Hackernoon logoA Comprehensive Guide to the Next Generation of ICOs & Crypto Funding | The Rise, Boom, Bust, &… by@rubenmerre

A Comprehensive Guide to the Next Generation of ICOs & Crypto Funding | The Rise, Boom, Bust, &…

Ruben Merre Hacker Noon profile picture

@rubenmerreRuben Merre

CEO @NGRAVE, Country Lead BELGIUM @BitAngels, Crypto Security Evangelist

The Rise, Boom, Bust, & Rebirth

Introduction

Dear reader,

I started writing up this article with the noble intention to:

  1. Cover my thoughts on the next generation of ICOs, beyond the period of 2013 (when it all started) until 2019 (during which ICOs unfortunately came to be viewed as “scammy by nature” by many). I believe there is a way forward to fix that issue, and one of the things I was thinking about is to coin a new term to clearly distinguish between the ICOs of yore and the high quality new ones that will have to pass several quality filters before actually being presented to a broader audience (think Binance’s LaunchPad).
  2. Include a quick take on the advent of security (STO) and equity (ETO) tokens and why these are such strong alternatives when talking crypto funding.

Covering these two reflections in a nice, brief Medium-post turned out to encompass a larger scope then I initially intended. Why? Well, when it comes to ICOs, I believe that in order to thoroughly understand where we ought to be going, it is imperative to understand where we actually come from and why such a shift in mindset is needed in the first place.

That being said/written, I have decided to divide the article in two parts. Part I will cover the core of what an ICO is and what its pros and cons are dependent on who’s asking. It will shed some light on the very first ICOs, even before the great Ethereum token sale. As it turns out, some of these are even omitted on most sites. To ensure that the future blockchain generation gets their facts straight when they take their Bitcoin exam, I decided to put them back nicely to where they belong: crypto history. Part I’s concluding section provides a visualised deep dive in all the exciting token sales that took place between 2013 — 2019. And yes, how some of them went rogue.

Finally, if and when (hopefully someday) the bell rings to notify me of the 300th clap on this first piece, I will unveil part II: the next generation in crypto funding and a couple of my thoughts on that. Update: Part II can be found here:

In the meanwhile, best wishes for the new year and I warmheartedly welcome any claps and follows and shoulder pats and additional information that makes the world of blockchain and crypto a better place!

Ruben

Executive summary

  • 2017 was the amazing year of the #ICO aka “Initial Coin Offering”: basically anyone with a big love for a quick buck could present a digital so-called #whitepaper rambling about — in many cases — a completely fictitious business, and crypto investors — rather: speculators — would still be throwing amounts of money to them beyond imagination. Billions of dollars got raised to fund ICO projects of which unfortunately an overwhelming majority turned out to be raise-money-&-run exit scams. Lots of fun though. (And yes, there were also amazing quality projects, no worries!)
  • 2018 was the year of the bear. Many ICOs “failed”, but that totally depends on how you define “success”. If collecting US$5M & running off falls under success, it was actually quite a good year. But overall, 2018 made ICOs notorious for their scammy character. Dumping time. Gbye ICO!? Well, 2018 was actually not a bad year for ICOs, with the top 2 projects raising just under US$6B all by themselves.
  • 2019 — ah, a fresh year! Finally some sense in the crypto markets: companies such as Neufund, DESICO.IO, Polymath, SWARM, & a couple more are making history in #tokenising securities as we know them. Platforms really try to align with more traditional regulation, for instance typical #IPO docs such as a prospectus are required. We really talk actual stocks on the blockchain, including ownership, voting rights, dividends. But also art. Real estate. And a lot more.
  • Lurking around the corner? #Utility tokens coming back stronger than ever. This time with a quality filter? In Part II of this series, we’ll go all in on the next generation of crypto funding!

SECTION A | ICO 101 | QUICK INTRODUCTION TO ICOs |

1. What is an ICO?

An Inital Coin Offering — in some cases also referred to as Initial Currency Offering — is a type of funding mechanism typically used by and for cryptocurrency projects.

