Throughout the past year, Initial Coin Offerings (from now on ICO’s) have been considered the gold rush of the 21st century. Millions of dollars have been raised by companies working with blockchain technology solutions, bypassing the entire financial industry without asking for permission. This new way of funding business has caught the attention of all the regulatory agencies over the world. But what exactly is an ICO? The ICO acronym translates to Initial Coin Offering, which goal is similar to any Initial Public Offerings with stocks.
The only problem is that all the money that is being raised does not comply with the existing regulatory framework. ICOs are the way for almost all blockchain ventures to find funding across the globe using cryptocurrencies or tokens. This phenomenon has disrupted the entire Venture Capitalist system, now people all over the world can contribute to the funding of a project that promises to deliver a cutting-edge blockchain application.
Recently, private investors (Hedge Funds and Business Angels among others) are welcoming the decentralization of the venture capitalist industry, which allows anyone across the globe to contribute to the projects they believe in. A company/individual creates an ICO with two main goals:
- To raise capital to fund a project
- To create a particular token for the blockchain application or protocol they are developing
Normally, a team develops a smart contract that launches the token distribution once the sale/payment is completed. Users contribute with the amount they wish to invest in and deposit it on the company’s address using cryptocurrencies. On the market, we typically see that the two main procedures for a token sale are the following: i) companies will either put a hard cap (Limit Amount of money they would like to raise) on the smart contract or ii) they will have an open cap (they will raise as much as people want to contribute to their project).
Some terms also introduce the concept of a soft cap (Minimum Amount of money needed to start development). In the case of not reaching such soft cap, the team will return all the contributions to the owner and will not proceed with the development of the project.
Most of the ICOs that are being raised today are based on pure speculation with the hope of a future appreciation of the token. In the beginning companies used to offer a beta of the network application before raising money. Nowadays the market has been very bullish and backed by FOMO (Fear of Missing Out) for the next bitcoin, projects move on to raise money only having a white paper (which is similar to a business plan) without providing much more information. Over the past year, we have seen several companies raising millions over the course of a week, a day or seconds.
Most of the projects working with ICOs are deployed on the Ethereum Blockchain. This is due to the easiness of the standard ERC20 token and smart contracts that allow companies to easily set up a system for doing so. Although other big projects are using their own Blockchain set up.
Blockchain technology is still in its youth days and needs lots of developments and maturity. On this space, scams and hacks have happened a few times, making a lot of people losing large sums of money. Many experts around the cryptocurrency community have also criticized ICOS because they have been used to speculate and create hype with the mere purpose of scamming investors.
The most common scam is the one where a good looking website and fake project are created , showing crypto addresses to see if someone is willing to fall in the trap of believing the project would actually deliver a token. Unfortunately this isn’t the only situation where people have lost money. Hackers have managed to hack some companies and smart contracts to steal the funds on their behalf. Since cryptocurrencies are deployed over blockchain networks with an irreversible transmission of tokens, there’s no way to reclaim the lost funds.
In one case, hackers hacked EtherParty minutes before their ICO began, making the funding address almost identical to go unnoticed and grab all the funds from the contributors that did not notice the change.
The following ICOs are in our opinion some of the Key Sales that have happened over the past years in the space, let’s dive in:
The first ever Decentralized Autonomous Application which ought to represent the ideals of decentralization. The idea consisted of mimicking a hedge fund without a central control, with the investments the DAO would make, being decided by the holders of the token. In other words, token holders would decide which projects would receive the funding from the collective.
The DAO was one of the first, and highest ICO, raising a total of 12 Million ethers, which at the time were approximately $140 Million dollars. Unfortunately, after some time, a vulnerability was exploited, locking 3 Million dollars into a hacker’s address. Unfortunately for the crypto community, this project sparked a huge controversy. The hacker managed to find a vulnerability in the smart contract that allowed to slowly remove all the ethers from the contract that held the funds. This hack was important enough to split the Ethereum into two blockchains, Ethereum and Ethereum Classic.
The reasons for that fork were that at the time of the hack, that the Ethereum network was working on its PoS (Proof of Stake Mechanism) and having a user with large amounts of ethers that were “stolen” could comprise the future validation process of the chain. That is why the Ethereum team, decided to rewrite the history of the blockchain and returned all the funds to all the people who contributed to the token sale. Many people didn’t agree with that solution as they couldn’t withstand rewriting the unwriteable blockchain and gave birth to Ethereum Classic. A team of developers took charge of the development and continued with the Ethereum blockchain without reversing the transactions.
Founded by two young Spaniards, Aragon has become a very important player in the decentralized blockchain communities. The platform gives users the tools needed to run any type of decentralized autonomous company on top of the Ethereum blockchain. Aragon’s team is developing a wide set of tools, ranging from Cap table, governance, fundraising, payroll accounting, voting…
The best part of setting up your company through the Aragon platform is that you can extremely customize your company in the way that works best for you and all within a simple but beautiful interface. Their goal is to make decentralized organizations widespread and make a more global world where intermediaries and borders don’t matter in order to transact with another.
