ICOs are harder than traditional finance

Source: D News

The $2.7 billion that has poured into new token sales this year has led to considerable skepticism. This is largely deserved as most are either malformed or greedy.

While a fancy whitepaper and a hatful of prominent advisors or celebrities can raise millions, tokens actually makes a successful project harder to achieve.

If success is parting a fool and his money to buy Teslas and OLED TVs these are great.

Sergey is a success, you can be too

There is typically minimal oversight or governance and as long as you pay your taxes you are likely to be fine.

That is, until someone brings a civil suit against you demanding rescission and other sanctions, not just from financial regulators, but police enforcing consumer protection and fraud laws.

If success is measured in growing a sustainable platform or protocol then tokens make things difficult.

Much more difficult.

For starters, if a token resembles a security in any way in any major jurisdiction then it opens founders up to potential future litigation. This makes any refinancing or exit via a sale of your company or platform very difficult.

Tokens that purport to be “utility” tokens, similar to software licenses to give access to the platform, also cause issues around accounting under international standards for companies issuing them as they can count as a liability against future revenue before usage. This liability increases with the token price and can create odd accounting issues. Please check with your crypto-accountant.

Utility tokens also often misalign incentives, entangling the price of the token with its usage. This means that the platform gets more expensive to use over time, the inverse of the usual economies of scale, increasing friction.

Many tokens launch at huge implied valuations, in some cases close to $1 billion, needing to deliver a $10 billion project to sate purchasers, otherwise leading to hordes of technologically-adept individuals angry at the platform.

The problem with mega-raises

As most of the value of a token at the outset is usually speculative, it should be assumed that any new token will at some point at least halve in value and if you’re halving from a high base..

As many tokens are based on open source protocols, they are also susceptible to being copied if the price gets too high unless there are real moats built around scarce resources.

Where tokens are currencies, governments tend to watch any successful entrant very carefully.

We have already seen crackdowns on Bitcoin, which is highly valued in large part due to the difficulty of censoring it. If currencies like Monero or Zcash, which more difficult to censor or track, then the focus may shift to developers and those that exchange them for fiat.

It can be appealing to be against government control, but it is worth remembering that one definition of a government/state is the entity that has a monopoly on the “legitimate” use of violence.

Why have a token at all?

Source: CNBC

Finally, almost all tokens fail the test of “why not just use Bitcoin or Ethereum”.

This will gobble up more tokens as they platforms receive upgrades allowing for faster, cheaper transactions and complex transactions to be undertaken outside their blockchain.

Tools such as “atomic swaps” also means it will be possible to quickly jump from one chain to another, focusing value on the most used blockchains for each functionality.

So why bother?

While this all sounds rather glum versus the hullabaloo around the potential of this nascent sector and excitement around it, there is real value in some of the innovation being undertaken and infrastructure being built.

The co-founder of Ethereum, the cryptocurrency on which much of the token craze has been built, noted that there is a growing, nascent field of “crypto-economics”, which combines cryptographic algorithms and the kind of economic incentives that keep the likes of Bitcoin going.

All together now

This offers huge potential for innovation in creating and aligning incentives to bring people together to create great projects, particularly when issued by well-regulated charities.

This is the approach we took in creating a token to align disparate groups in our platform, Ananas, to combat growing ideological hate.

If constructed to become more attractive as the price rises, with a low starting price, tokens can create true believers for any project, as can be seen by the fervent supporters of Bitcoin and Ethereum.

There is also great potential in opening crowd funding and trading of actual securities, smoothing the process, first for accredited investors and then the broader population.

To the future

Just as the dot-com boom left us with truly innovative and valuable companies, the token boom will create exceptional value.

This value will be concentrated in impactful projects where real care has been taken as opposed to quick cash ins where the bill will eventually come due.

Cheers

Emad is Co-CIO of Capricorn Fund Managers and Co-founder of Ananas, a UK-based charity using cryptocurrency to create a decentralized global knowledge base for peace.