The best way to look at it is actually by seeing it as some sort of a combination of:

  • The fundraising aspect of a crowdfunding or crowd sale (be it fiat money or crypto, but generally mostly the latter), including the fact that some sort of soft/hard cap has to be reached in order to be valid (i.e. a minimum amount should be raised)
  • The product maturity of an early stage VC investment or even business angel round (i.e. a very immature product, and in a lot of cases actually just the mere “idea” of that product)
  • The fact that in return for the funds, some sort of a “token” is received, the latter becoming “tradable” just as in the case of an IPO or Initial Public Offering (i.e. when a private company goes public and everyone can start buying — “trading” — shares)
  • The token sale runs on blockchain infrastructure and the tokens become available on a blockchain platform (such as e.g. the Ethereum blockchain for ERC20 tokens)

Just to make sure everyone is still following, I’m happy to include the description offered by our friends at Wikipedia:

“In an ICO, a quantity of cryptocurrency is sold in the form of “tokens” (“coins”) to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. The tokens sold are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches. In some cases like Ethereum the tokens are required to use the system for its purposes.” (source: Wikipedia)

2. Pros and cons of doing an ICO as a company

To get a good understanding of ICOs, it’s recommended to be aware of some of the advantages and disadvantages.

5 Advantages of doing an ICO as a company

  1. The world is your investor. The range and geographic distribution of potential investors is enormous. Literally, a huge part of the entire globe is able to invest in the company (give or take some geographic restrictions). Wire transfers from all over the world can get you millions of dollars (in crypto) in minutes, without being frozen up by the banks;
  2. Following from 1, the potential publicity for the company is humongous and again, worldwide;
  3. You can raise funds fast and have it available quickly, making it easier to build traction for the company at an early stage;
  4. No extensive disclosure requirements for the fundraiser (so far);
  5. You can raise a lot of funds at an incredibly (likely even too, but what the heck) early stage of your company.

5 Disadvantages of doing an ICO as a company

  1. You have a considerable risk that the regulator at some point will start chasing you! (just look at the SEC’s recent actions);
  2. The funds you raise are (at least for now) inherently extremely volatile;
  3. Communication effort and potential impact is huge. You have a worldwide investor community and you have to be able to manage the communication (especially bad communication) as well as you can;
  4. Most ICO investors are used to the highly speculative nature of cryptocurrencies and tend to be less patient than a traditional equity investor;
  5. Pressure of the community on you making progress can be strong. After all, you just raised the equivalent of a couple of million dollars from their pockets.

3. Pros and cons of participating in an ICO as an investor

10 Advantages of participating in an ICO as an investor

  1. Early contributors can have access to and will have more liquidity in early stage companies. Being early also increases the potential for rapid capital growth;
  2. Depending on the ICO, there can be a big network behind it (e.g. if the token launch takes place on the Ethereum network), generating additional buzz and potential capital appreciation;
  3. Custody without intermediaries. The one with the private key owns the tokens;
  4. Limited regulatory scrutiny (so far);
  5. ICO coins have the same anonymity as cryptocurrencies such as BTC and ETH;
  6. Transparency of use of funds, an escrow can be used to verify how the funds are being spent after the ICO;
  7. An innovative way to deploy capital that offers a hedge against political and economic shocks;
  8. Contributors are usually the first users of the (utility) token — thus unlike holding a stock of a company whose products a contributor never used, ironically tokens can be more tangible than securities;
  9. A high risk, high reward asset which is (to some extent) disconnected from the stock market and the economy;
  10. Possibility to own an alternative asset not based on FIAT (state regulated) currency.