With their Initial Coin Offerings, they raised all the fund’s necessaries for their hard cap (term used to describe the maximum amount of money a project is willing to raise). The total hard cap of the project was $21 Million dollars, achieved three hours after the sale started. It is one of the quickest ICOs to be launched so far.
Bancor Protocol is a standard for a new generation of cryptocurrencies called, Smart Tokens. Smart tokens can be purchased or settled by anyone, anytime, through their attached smart contract. Bancor enables liquidity and asynchronous price discovery for any existing standard token. Prices are calculated by the smart token so they buy and sell at the same market price. No need to deposit in an exchange in order to convert smart tokens.
Reserves endow smart tokens with significant market depth, resulting in reduced price volatility. Price slippage is pre-calculated relative to transaction size and incorporated into the current price. It gives the tools for any company to become a central bank and create the smart token that their company needs.
During the summer, Bancor was one of the hottest projects in the crypto community space. During their ICO they raised a total of $150 Million dollars to develop the Bancor platform. At the moment the project is following the development path and has build many partnerships within the crypto space.
Numerai is a hedge fund that wants to combine the wisdom of the crowd with artificial intelligence modeling and apply it to predict the outcome of financial events. Using a meta model, an AI manages and decides how to combine all the prediction models (based on machine learning) together, to increase the overall accuracy of it so they can use to invest in the outcome of financial events.
They create weekly tournaments where users contribute their predictive models to get rewarded for the accuracy of them. Once Numerai has tested the model, a score is given and shown on ranking with all the submitted models.
In the beginning, Numerai decided to use bitcoin but they decided to move over the Ethereum Blockchain to create its own token even though they received many critics for it. Although Numerai used a different type of strategy on their token distribution compared to the majority of the Blockchain projects at the time.
Numerai didn’t conduct an ICO. Instead, they distributed 1,2M tokens to all the users that had helped to build the meta model. The number of tokens given was determined by how helpful the model of the user had scored in each of the tournaments.
The reason behind this was that Numerai did not want their token to be another souvenir among the crypto community. It had to have a meaning for the users of its platform. That is why when distributing the tokens, they introduced a new feature. Users will now be able to stake their tokens to show how confident they are in the future performance of their submitted model. This will incentive users as they can earn a big reward by just creating a robust prediction model.
Tezos is up to the date the second most successful ICO, raising a total of $232 Million Dollars. They raised this entire amount over the course of two weeks, where users were allowed to deposit cryptocurrencies on their wallets with the hope of getting tezzie (Tezo’s Token) in exchange.
The Tezos team is developing a platform that is based on a decentralized blockchain that governs itself by establishing a true digital commonwealth. It facilitates formal verification, a technique which mathematically proves the correctness of the code governing transactions and boosts the security. Once the ICO was over it was all a road of roses them with their futures price skyrocketing but unexpected problems have risen out of nowhere.
The two companies that were in charge of conducting and handling the ICOs money (The Tezos foundation where people actually send the money too and Dynamic Ledger solutions who is in charge of the product development) are battling each other for the tezos thrown. This has delayed the project for over 5 months longer than expected, leaving users without their promised tokens.
It is a continuous battle between the founders of the technology and the manager of the funds, to see who has full control access to the projects raised funds. On top of their own internal legal battles, users have gotten tired of waiting and have done a class action lawsuit against Tezos for failing to deliver tokens to their investors. They allegate that Tezos violated the securities laws by conducting such type of ICO.
We will see what the future holds for this company, which indeed has a very interesting project, but when massive amounts of money are in the game is no longer a game.
The polkadot project aims to connect to multiple blockchains without even noticing. This blockchain will allow users to own multi-signature wallets and operate between different blockchains such as Bitcoin or Ethereum.
Their ICO was conducted in a Dutch Auction Manner, which meant that the price of token would decrease as the deadline of the sale approached. Polkadot ICO was able to collect 130 $Million Dollars. Although it was not all good news for the company, within one month the project has gone through a massive shakedown. Unfortunately, the users of Parity multi-signature wallets (like Polkadot), on June 20th saw their funds being frozen, as a user of the Ethereum blockchain killed the smart contract holding their funds.
Basic Attention Token
Basic Attention Token radically improves the efficiency of digital advertising by creating a new token that can be exchanged between publishers, advertisers, and users. It all happens on the Ethereum blockchain. The token can be used to obtain a variety of advertising and attention-based services on the Brave platform.
Brave is a browser similar to Chrome but ten to eight times faster loading your website. Their ICO was up to the date the shortest one the industry has ever seen. The project set up an ICO with a hard cap of $30 Million of dollars, which was achieved within the first thirty seconds after the opening of the token sale.
