Rehashed - #14 The State of the Initial Coin Offering (ICO) - Part 2
ICOs: Examining Token Supply
Despite somewhat ridiculous valuations, the ICO space continues to hum along and we are starting to see how capital raised from ICOs is deployed. There are generally two sources of funds for any given crypto project. The first is the proceeds generated from the ICO and the second is the supply of native tokens that the project retains on its balance sheet.
The second source of funds- the supply of native tokens retained by the project, is often overlooked by investors. Projects typically sell anywhere from 50-80% of total token supply, leaving the team and foundation with a significant amount of tokens themselves to use for future funding and development.
Many projects are retaining absurdly large chunks of supply on their balance sheet. Not to pick on Ripple but they still own over 60% of the supply which, at current prices, roughly amounts to over (NZD) $40 billion of XRP. That’s a lot of excess capital which Ripple have been finding creative ways to deploy. Although Ripple has imposed a lock-up on their XRP reserves, (a measure that many crypto projects fail to even take), they are able to liquidate 1 billion XRP per month over the next few years. They are transparent about this process; informing the public of any XRP sold in the open market in their quarterly updates.
The main issue is one of centralization; Ripple has the power and authority to flood the market with (NZD) $700 million XRP per month. If such measures were carried out, this would not only have dramatic effects on the market price of XRP but Ripple would be netting themselves ridiculous profits, for a product that is not even being used yet. Additionally, one of Ripple’s co-founders, Chris Larsen, apparently owns ~5% of the XRP supply, which has fluctuated between (NZD) $3-$20 billion (based upon XRP price range over the past 6-months).
Ripple is certainly an example of one of the more centralized token supply projects, but it is not an outlier. For a space that stands for decentralization and equality of opportunity, we seem to failing these basic principles.
In fact, compared to ICOs in 2017, the percentage of token supply sold to the public has decreased. Astronaut Capital found that, on average, ICO’s are now keeping 22% more tokens than the same time last year.
As valuations aren’t getting any more conservative, this signals that projects are generally taking a bigger piece of the pie for themselves. And if they can, why wouldn’t they? Projects do not owe it to token buyers to divulge any information on how proceeds and retained tokens will be deployed to fund the project. Unlike equities, there are no disclosure standards and token holders generally have no rights to exercise.
ICOs: Establishing Best Practices
Even when genuine projects go through the ICO process, there is a large misalignment of incentives. Post-raise, founding teams are suddenly sitting on a giant war chest of capital- not to mention, as discussed above, the significant chunk of token supply they are likely to have retained. Where is the motivation to build and execute on the product when the money is already in hand?
As a result, there is a pressing need for the emergence of more thoughtful funding models; ones that reduce the mass overcapitalization at initial raise and subsequently set forth a rational trajectory and expectation of product delivery. In an ideal world, projects would raise funds that could only be released upon the achievement of certain milestones that are previously outlined. I am yet to see a project hold themselves to such standards.
Ultimately the space should migrate towards a model such as Zcash, who initially raised $1 million as a company and is further funded through a “founders reward”. 20% of the block reward (mining profits) over the first four years of network activity will go to early investors, advisors and employees etc. It’s similar to a vesting schedule, with the added benefit of ensuring a functioning network. This type of funding mechanism deserves a big tick: modest funding to bootstrap the product, followed by a sustainable revenue model that ‘drip feeds’ capital to continue to fund developer activity. Furthermore, projects that do not implement a large pre-mine are starting to be more favourably looked upon. For example, Mimblewimble’s GRIN implementation will not be conducting a pre-mine. In fact, their community funding guidelines may serve as a great starting point for new projects looking to raise in the space.
In the News
ANZ reports on how the NZ business ecosystem is well-primed to incorporate blockchain technology.
The online bitcoin community has been discussing the numbers inside a block hash that randomly appeared last week.
The Korean government is investing $9 million in new blockchain projects.
RobinHood co-founder is bullish on bitcoin as millions of young investors use the app to trade cryptocurrency.
Coinbase CEO Brian Armstrong wrote a letter to new employees telling them not to panic over bitcoin’s price drop this year.
A remote part of Russia has become a hub for mining bitcoin. Miners have set up operations in old Soviet factories in the town of Kaliningrad.
Jack Dorsey’s Square has received a “Bitlicense” from New York State. Square is the ninth company to receive a "Bitlicense” from the state.
26 June - Payments NZ FinTech Innovation Challenge 2018
3 July - Blockchain Training Workshop in Wellington
5 July - Blockchain Training Workshop in Auckland
Thanks for joining, see you next week for Rehashed.
View previous issue: Rehashed #13 Cryptocurrencies: Regulations and Cross-Correlations
About the author:
Capital markets to crypto convert. From Christchurch → Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.
Disclaimer: The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.