10 Disadvantages of participating in an ICO as an investor

  1. ICOs are not regulated and have no investor verification or protection;
  2. IPOs are typically supported by institutional investors, whereas ICOs are mostly supported by investors from within the community;
  3. As there are limited requirements to fulfil when initiating an ICO, it is very hard for an investor to elicit the correct and relevant information to make a sound investment decision (e.g. in 2017, many considered watching a couple of YouTube videos as doing sound due diligence);
  4. Products and projects are typically very immature, strongly increasing the inherent risk of making an investment whatsoever. In some cases one is merely investing in an idea without tangible planning for implementation;
  5. Aggravating the previous point, the company holding the ICO will receive the bulk of the investments at the very start and as there is little to no liability, there is essentially no pressure to actually deliver a product. Many projects either exit scam right after the ICO or slowly wither in development activity as the team enjoys their newfound riches;
  6. The exchanges where the tokens are eventually listed have relatively limited guidelines and policies to prevent fraudulent activities;
  7. Even if the token sale is fully legitimate and there is a strong project behind it, crypto exchanges and crypto wallets are hacked and stolen from on a daily basis. So the moment you log in to smile at your incredible investment returns, it might be all gone;
  8. If your money gets lost in some way, there is practically no way of retrieving it. Be it you losing your private keys yourself or hackers stealing your tokens, there isn’t much you can do once you lose token ownership;
  9. Lack in transparency. There is absolutely no enforceable obligation for a project to actually disclose the progress made, potentially leaving investors behind in a haze;
  10. Your investment might be prone to artificial pump-and-dump schemes, where the value of your coins can become even more volatile than in the case of an established high-market-cap crypto such as BTC.

Source: Own research + honorable mention: 1) “Inclusive FinTech: Blockchain, Cryptocurrency and ICO” — Book by Lee David Kuo Chuen, Low Linda, 2018; 2) Introduction to ICOs — Reftoken.io

SECTION B | ICO ORIGINS — THE BIRTH AND RISE OF THE INITIAL COIN OFFERING |

1. Origins of the ICO — Where it all started. And no, it was not Ethereum!

2013. BAM! After quite silently working on his idea for two years, this guy J.R. Willett pops up on the bitcointalk forum explaining a supplementary protocol to Bitcoin with built-in support for a.o. custom tokens, a distributed currency exchange (think DEX), distributed betting (no need to trust a website to coordinate bets), smart property tokens, and more! In brief, a protocol — called “MasterCoin” — that would leverage the existing Bitcoin blockchain by adding additional features and possibilities to it.

Obviously, Willet needed to fund his idea so he kindly asked for some BTC donations here and there (sounds familiar, right?!). In order to motivate potential investors in actually contributing, he also added that several features inside the protocol would only be available to those actually owning MasterCoins. Et voilà, wise mister Willet introduced us not only to what was coined afterwards as the first ICO, but to the first utility token as well. Now that’s getting two sons in law with one daughter! (my fancy way of saying “killing two birds with one stone”).

See Willett making his mark in crypto history in the video below; it should start automatically at 4min30sec:

Willett: “If you wanted to, today, start a new protocol layer on top of Bitcoin, a lot of people don’t realize, you could do it without going to a bunch of venture capitalists and instead of saying, hey, I’ve got this idea, you can — you’re familiar with Kickstarter I assume? Most of you? You can actually say, okay, here’s my pitch, here’s my group of developers — there’s a lot of developers in this room. If you get a bunch of trustworthy guys together that people have heard of and say, okay, we’re going to do this. We’re going to make a new protocol layer. It’s going to have new features X, Y and Z on top of bitcoin, and here’s who we are and here’s our plan, and here’s our bitcoin address, and anybody who sends coins to this address owns a piece of our new protocol. Anybody could do that. And I’ve been telling people this for at least a year now because I want to invest in it. I don’t have a ton of coins, but that’s where I want to invest my coins. And I’ve yet to find somebody who wants my coins. Does anybody in this room want my bitcoins because I want to — ”

Total raised: US$600K

Fun facts (& thank you Eric Wall for writing a whole Twitter feed about this)

  • The MasterCoin protocol turned out to be incredibly successful. Rebranded to and known today as “Omni Layer” (#OMNI), it now serves as the underlying protocol for the Tether token (#USDT), which is the most traded crypto token after BTC itself.
  • The total funds raised in July 2013 peaked at approximately 4740 BTC, that’s a lot of Bitcoins. At the time worth around US$500K, today somewhere around buttloads of money.
  • The MasterCoin (#MSC) tokens themselves failed to find actual usage within the protocol. Apparently, “requiring users to hold tokens in order to access basic features is bad UX, horribly inefficient & unnecessarily complex”.
  • The #MSC coins still exist today with no purpose, no plan. Nevertheless, in the 2017 mania, they joined in on the great irrational pump to the moon, from US$4 to US$123. Now they are resting at US$7 a piece. Who knows what the future will bring…