Not many users were able to get a hand of this tokens though to high investment from a few contributions and complained the token was not distributed fairly and across enough people. The BAT team argued back that they set up a hard cap to raise only the amount necessary for development and that if some investors grabbed almost all the tokens had all been decided by the basis of a free market.
The few users that were able to contribute and obtain BAT tokens attached very large fees within their transactions in order for the miner of the Network to include them faster. By theory, everyone is allowed to do the same, therefore it’s working as free market principles, the problem some users saw was that not everyone started with the same level of funds to contribute.
Filecoin was the fastest ICO to raise $200 Million Dollars and also obtained the record breaker for largest ever ICO, defeating Tezos (mentioned by above) raising a total of $257 Million Dollars. Filecoin tema only allowed accredited investors to participate in the token sale. Filecoin is a data storage network on the blockchain. Users will be able to sell the extra memory space on their computer, to other users who need more memory to store files.
All the files are encrypted, making them unreadable to anyone, besides the owner of such files. Many early adopters of the community have heavily criticized Filecoin for conducting a closed pre-sale. They allowed their early backers to get at a discount price. This is considered by many to be disrespectful as not everybody could participate in the pre-sale. The distribution of tokens should only have taken place during the ICO and not during a presale for a selected handful of individuals. Besides all of this, many contributors are looking forward to the deployment of this crypto-storage network. Particularly about the possibility of earning filecoins for just renting storage on their computer.
Singularity Net is one of the most promising protocols to be developed within Artificial Intelligence and Blockchain markets. Their goal is to create a “protocol specifically designed to solve the problem of connecting people to AI, while opening the AI market to the entire world. Singularity Net enables AI-as-a-service on a permissionless platform, so that anyone can use AI services easily”. Back in December, they conducted an ICO based on a model that surprised many people within the crypto community.
Their ICO had a hard cap at $36 Million, which for many people seemed very low, compared to other projects and the potential of the Singularity Net protocol. But the surprise wasn’t either the low hard cap or the fact that you had to go through a proper KYC process in order to contribute on the token sale. The surprise came, when a week before the start of the ICO they announced that this one, would be divided into two parts. The first part would last 24 hours and will give all the approved KYC contributors to invest an amount up to 5 ETH. This measure was done to ensure that all their community had a chance to get some AGI (name of the singularity net token) and was not overthrown by huge investors.
Once the first 24 Hours, the contribution limit would be erased, and the contribution was based on first come, first serve (the investors that contributed the quickest until reaching the hard cap will be the ones that get the rest of AGI tokens). The second 24 Hours didn’t last more than 2 minutes. In about 66 seconds, the Singularity Net ICO reached the hard cap and finalized the token sale. Singularity Net is a promising protocol with the goal of disrupting the artificial intelligence market. Their goal is to allow the technological singularity to become a reality way sooner than most people think.
TenX offers a virtual currency debit card that lets anyone travel and spend cryptocurrencies around the world much easier. The “debit card” allows users to send and receive funds, withdraw from any ATM around the world, receive real time notifications, as well as the possibility of locking or unlocking the card all within one app. In the ICO, TenX managed to raise their hard cap of $80 Million Dollars in the seven minutes that lasted.
Their debit card will allow users to make secure transactions across different blockchains, all within the user’s fingertips. The debit card has become the gadget to have and has been vastly accepted in the crypto community, receiving 10,000 orders in the first weeks. As of know they only support Bitcoin and Ethereum as the only cryptocurrencies their users can spend, but they plan to integrate all ERC20 tokens (the vast majority of the available tokens) and Dash in the future once the beta version is tested enough. TenX roadmap also states their plans for the company to be granted with a banking license which will allow everyone to connect from the traditional banking system to the new blockchain banking era.
Status is the first mobile client of the Ethereum Blockchain built entirely by peer to peer technologies, making the app Ethereum´s “discovery tool”. But what does being a mobile client mean? It means that the status app allows users to connect to all the applications deployed in the Ethereum Blockchain within their smartphone. Status is a decentralized mobile browser that makes it easy for users to access the decentralized web. In less than 24 hours, Status was able to raise $100 Million dollars from all the contributions. Recently, the Status team joined the Ethereum Enterprise Alliance, which aligns with their goals of open source blockchains.
The most important thing that Status has to offer is the fact that its technology will be the first implementation of Ethereum on Android or iOS. This will allow users to connect to all sort of DApps (decentralized applications) that are deployed on the Ethereum Blockchain. Status gives users the chance to use real peer to peer applications instead of third party’s app that benefit from the user. They are strongly committed to making decentralization a reality and create an Ethereum powered world for all.
