Ondrej Sarnecký


About token evolution and adolescence of investors

During the sixties, the idea of Venture Capital (VC) has started to spread, created as a new form of financial aid for emerging companies with promising potential. Because of the VC, these young companies got what they needed the most — the capital. For the very beginning, VC was designed to achieve equity — a percentual share in the ownership of the company. The investment is creating a relationship between the entrepreneur and the investor, in the best case a partnership between those two parties, both aiming for the same goal and heading of the company.


The arrival of cryptocurrencies has changed the way investments are made and de-facto sidelined the VC. Last year, the amount of money acquired by start-up companies through the means of the ICO far exceeded the amount acquired by the VC.

The end of an era

2017 was the perfect year for the ICO. In its second quarter, we experienced something that could be named “Crypto-Eldorado.” It was a smoothie cocktail of FOMO and coins like “We want to be the next BITCOIN”. Investor after investor got into the project after project, acquiring token after token. Companies had no idea how to correctly implement this new token economy into their projects, not to say how to properly evaluate their token (I strongly recommend reading this).

They tossed these tokens to their advisors and team members without too much thinking. An influx of money without any obligations, just a vague promise that it *might* go up on the market someday. Tokens does not create any obligations towards their investors. The investor has no share in the financial assets nor property and has no right to vote to influence the heading of the company. In fact, the company has no obligations to continue it’s operations if founders decide to close the store.

The coming of a new year had everybody’s smiles frozen. Sudden fall and a long winter, which prices started to melt only in April. Only then numbers started to go green again. It became an obligation for the investors to be wiser and for projects to re-think their heading and future operations.

We in the Bethereum were also influenced by all this. We’ve realized that the beautiful design or nearly perfect whitepaper, which we spent a lot of time working on, is not enough. To be honest, I envy a bit our CEO Giacomo’s ability to “see through”, and after fixing all the imperfections of the document provide another tens of paper with comments what could be made better. Not to speak about commenting the web design and content. In the end, we found out that all this is
very important to the real investors, not the childish investors like “a friend told me to invest in the Ripple” driven by their emotions and not by common sense.

Thank God, the market got rid of these investors. It left behind something what Ran Neu-Ner (whomst ideas I’ve shamelessly stolen) named TOKEN 1.0 and revealed us the path towards a new phase, aptly named TOKEN 2.0.

How did this Token 1.0 look like and the mistakes we’ve hopefully learned from?

  1. We forgot that the word “blockchain” isn’t some spell that instantly adds several millions to your bank account. It is a future-shaping technology for sure, but the utilization of this technology was in many cases poorly understood, non-sensical or did not have to be used at all. I recommend this document, which helps to precisely define the role of the blockchain and token in the project.
  2. In many cases sketchy, basic strategy how to dodge regulations or possible unwanted authorities’ attention was to declare that “we are utility token”. Okay, to be a utility token often means something totally different, or in some cases, projects couldn’t describe their utilitness at all.
  3. Many projects encountered another serious problem concerning the very existence of their token. If the token is not necessary for the network to function properly, or the app/user could just use ether instead, what was it’s purpose in the beginning?
  4. Another very important thing to consider is the Metrics of the token or the mechanism creating its value. Many expect that their token will grow its value just because of the popularity of their project or when the company’s value grows, but they fail to consider that token should be incorporated into the system through mechanisms, which encourage the demand for the token, which leads us back to the point 3.
  5. Also, “Revenue share” was something with which many projects defended the existence of their token. They soon come across the problem with cases of massive delisting from exchanges and regulations from countries like USA, China or South Korea, but today there are many emerging security token projects and it seems so that the trend is going towards the new concept of — STO — Security token offering. We will talk about this in the article later.

Evolving relationship between the investor and the entrepreneur

As I’ve mentioned earlier, VC creates a relationship between the investor and the entrepreneur. A partnership in the best case, where both sides have the same goals and ideas about the heading of the company, which is non-existent in the world of ICO. Crypto-investor, as we know him today, realizes that he should acquire some rights, which are part of the traditional VC investment.

