Towards ICO 3.0

It has been a year since my first blog post on ICO 2.0 which eventually led to the creation of Cofound.it. In the last 12 months, there have been quite some changes in the blockchain ecosystem.

This is the first blog post in the series of the posts a year on with the goal to propose the new “ICO” structure for 2018. But first, let’s have a quick trip down memory lane and see what we have been through with ICOs already.

ICO beta — the Romanticism phase

The romantic phase marked the establishment of alt-coins that were not just copycats of Bitcoins. Tokens from this period were usually representing platforms such as Ethereum and Lisk. They also represented some of the services offering the distributed alternative to centralised systems on the Internet such as Maidsafe and Sia. During this era, we also saw the rise of the platforms and the first decentralized apps.

The most significant project to come from this phase was the DAO. During its short lifespan, The DAO gained $160 million (USD) of investment, indicating investor money was available for worthy blockchain projects.

The end of this period was marked by the rise and fall of the DAO.

After the fall of the DAO, we had a period of Bitcoin domination lasting until the end of 2016.

ICO 1.0 — the Wild West

This period was described as the Wild West mostly by American critics (for example Nick Tomaino and Travis Scher). Today, looking back, it is evident this era was dominated by projects that had origins outside the US such as 1stblood (Singapore), ICONOMI (Slovenia), Decent (Slovakia), Golem (Poland), SingularDTV (Switzerland). All were ICO pioneers and acted as a proof of the democratisation potential of distributed economy.

These projects proved the potential of crowdsourcing while any criticism received was more likely a knee-jerk reaction of surprise from the VC ecosystem.

Focusing on the project white papers from this era, we find businesses with strong visions and teams with strong crypto credentials.

During this period investors were different from those in later periods. The majority of them were members of the crypto community. Initial crowdsale mechanics were built around them using, for example, bounty mechanisms which have almost completely disappeared in the later ICO eras.

It is hard to single out one project to represent this period. Instead, I believe this period ended with the start of the altcoin cycle, dominated by the rise of Ethereum. There were two great events: Ethereum’s Edcon in Paris, where it became evident that ICO (ERC20) was the first killer app for Ethereum, and the establishment of Ethereum Enterprise, bringing wider acceptance among the business community.

ICO 2.0 — the Golden Age

The first projects that started to appear in this era had their roots in Q4 2016. Although they were mostly platforms, the first “missing dapps” relevant for higher levels of the ecosystem started to emerge. Another key element was the addition of a business model section in the project whitepapers instead of just a tech focus as in the ICO 1.0 model.

The new concept introduced in this period was the utility of the token coupled with the importance of the network effect.

According to VC logic, tokenisation made sense if it led to the network effect (a phenomenon whereby a product or service gains additional value as more people use it) thus enabling completely new types of tokenised business models. We could actually call this era the age of the tokenised business model.

One of the key thought leaders for this period is William Mougayar.

It was a period of general awareness that utility tokens had their intrinsic value stored in their rights of participating in micro-economies. The established consensus was that even though such tokens are not backed by any assets, they still carry value due to their scarcity and their limited rights associated with each token of using certain services.

The underlying theory behind this relies on valuation principles of currencies velocity of tokens. The other reason is legal. It became clear the key benefit of token crowdsale for investors is (instant) liquidity. (But that required being listed on exchanges that are still mostly based in the US.)

Tokenisation is playing a central role here, without the utility “token” becomes defined as a security and therefore the key benefit, liquidity, disappears.

In the Golden Period anything was sellable. At the beginning, ICOs were still a scarcity and therefore multiplication of investments immediately after tokens hit the exchanges was almost a rule. This of course, brought a lot of speculators.

This period is also characterised by different kinds of experimentation and initiatives. Some of them were good, and some controversial by opening up a lot of questions.

Reverse auctions used by Gnosis led to huge investments for a small share of tokens. Projects raised investments in the first hour, minutes, and even unbelievably seconds (examples are Iex.ec and Aragon). The faster the last ICO completed, the bigger the FOMO was for the next one. Unintentionally, the result was that smaller, less technically savvy supporters (not investors) were unable to invest.