Very noteworthy:

Unlike how most ICOs market themselves, Willett was actually super transparent (what a delightful contrast!) in listing and communicating the risks of investing in his ICO. Read for yourself in the excerpt below:

2. The remarkable second — NextCoin

NextCoin (#NXT) is a peculiar second when we talk ICOs. On 28 September 2013, the further anonymous Bitcointalk.org member BCNext created a forum thread announcing the proposed launch of “Nxt” as a second generation cryptocurrency. He asked only for very small bitcoin donations in order to determine how to distribute the initial stake. A couple months later, on 18 November 2013, the fundraising for Nxt was closed. The initial coin offering “successfully” — as it wasn’t the objective to raise tons of money — collected 21 bitcoins that were worth roughly USD3,000 — US$17,000 at the time (depending on the exact timing you take as BTC experienced a little surge in the period).

Today (early January 2019 as of the initial writing), NextCoin hoovers somewhere just outside of the top 100 on coinmarketcap at a valuation just under US$30M.

Total raised: US$16.8K

Fun facts

  • NextCoin was/is the first cryptocurrency that purely relies on the Proof-of-Stake (POS) consensus mechanism.

3. A tiny 3rd — The CounterParty token sale

Ranked 339 today on Coinmarketcap at US$6M, CounterParty (#XCP) is often even omitted from the list of pioneering historical ICOs. However, CounterParty is actually the 3rd ICO ever, so I would argue that still deserves a special place in this introductory list.

Simply put, XCP is used to provide functionality where it isn’t technically possible to use BTC. For instance, XCP is the currency used to pay for the execution of all smart contract code (whereas Bitcoin by itself originally has no such smart contracting possibility). More generally, XCP represents stake in the Counterparty protocol, and is the voting currency for changes to be decided on by the community.

If you want to know more about it, the site explains it better than I do:

Noteworty: YouTube video on CounterParty and the Asset Revolution with Chris DeRose at Coins in the Kingdom 2014:

Total raised: US$1.8M

Fun facts

  • At the top of the previous bull market (January 2018), XCP peaked at around $US240M.

4. A strangely named 4th: MaidSafeCoin

MaidSafe might seem like a strange name at first. But it actually just stands for Massive Array of Internet Disks, Secure Access for Everyone. So don’t go complaining about the abbreviation! The weird name didn’t hold it back from raising a considerable amount of funds back in the days though. #MAID raised a US$7M equivalent in funds in its token sale.

Standing on the shoulders of giants, the SAFE (“Secure Access For Everyone”) network hoped to (and is still working today towards) combining the features of history’s famous decentralised networks the likes of Napster, Freenet, BitTorrent, and Bitcoin, and it aims to provide the following features:

  • Fully encrypted data storage and file sharing
  • Ability to use the network anonymously
  • Censorship resistant communication
  • Serverless data
  • Scalable cryptocurrency free from transaction fees

The SAFE network ultimately wants to “create a secure, autonomous, data-centric, peer-to-peer network as an alternative to the current server-centric model. For more info I kindly refer to the Coincentral article.

Today, it proudly holds a top 100 position on coinmarketcap, worth around $US64M at the time of writing. As you can see, its price is not only expressed in BTC, but also in OMNI (i.e. in Willett’s MasterCoin successor #OMNI for the less attentive!)

Total raised: US$6M

5. The practically forgotten 5th? — Swarm

In July 2014, this project Swarm raised US$800K in its token sale. However, it is hard to find any information on it. Some more recent endeavours have likely overshadowed the project. For instance Swarm.fund (#SWM), which is a Security Token Offering platform (STO — we’ll talk STOs in a jiffy, well… in part II) that completed its token sale end 2017. Then there is Swarm City (#SWT), where Ngrave’s CTO Xavier Hendrickx currently holds the CTO position as well. Swarm City completed its ICO end 2016.