ICO are evolving towards more complex utilization of the token within the project or platform, for example using the token for staking, voting or “Pro rata” right, which creates a whole new discussion about token rights or “Investor governance rights”.

How can we move the utilization of tokens a level higher?

  1. Democratization and voting rights
    ICO has bust opened the door not only for the institutional investors with experience and vide view, but also for small investors wanting their piece of cake. Aside from ICO, thanks to the blockchain technology and smart contracts we could test the DAO as a concept of decentralized autonomous organization. The existence and future of such an organization depends on its community or its members, and one way how to further engage the members the company is the democratization of the company based on the token used here as the means for voting, deciding or management of such a company.
  2. Financing based on roadmap/milestone and Pro Rata rights
    VC model of start-up financing works in several phases (seed, first phase, second phase) to mitigate risk of the investment, as the company will get further funding only after it shows grow and potential. Also the amount of the investment depends on the estimated costs. In case of ICO the financing happend in one phase as a single event, during which the company acquires in many cases a vast amount of money which many times exceeds the costs of development and company growth, which leads to a mysterious disappearances of numbers on the company’s accounts. The idea of financing the project in several phases is best suited for experimental and research projects, which are not expected to be profitable or enter the exchange in near future. The investor, in this case, could get a Pro Rota right. For the investor it means the right to participate in the future financing of the company, in case of ICO to participate in the next round of ICO. In case of platforms and whole projects this right can be extended for preferential participation on ICO of products built upon the platform.
  3. Management structure and the information access rights
    Startups generally have the Board of directors, which can include founders, chief executives, investor or independent parties. These management structures have well defined mechanisms to solve conflicts. Management structure of non-profit organizations or foundations sponsoring protocols (f.e. Ethereum Foundation) is unclear and can lead to conflicts. One possible solution to keep financing transparent is to grant investors the information about their investments during or after ICO. After some time these main investors would probably liquidate their positions and fall under a set minimum amount for this right, which would most likely lead to the state that no token holders would own such an amount to be able to claim this right.
  4. Token vesting and trust between the investor and the company
    For some an obvious part of token economy and strategy, but in some cases not. Token vesting should be a matter of course for every ICO. It increases the trust in the project and also motivates the team and the founders to be active in the project and partially discourages price manipulation tactics like “pump and dump”.

A few words to token as a security

Tokens differ from “equity shares” a.k.a. company shares in two ways: utilitness and liquidity. Many tokens present themselves as utility or platform tokens, which means that they are designed to be used inside a system, which offers some service or commodity. They are also liquidable, which means that after the end of ICO they can be sold. This is not the case of equity VC investor can sell his share only after the company is publicly tradeable and in
many cases, only after a set amount of time.

A token is also a kind of equity share. By buying a token we do not buy a share in the company, but a share on the possible future success of the company. As many tokens have their total number firmly set, every token can be represented as a percentual share on the future success of the company or the whole protocol.

Now we are getting to token as a security. In the age of Token 1.0 the security token is seen as something negative, mostly because of the harsh regulations from the governments. We have to realize that regulations are often times not for harm, but for protecting the investor from the potential scammers. To some degree of course, if those regulations are not nonsense. Because of this, the security token can be mean to achieve consensus between the investors, ICO, and regulators. This shift or evolution can be seen as part of ICO maturing as a crowdfunding mechanism.


Security tokens, as much as we avoided them, are very interesting topic and it’s only a matter of time when ICO will rush in this direction. I’m personally interested in more complex utilization of token in the governance project or protocol and it’s future heading. The age of rapid investment into the first ICO recommended by a friend is over. If I as an investor entrust my funds to some company, I expect an opportunity to get involved and somehow contribute to its development process, not just waiting till the green candle goes up.

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