Six Alternatives to an Initial Coin Offering
Last summer, ICOs could do no wrong. But by 2018, the acronym had been relegated to the realm of the unmentionables, a place normally reserved for the most offensive cuss words and the name of Harry Potter’s antagonist, Voldemort. In many circles, “ICO” has become a dirty word. In its place has come a range of creative alternatives, each designed to improve on the model and nomenclature of the much derided Initial Coin Offering.
ICOs Are So Last Year
Whenever a new musical movement emerges – punk; nu-metal; emo – bands lumped into the genre rush to distance themselves from it. Something similar has happened with ICOs: everyone’s in them, but no one wants to admit to being in them. Instead, we have the spectacle of projects dressing their ICO up as a “token generation event” and other euphemisms.
Some of the alternative nomenclature is an attempt to avoid legal repercussions (“You can’t charge us with running an unregistered ICO if we didn’t call it an ICO!”), but more often it’s an attempt to avoid being tarred with the same brush as the scammy ICOs that have ruined the name for everyone. Then there are the crowdsales whose alternative name reflects a genuine desire to provide an alternative means of raising capital in which everyone gets a bite of the cherry. What follows is six alternatives to the tried, tested, and tired ICO.
A Security Token Offering (STO) is a fully regulated ICO which proceeds with the SEC’s blessing. These are categorized into various types including Reg D (open to institutional investors only) and Reg S, which is for STOs being held in a country outside the US. The holy grail for companies seeking an STO is Reg A+ as this entitles retail investors to participate. A number of projects including Dexfreight, Gab.ai, and Knowbella are all waiting for Reg A+ approval, but SEC permission is still pending.
The Interactive Initial Coin Offering (IICO) was first proposed in a paper by Vitalik Buterin as a fairer model of ICO. It’s designed to prevent the sort of FOMO and gas wars that can result in whales getting all the tokens and squeezing out investors of humbler means. In Fantom’s recent crowdsale, for example, one investor spent 580k gwei, or around $24,000, just to ensure their transaction reached the front of the queue.
Decentralized justice protocol Kleros has become the first project to trial an Interactive Initial Coin Offering. Contributors can specify a maximum cap for the sale; if the total raised surpasses that, their ether will be returned to them. This ensures that everyone is given a chance to purchase tokens at a price they deem fair – or at least that’s the theory.
Initial Supply Auction
Metronome’s crowdsale started today under the banner of an Initial Supply Auction. As the team explain, “The Initial Supply Auction utilizes a descending price auction, where the price starts intentionally high and ticks down incrementally toward its intentionally low price floor as long as the auction is open. The price is not averaged out. Purchasers will receive their Metronome almost immediately after purchase, at the price they purchased. Purchasers should purchase only when they feel the price of MET to be fair.”
Various attempts have been made at ensuring everyone gets a chance to participate in a crowdsale including the IICO, the Initial Supply Auction, and variations of the Dutch auction, in which winning bids are not revealed until the sale has been completed. The risk with the latter two methods is that they risk being perceived as a mechanism for boosting the coffers of the project rather than as a more democratic process.
A Simple Agreement for Future Tokens provides a means of overcoming the risk that tokens sold for a project that is under development could be classified as a security. To circumvent this, investors contribute funds on the understanding that they will receive their tokens once the network is operational and the tokens are usable. That way the project benefits from receiving the capital necessary to get building, and investors can sell their tokens to the public at a future date, once the platform has utility.
Most ICOs now allocate a portion of their tokens to an airdrop – i.e a giveaway – to onboard a distributed community in the hope that these individuals will become users of the platform. It’s standard practice to distribute less than 5% of tokens via an airdrop, but there is a bolder approach: to give away the majority of your tokens in this manner, retain a portion for the team as a reserve, and then hope that the market assigns value to the token once it starts trading. That’s the model being trialed by Everipedia and a host of other EOS-based projects whose tokens will be given away to EOS token holders.
The final alternative to the ICO is to have no ICO whatsoever. That might sound crazy in an era of multi-million-dollar valuations for crypto projects, but it’s actually a much better way to align the incentives of participants. Bitcoin, Litecoin, and Decred are all examples of networks that started life without a fundraiser. If your tokenized idea is genuinely revolutionary, you don’t necessarily need to resort to an ICO: build it and they will come.
What ICO alternatives do you think provide a fairer investment model? Let us know in the comments section below.
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