The new blueprint for utility token ICOs in a sophisticated investor market

Perhaps by now a lot of the dumb money has been put into the ICO market and subsequently vanished? We are now seeing smarter money move in, thanks to institutional and sophisticated investors, which will force a change in ICO structures, marketing and expectations. I, for one, am overjoyed by these developments, because the pumpers and dumpers of this world represent terrible business practice. The ICO as a mechanism for creating new competitive companies delivering value is an exceptional one. However, true to form, human nature has led to the exploitation of something that is useful, because it is a lot easier to exploit than create real value. With new smarter money coming in, ICOs in the future will need to dance to a very different tune by proving they are the beginning of a new competitive business — and not purpose built for a once in a lifetime sale.

I propose a new utility token ICO model, which can serve as a blueprint for adaptation to different business models/plans, to create more substance based on commercial realities, rather than pure hype. The model uses macroeconomics to create stability for a token, so it grows based on controlled supply & demand, has genuine token usability for a community and prevents inflation within the community. A key factor is that the token gains protection against wild speculation, with the token supply acting as an effective market maker.

I’m making the assumption that anyone who uses this blueprint understands blockchain is a community based technology, they also realise that creating a currency has many similarities to creating a central bank and their business idea must fit with blockchain technologies and the need to create an economy with purpose for a community.

A significant mistake made by ICOs is they have failed to understand they are both a central bank and a business model in the making. So they must adhere to macroeconomic principles, chief of which is allocating tokens in a manner so the economy can thrive. The business model must have other sources of revenue aside from the token, ideally FIAT currencies, for the same reasons a country must have export money coming into the economy and, as a developing economy, leverage the advantages of a stronger, more stable currency. Otherwise, you will have a closed economic system and start to look like North Korea.

It is a common practice that token allocations are focused only on the ICO event and shortsighted ploys, such as massive discounts to artificially create FOMO, while squandering the bulk of the token supply on the ICO, with upwards of 50% — 70% earmarked for early sale. Sophisticated investors look at the practice of discounts with disbelief, because it sends a clear signal that the team behind the ICO have no clear idea about how much money they actually need. You are also attracting the pump and dump market, essentially setting yourself up for failure, especially if you have sold most of your tokens for the ICO.

The practice of selling as many coins as possible for the ICO smacks of opportunism rather than having a clear plan for building a competitive business. It’s also bad economics for a new currency, because you are begging to be a victim of ruthless speculation.

The new blueprint calls for a modest amount of tokens to be allocated for the ICO and that allocation must be tied to a budget, which will give the project the oxygen it needs for at least a two year period, without sales revenues; always plan for the worst, work and innovate for the best. Doing this sends a clear message: that you have a business plan and you know what budget is required to deliver on your project.

To support those tokens sold, there needs to be a large reserve of tokens to control the supply, and the pricing for those reserve tokens must be higher than the pricing on exchanges. That way demand is created in two ways: firstly, the cheapest tokens are on the exchange, so that is where people will buy them and, as you have the bulk of supply, you can induce scarcity; secondly, you have to of course have a compelling offer for what the tokens are to be used for, to make them attractive in the first place. If anyone chooses to buy the tokens directly from you, that’s a handsome profit.

Within the community, there needs to be an economy for use of the token and also to bring in other forms of revenues. If you set this up correctly, you create an interesting dynamic between the exchange and your own economy. People buy and sell on an exchange, they bring the purchased token into your economy to use, ideally to buy something. You then gain those tokens to either hold and control supply, or to sell onto an exchange to generate more revenues or as part of a monetary strategy.

In this way you can support your token (if someone wants to get cute and bring your token price down) by having a strategic reserve to buy tokens on an exchange, reduce supply and do what you can to increase demand — assuming you have a compelling market offer and terrific token use for your community.

Finally, stay native to the platform. If you are using Ethereum to create the tokens, then quote the conversion with ETH to your token. Doing this means you have to understand what is the low point of pricing of your native currency (ETH), which will fund the business plan. You need to have strategies in place for the minimum and a plan for what happens should the pricing go below that.

Underpinning the blueprint, of course, are good old fashioned business models and planning, along with having a winning team and meeting market demand. I see a new age coming very quickly, with more robust models and new competitive advantages being granted to companies who seize the moment for using ICO style fundraising, but this time, with an eye for a future, not a bag grab using the gullible and inexperienced.

The blueprint will mean that genuine business ideas and innovations based on blockchain can flourish faster and that faith can be restored in the crypto community. All you need is the right business idea that is globally competitive and the right team to execute it.