These early supporters are crucial because they would often become the first involved users of a platform kicking-off the network effect.

Recognition of this vital component called for the upgrade of the ICO model. Cofound.it introduced the concept of a multistage presale with whitelisted supporters coming from the original support community. These early stage supporters would now have a guaranteed opportunity to invest.

With 56,565 ETH raised in presale Cofound.it became the first project to hit its funding goal without even getting to the ICO phase.

Regulation was also showing its power and effect on the ecosystem. There was the closing of Chinese exchanges, followed by the SEC’s opinion on the DAO case clarifying the “security” issue we had all known about from the beginning. ICOs were banned in numerous countries.

This period ended with projects like Tezos and Bancor raising ridiculously huge amounts of money and by the end of this period it had became extremely hard to list new tokens on exchanges.

ICO 2.5 — the King is Back

But even with all these new challenges, ICOs, as well as the resources available to invest in them were still there.

There were lots of successful ICOs while only some of them were hitting the exchanges. Usually these were smaller exchanges while tokens had low liquidity and value were often below ICO price.

Then a very important thing happened, the market value of the token became almost disconnected from the developments of projects creating complete market randomness.

Bitcoin was regaining dominance.

At this time presale became the most influential phase of fundraising but it was dominated by American VCs. Raising half of the money needed in presale became almost standard. If the ICO concept was about transparency and democratisation, presales were about non-transparency with non-disclosed terms.

This situation culminated recently. There are two project raising funds right now: Storm and Leverj. Both projects have working prototypes, fully developed business plans, with super-teams and advisors, and big investments from VCs in presale. During the Golden Age they would have raised funds immediately, but as of this writing, both projects are struggling hard to attract crowd-money.

And there is also the issue of regulation.

There are projects emerging now proposing blockchain alternatives to current businesses. For example, Etherisc in insurance. Or projects that are using blockchain for solving new regulations, for example, Datafund in personal data management in the context of GDPR.

These projects are setting new standards in terms of incorporation and all aspects of regulation, quite simply, they need to be properly regulated from the first day.

Legal also again showed that it can be a deal breaker. In the previous phase it questioned the legal status of the ICO concept and in some countries they were prohibited. The Tezos case also opened the even bigger question of the status of investment. To quote: “Many who put money toward the initial coin offering consider themselves investors, but the funds were raised as non-refundable donations.”

ICO 3.0 is looming on the horizon

It is hard to judge the end of an era when you are in it but to me it feels like we will be entering ICO 3.0 in early 2018.

Let me explain my thinking:

• This new economy is developing fast — ICO “periods” last for a maximum of 6 months.
• These periods are initiated by the first mover innovation.
• They end with the radicalisation of such an innovation.
• An important part of this periods are market cycles — overall and bitcoin vs. Alt-coin.
• Wonderful ideas are being killed by regulation.
• Forces from the old economy still coming into to play.

What will ICO 3.0 be like like?

No idea. Someone asked me if ICO 3.0 will be able to return power back to the crowd. I think not, but we should least aim is to gain back the crowd’s trust in this new form of funding.

It is evident this version calls for a serious rethink, maybe a completely new concept of “ICO” is needed. In such moments, beside these “historical” facts with a short “time-series” we should also take into the accounts projects that were not suitable for the current ICO concept.

“Not suitable” means these attempts were not successful or they were from a legal perspective securities. For example there are a lot of very good B2B projects that should aim at institutional investors. The corporate world is slowly embracing the blockchain concept while the investment itself it is still hard to implement internally. The other type of projects are those that are clear securities but use the benefits of blockchain to define the roles and returns for investors. We are talking here of investments and returns in verticals where many parties are involved — real estate, hospitality business, and production for example.

Whatever we do, we should stick to the main idea — this is a new asset class, a completely new species that is hard to put into the old regulation. We — the new economy did our best — developing non-security business concepts, using foundations etc., but it seems these are not long term solutions.

What follows now is a period of experimentation, trying new concepts, and new initiatives. The Cofound.it Seed program and the Playoffs showcase event are just the first two example and there will soon be more.

So how are we going to solve these challenges? We’ll give you more details in our next blog post.