The shortcomings of ICO funding
By boris, August 29, 2017
Initial coin offerings are a phenomenally successful way of raising money. Through ICOs, startups have raised a record $1.27 billion in the first half of 2017. When I wrote the post “Will Initial Coin Offerings Fund the Future?” back in May, the total tally was around $100m. In the few months since then since then we’ve seen single projects like Tezos raise over $200m.
While I love the idea of lowering barriers to fundraising, I think there are two major shortcomings with current ICO models.
First, the bubbly nature of the ICO market seems to favour the ability to tell a story over the ability to create a great product. The risk here is we’ll end up with more “stock promoters” than “product makers.”
Second, many ICOs are built around tokens with no real utility value. Since the recent SEC ruling, nearly every ICO tries to position their token as a utility, and thus avoid having their tokens classified as securities and subject to SEC regulation. But the reality is that very few of these tokens actually have utility value and could be regarded as “native tokens.” Filecoin, Numerai, Augur, and Golem come to mind – but that’s just a handful out of a sea of 1,000+ tokens.
This means that in order to fundraise and be compliant with the law, tokens are getting created with no real value. The problem here is twofold: 1) it creates unnecessary friction for the users of a service and 2) it lowers overall network effects. Both are bad for the development of a thriving and healthy decentralized ecosystem and I hope we can develop new funding mechanisms that fix those shortcomings.
What are those new funding mechanisms? I’m not entirely certain but one good example is how Tezos allows developers to attach a bill for enhancements they make to the service. This means that developers get paid for their individual contributions to the protocol (if the community agrees).
Fred Ehrsam recently wrote a great post on the evolution of blockchain where he stressed how there are currently no economic incentives for anyone to contribute to a blockchain’s core protocols (and that’s a huge deterrent to innovation and growth).
Figuring out the best funding mechanisms to properly incentivize developers to build our decentralized platforms will be key to their development and success in the near term.