Current Wallets are incredibly user unfriendly, they do not pass the grandmother test: can my grandmother use this technology?

Those are just some of the criticisms regarding the technology. Many have also criticized the actual feasibility of Blockchain technology in a market. Medium writer “Kai Stinchcombe” wrote one of the best criticisms of the Blockchain technology we have read on medium:

“Ten years in, nobody has come up with a use for blockchain”

Written by Kai Stinchcombe

The Ugly

While the above problems with Blockchain technology are pretty bad, there are plans and strategies in place to address these technological issues, however there is still another layer of difficulties. The ICO space is riddled with people who are looking to specifically commit malicious attacks against others. Most of these attacks have been seen as Hacks, Scams, and Securities Fraud that have been committed by dozens of ICOs, and which prompted us to to write our first article, “Why Most ICOs are Scams”.

From LinkedIn User Douglas Y. Park via LinkedIn

The amount of scams, and companies claiming to sell non-securities has also increased exponentially. It has gotten so bad, that two months ago, United States’ Securities Exchange Commission launched a new Cyber Unit specifically looking to investigate ICOs and Blockchain Companies.

2018: The Future

Solving the Problems

A lot of the issues we currently see in Blockchain technologies are currently being solved by various efforts:

• Expensive transaction fees and slow transactions: The Raiden Network, Raiblocks and Counterfactual are three major efforts that are currently being implemented to solve both the problem with expensive transaction fees and slow network times by establishing off-chain transactions that can then be settled on-chain without blocking the entire network. There are minor differences between all three implementations but they are all based around state channels and off-chain transactions.
• 51% attacks: Ethereum and consequently many other tokens on the Ethereum Blockchain are looking towards moving to a different trust algorithm, namely proof of stake as opposed to proof of work. This will render any computing power based attacks unusable and thus effectively solve 51% attacks as they are currently defined today.
• Irreversibility: Multisignature (commonly 2-of-3 transactions) are already allowed in the Bitcoin and Ethereum protocols, which enables an arbitrator to settle transaction disputes (thus effectively reversing bad transactions). Currently we do not know any cryptocurrencies that implement these protocols as default options in their transaction/wallet schemes however, since a solution already exists for this problem it is not a major stumbling block to improve the technology to be easily usable.
• Other technical requirements: Many companies that have ICOd are continuously working towards increasing the user-friendliness of cryptocurrencies and related products by contributing development work to better wallets, more scalable and established schemes such as hybrid token models where the cryptocurrencies are semi-controlled by the company that generated them, as well as other efforts by cryptocurrency enthusiasts to bring awareness and education about the benefits and drawbacks of crypto-economic products.

Moving Forward

A series of services, legal requirements, and technologies, are also being currently developed to protect users against hacks, scams, and scummy practices. As we previously mentioned, the SEC has developed a Cyber Unit with the purpose of debunking scammy ICOs. But also governments around the world are starting to describe the requirements that ICOs have to fulfill in every jurisdiction, as well as better descriptions of their status as securities, utilities, or both.

Websites that provide users with information regarding ICOs are also exploding everywhere.

Good examples of these services include:

• ICOIndex: Aims to make Initial Coin Offerings transparent, easy to understand and available for everyone.
• Coinbase: An exchange that enables users to safely store and purchase cryptocurrencies
• Coinlist: A company looking to help ICOs scale, as well as provide with a series of protocols and services for token sales

All of these services are looking to make and purchase ICOs easier, more transparent, safer, and fair.

Conclusion

Every year since 2013 has been the greatest year for ICOs. 2017 has no exception, creating a market that is recognizable, and most importantly, bringing enough notoriety to the industry to make it mainstream.

As more cryptocurrencies are added to the list, the amount of services, indexes, and websites helping users determine which ICOs to purchase will just continue to increase. We have seen an explosion not only in the amount of ICOs, but also in the options that people have to purchase, trade, and read about them.

As we mentioned in “What You Need to Know About Managing Crypto-Investments”. Anyone who is interested in getting involved with the market, has to take the right precautions to safeguard their investments.

We also make a prediction. We predict that 2018 will be the largest year for ICOs ever, and that there will be at least one Unicorn (a Billion dollar company) born from this revolution.

2018 will also bring with it, the largest amounts of platforms, technologies, and services for the field. We think that these surge of products will hopefully create a society that cares more about the companies and products they invest in, and in return gives power to the users and holds companies more accountable.

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