Total raised: US$800K

6. Enter the real deal: Ethereum

2014. Barely old enough to drink by American standards, the Russian “lad” Vitalik Buterin tries raising funds for a new and noteworthy ICO for what he envisions the world’s first zero-infrastructure platform, named “Ethereum”. The token sale raised 3700BTC in the first 12 hours, now who wouldn’t want that?! And as you can see, it can buy you some nice T-shirts!

Total raised: US$18.3M

Fun facts

  • Ethereum’s ICO token price on 31 August 2014 was 0.31USD. In the following years, the market value of 1 single ETH exploded to over 1,400USD in the craze of 2017. That’s a percentage increase I have difficulty with to fathom at times.
  • The raise occurred in the middle of a considerable Bitcoin bear market.
  • Ethereum has risen to the typical top 3 in crypto in terms of market cap, together with Bitcoin and Ripple. It generally holds a steady 2nd place.
  • Meanwhile, since Ethereum’s inception, over 1,000 so-called “ERC20” cryptocurrencies have been issued on the platform since its initial ICO. ERC20 itself is a protocol standard that defines certain rules and standards for issuing tokens on Ethereum’s network and infrastructure. ERC stands for Ethereum Request For Comments and 20 stands for a unique ID number to distinguish this standard from others.
  • In 2016 a decentralized autonomous organization called The DAO, a set of smart contracts developed on the platform, raised a record US$150 million in a crowd/token sale to fund the project. The DAO was exploited in June when US$50 million in Ether were taken by an unknown hacker (now that’s a heist!). Subsequently, Ethereum was split into two separate blockchains (a so-called “forking event”) — the new separate version became Ethereum (ETH) with the theft reversed, and the original continued as Ethereum Classic (ETC).
  • Solidity, initially proposed by Gavin Woods in August 2014, is the primary programming language (contract-oriented) used on the Ethereum platform. Most people who are slightly into crypto have definitely heard about it. However, if you ever find yourself trapped in a crypto-quiz, do remember that Serpent, LLL, Viper, and Mutan are other relatively popular languages when interacting with the programming interface called “Ethereum Virtual Machine” (EVM).
  • Vitalik picked the name after browsing Wikipedia articles about elements and science fiction. When he found the name, he “immediately realised that I liked it better than all of the other alternatives that I had seen; I suppose it was the fact that sounded nice and it had the word ‘ether’, referring to the hypothetical invisible medium that permeates the universe and allows light to travel.”

SECTION C | THE DAYS OF THE ICO CRAZE & TODAY’S AFTERMATH |

1. The Boom. ICOs anno 2017.

It took some time before the real momentum kicked in. But by 2017, Initial Coin Offerings were on fire. Suddenly it went so hard that the whole crypto market turned completely parabolic. At some point, basically anyone with a big love for a quick buck could present a digital so-called #whitepaper rambling about — in many cases — a completely fictitious business, and crypto investors — rather: speculators — would still be throwing amounts of money to them beyond imagination.

Just take a look at the bubble chart below. It works interactively and you can see how the bubbles are bursting into the screen as of say early 2017:

2. The money raised. Top projects in 2017 & 2018.

So how much money have ICOs actually raised so far? According to Bloomberg, it depends on who you ask. They put it like this:

“Blockchain may be billed as an immutable public ledger, but in the controversial world of crypto it spawned, establishing truth can be tricky when disclosure standards are still being improvised daily. In the case of ICOs, it remains hard to ascertain the amount of funds an issuer claims it’s raised when no one has to submit any regulated filings or even reveal their identities.” (Justina Lee, Bloomberg)

An example of how far the actual reportedly raised funds can diverge is the crypto exchange project Ruby-X. CoinSchedule says it raised US$1.2 billion; ICORating, US$200 million; Autonomous Research says it’s chosen to exclude it, since its online footprint was unreliable. Ruby-X, which hasn’t disclosed where it’s based, didn’t reply to e-mails seeking comment.

