One innovation we have seen in Blockchain has been the rise of app coins as a way to monetize protocols and open source projects. Most launches were through Initial Coin Offerings (ICOs), basically crowdfunded app coin sales. And boy, has it taken off!

In 2017 alone, ICOs raised more than $100 million in 15 deals. Cosmos Network raised $16.8 million in 30 minutes and Qtum raised $15.4. Most recently, Gnosis (a decentralized prediction market) raised $12.5 million at a valuation close to $300M in just a matter of minutes (the valuation has more than quadrupled since in secondary markets).

Note that most of these ICO-funded projects have not publicly launched yet. We are seeing much larger valuations and sizes of rounds with ICOs than with the traditional VC market for companies at similar stages.

So what is going on? Is this an ICO bubble or smart funding of the next technology platform? It’s probably a bit of both.

On the bubble side… A lot of people have made money through crypto-currencies (Ethereum is up more than 500% this year), so we can assume that people are pouring some of this money into new projects.

There’s also a strong FOMO (Fear of Missing Out) effect at play. Many of these offerings are run as auctions with a scarce supply of tokens. This naturally triggers the “I need to get in on this now” feeling.

However, we’d be remiss if we just called the ICO market a bubble and left it at that. We might be seeing the emergence of a new technology platform coupled with a business model change. That’s a very powerful combination.

The big winners have tightly linked tokens to usage of their platform, thus creating strong network effects. If the protocol is useful, it attracts developers to build on it. In turn, this increases the usefulness of the protocol and encourages more usage, which increases demand for the underlying token. And so, the price of tokens rises and this further attracts developers to build more apps on top of it. And, the feedback loop continues…

The other factor is that most of the current projects are on the infrastructure/protocol layer, which has different dynamics than Internet platforms. Here, the expectation is that most value will be accrued at the protocol, not the app layer.

Joel Monegro of USV wrote about this last year: “The market cap of the protocol always grows faster than the combined value of the applications built on top, since the success of the application layer drives further speculation at the protocol layer. And again, increasing value at the protocol layer attracts and incentivises competition at the application layer.”

For those of us who are participating or watching this space, it’s hard not to compare it to the Wild, Wild West. Earlier this month, a company called Matchpool raised $5.7 million in 48 hours. A day later, the co-founder departs alleging the misuse of funds by the CEO.

I’m not yet sure if the ICO successes will solidify before the disappointment from some of the weaker projects take over. But all in all, it feels like the future is being funded through ICOs these days.