The author, Dr. Nicholas Adams Judge, is a cofounder of RootProject . The other cofounder is Chris Place, a Y Combinator alum. Their nonprofit’s pre-ICO just passed 200% of its funding goal and is open until July 28th, 2017. An easy way to understand their model is here . There is a about the very basics of valuation in most coverage of ICOs. An eye-popping market cap number from a brand new ICO is brought up. It’s compared to some VC funded start up. The conclusion is we’re in a huge bubble and this is madness. Somewhere a blogger pats himself on his back for being so clever. misperception crypto *Ew.* Markets try to price assets on a risk-adjusted basis. They just do. They’re wrong of the time. But investors are to value their holdings on a risk-adjusted basis. plenty attempting Think of a typical seed round. A VC firm puts in, say, $1 million for 10% of a company, effectively valuing it at $10 million. That VC firm needs the company to succeed or be bought. Most any other outcome involves the VC firm losing $1 million (that’s the key part). The same VC firm puts in $1 million into the token of a new firm, whose token is already on exchanges. The market is sufficiently liquid such that there is a .95 probability a stop-loss order (and order to sell at a given price) will be filled. They place a stop-loss order 10% below current price levels, as they expect the asset to appreciate. The VC’s firm’s risk is, 10% * $1 million = $100,000 + .05 * $1 million = $50,000 (that 5% chance the currency becomes illiquid before a stop loss order kicks in. This is greatly overstating the risk from illiquidity, but let’s do that just to be safe.) That equals $150,000 that is truly at risk. In our case, the VC firm should accept risk about the rate of that based on a start-up’s illiquid equity. 7 times This is a simplification. There’s plenty of other basics to consider: volatility, information costs, and so on. However, the basic point that escapes people that somehow prefer traditional VC standards — MVP + traction — over ICO standards— credible founders + credible plan — remains: Asset liquidity isn’t a detail. It’s a fundamental part of the of value. definition Personally, I welcome the crypto-begun eventual demise of the traditional VC model. I want to see the bridge between ideas and reality get shorter. Democratization of finance — just like the democratization of governance — means the process will get messier, but better. Read about rootproject here . Want to help use a cryptocurrency to end extreme proverty? Join the 750 people that have signed up to our Slack channel in ten days here .
