ICOs are one of the hottest topics Venture Capitalists are diving in right now – not only shown by the increasing number of organized Tokensales and their raised volume. Though, I am doubting the rationality of the approach many ICOs are following when they are selling their idea to the market.
The difference between Utility tokens and securities
The beginning of ICOs lies in selling tokens or cryptocurrency coins to a reduced price in early-stage phases of a project. Investors seek for price increases of this token if the project will be successful and therefore the token will be highly demanded. While this kind of Token is rather a utility token, a token that fulfills a specific role to use the project, product or network, other ways exist. For example, an ICO can issue tokens simply as a security to implement a revenue-sharing mechanism based on the ownership of tokens. The second kind of Tokensale resembles more with an IPO on the stock market. Summed up, in the case of a utility token, the users need to possess these to use the project, while a security token can be an invisible one for users.
The ”Blockchain First” approach
While ICOs are offering opportunities for both ways of financing on behalf of the funded companies, many projects are trying to build an utility token that actually is not advantageous at all.
The first time I heard about ICOs, I strongly believed in the necessity of them to be used for Blockchain-related projects. It basically means that ICOs are only used to sell Utility tokens, but not to sell “useless” tokens that only serve as a vehicle for revenue-sharing. However, I started to see ICOs in a more general way of Funding, rather than selling tokens limited to Blockchain projects. The revenue-sharing token might not be useful for the projects usage itself, though it enhances the process of funding for companies, provides the distribution of dividends at lower costs and offers investors a more flexible way of trading, not depending on central authorities with limited opening hours anymore.
Obviously, ICOs also bring disadvantages with them. But the question of this post is less focused on advantages and disavantages of them, rather on their implementation. It is fairly understandable that they can offer advantages even as a revenue-sharing token und this kind of token is a valuable method.
However, many projects organizing an ICO seem to follow the “Blockchain First” approach and hardly try to launch a utility token is not really utilizable. Many networks are forcing their users to use the new token instead of paying with well-known and already grown cryptocurrencies. Oftentimes you can see good projects that offer a valuable solution and transfer this concept to a Blockchain technology. This sometimes results into overengineered systems, not providing any further value due to the use of Blockchain technology. Furthermore, it also limits the market and the accessibility of the platform if users are imposed a new token for a small, niche use-case instead of taking advantage of already possessed tokens.
This might be a consequence of the general hype around Blockchain technologies, but also a marketing move since ICOs are still seen as a funding method related to Blockchain projects and many investors are coming from this background.
Although I am fascinated of Blockchain and DLT, I think that this “Blockchain First” approach is misleading when it comes to ICOs. In my opinion, ICOs can even gain more traction when they are seen as a universal method of funding of the digital age, facilitating Blockchain technologies, but not being related only Blockchain projects itself. Rather, they are disrupting the process of projects funding or IPOs in traditional way and should also be judged by their advantage for the financial use-case.