EOS is software that introduces a blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications (the “EOS.IO Software”), with a blockchain architecture that has the potential to scale to millions of transactions per second, eliminates user fees and allows for quick and easy deployment of decentralized applications. EOS is conducting one of the longest ICO seen within the crypto community.
Their ICO lasts for 341 days, dividing the token distribution into different tiers depending on the contributions made during each tier. Within the first five days of their ICO, they were able to raise $185 Million Dollars. After the madness of the initial days, the ICO cooled down and ended with a total of $195 Million Dollars. The company described their ICO strategy as: “the fairest token distribution project to date. The long timeframe of the token sale allows it to be distributed into tiers where for each tier the price is the same for every contributor”. The reasons behind the long timeframe of the sale was to avoid a short token sale and make sure the token was distributed enough across their community.
Cardano is a third generation blockchain created by a teams of PhDs. Within the past few months, its token has risen to the position 5 of the largest cryptocurrencies on Coinmarketcap. Although nowadays, it’s known more widely around the world, Cardano ICO did not follow such path. The token sale was conducted after making investors go through an extensive KYC (Know your customer) process, and it was sold primarily for Japanese investors, in fact 95% of the tokens were sold to investors living in Japan.
Cardano is developed under a scientific methodology from IOHK, composed by large teams of expert engineers and academia from across the world. Their aim is to create a fully featured, smart contract blockchain to compete against the existing ones like Ethereum or NEO but committing to deploy contracts, or code, with 100% certainty it will not have a flaw. The idea is to use the same scientific methodology used for example on the computer code that runs current aircrafts, or computer code used for medical purposes, in which, failure of the computer code will result on fatal consequences for society.
It was silly to think that all these financial investments would not go unseen by regulatory agencies. It caught all of the attention of the regulators, to the extent of getting banned on the People’s Republic of China soil. The rest of the regulators have taken the same position of the SEC (Securities and Exchange Commission of the United States), calling out many projects for delivering a token that works as a security investment in the market.
Therefore the same laws regarding regulatory compliance should be applied to such procedures of raising money. Companies have to follow carefully the regulations that apply to them if they want to deliver a certain type of token. The SEC has also expressed they are going to dedicate a large amount of time to investigate fraudulent actions in the crypto space. They have frozen the assets of the Plexcoin ICO for falsely promising absurd returns on investment.
So far, the agencies have carefully examined this phenomenon with care and time, to understand this new way of raising money across the globe. Jurisdictions have taken different approaches like total prohibition (China), Working on drafting appropriate regulations while warning users to be careful (Europe & USA) or sandbox approach (Switzerland & Singapore). ICOs are here to stay whether they like them or not. Throughout one quarter of the year, the volume of money being raised by ICOs surpassed all the Venture Capital Investments of the United States of of America. With the SEC and all other regulatory agencies agreeing on the pure nature of the tokens that are used as a vehicle of investment, companies have taken such claims more seriously and are now carefully stating their intentions in their token use or rights section before they conduct the token sale.
This has led to creating a couple of standard good practices among the community. For example, many companies conducting an ICO now do a proper KYC and AML compliance for those who wish to contribute large amounts of money. Other practices are to only let accredited investors invest in the company ICO. Among the early adopters of this community, having a hard cap on the token sale is also a good practice. Although massive amounts of speculation are still taking place in the industry, good practices have allowed consumers to understand better what is the process they are getting involved with. All this advantages or disadvantages of the current ICOs models have not left Vitalik Buterin without a say.
He believes that most of the ICOs have not followed a responsible approach, that is why he created the concept of DAICOs (Decentralized Application Initial Coin Offering). This concept is based on merging Dapps (Decentralized Applications) with ICOs. Instead of making a smart contract that only accepts contributions, the contract is developed in a “contribution mode” so the users have a higher degree of control over the funds they contribute. Once the team has shown advances in the development, the users have the option to increase (or decrease) the budget.
Private markets are going to be the sector to benefit most from this innovation, allowing them to find funding from anyone and anywhere in the world. Public markets are not going to be impacted yet due to the heavy financial regulatory aspects they have to comply with. We are experiencing a massive shift in the way money is moved or represented worldwide with the use of blockchain technology. Overall, ICOs deliver a new innovative method for raising capital. This new movement is bound to change many aspects of the financial sector, as we know it. Within few years we are going to see the tokenization of physical goods and projects allowing anyone in the world to have access to them. Even though the technology is still immature, people believe in this new way of capital allocation and are constantly working to fix its issues.
There is still a long road to go through and it will not be an easy one. Recall the fact that one of the oldest monopolies in the history of mankind is about to be radically impacted by forces like disruption and collaboration making giving these institutions the chance to either adapt or die. To put it in a nutshell, the general trend is the acceptance and recognition that ICOs have a place in the financial markets and that existing legal frameworks will have to adapt to work efficiently.