Obviously, given the volatile nature of cryptocurrencies, it also really depends on the date you fix to be that official ICO closing date. Or was it ICO launch date? Or pre-launch? Or? Moreover, as the “exchange rate” between the specific cryptocurrency can be pegged simultaneously to the typical Bitcoins or Ethers to invest in the project, something similar is required in case fiat money can be invested as well. And then indeed the question arises on when that exchange rate actually gets fixed. And preferably also to fiat, as that is what they are trying to report here above. It would be great to get some sort of a standardised way of actually measuring it. But then again, the ICO-ers probably care a little less about such an “accounting” “detail”.

Anyhow, for those still looking for an interesting resource to look up actual ICO related aggregated data, CoinSchedule might be an interesting site. Here below you can find a couple of screenshots of the overall amount raised as well as the top ten ICOs in size (and other information) in a given time period. In 2017, the bulkiest of the pack included US$100M — US$250M Hdac, Filecoin, Tezos, Sirin Labs, Bancor, Polkadot, Qash, and Status. All names that should sound familiar to the average crypto avid these days.

In 2018, the top projects each raised a multiple of the 2017 US$250M mark. #EOS alone raised over US$4B and Telegram raised just under US$2M. That brings us back to the whole “what-is-the-real-amount-raised-now-actually?” issue. For instance, Bloomberg reports for the Petro ICO of US$735M below:

“In March, President Nicolas Maduro said the Petro project had garnered US$5 billion in offers; in April, he said the sale raised US$3.3 billion; the token’s website says US$735 million, the figure cited by CoinSchedule and ICORating.” (Justina Lee, Bloomberg)

Bloomberg also reports an additional layer of complexity:

“To complicate things further, the nature of ICOs is also evolving. A growing portion of tokens are offered privately to selected investors, rather than crowdfunded via the internet as the innovation was initially known for.” (Justina Lee, Bloomberg)

3. ICOs gone rogue. Scams. Shitcoins. JesusCoin.

So far we haven’t gone into much detail about the actual shady character of ICOs. But an article about ICOs without mentioning the word scam or shitcoin for that matter, would be unheard of! So let’s dive right in. An interesting website to get you started on this wonderful world is https://deadcoins.com/.

Deadcoins.com provides a nice overview of no less than 680 “deceased” coins, 12 “hacks” i.e. ICOs that work with malware clients (fun huh?!), 182 scams, and 60 parody coins (such as JesusCoin, Bitcorn, ButtCoin, SexCoin, Asstoken, CryptoMeth, ObamaCoin, TrollCoin, ScamCoin, etc.)

An incredibly thorough research document of Bloomberg, published in July 2018, reports that around 78% of ICOs were identified scams prior to trading. Needless to say that I am not inventing the associated scammy character out of the blue!

The report further highlights that 70% of ICO funding (by US$ volume) to that date went to higher quality projects, although over 80% of projects (by # share) were identified as scams (uuff! At least most of the funding went to quality!). For the die-hards, you can find the exact meaning of the terminology used in the graphic below on page 23 of the report.

NEXT UP → WHAT TO EXPECT FROM PART II: THE FUTURE OF CRYPTO FUNDING

Great to see you made it this far! Part II will be covering exciting stuff on the next generation of crypto funding. Not only STOs and ETOs, but also an attempt to coining a new term to distinguish between the ICOs of yore and the next generation. Upon receiving 300 claps on this article, I’ll likely regain my motivation to write and I’ll happily jot down another post. So…where’s that clap?

Outro:

Don’t forget clapping!

And feel free to ecstatically follow me on Medium, Twitter, Linkedin.

Same goes for my company Ngrave’s website, Twitter, Linkedin, Facebook.

Thanks again for reading & clapping.

Ruben

About Ruben and Ngrave

Ruben Merre is CEO at Ngrave, a blockchain tech company on a mission to make the world of blockchain technology and cryptocurrencies a safer place, with the greater goal of sustaining and co-nurturing the technology’s widespread adoption. To this end, Ngrave is developing an ultra secure blockchain hardware wallet solution for safe-keeping one’s cryptocurrency investments, in collaboration with tech giant IMEC and a world-renowned team of cryptography and hardware security experts.

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