The $ Initial Coin Suggesting bubble is a enormous deal

The $Three.8bn cryptocurrency bubble is a meaty deal. But it could break the blockchain

How did the equivalent of coupons for a supermarket under construction come to be worth $Trio.8bn, and counting?

  • 14 Jul 2017

David Siegel had a problem. For years, the American entrepreneur had been working on an idea: an open-source platform, called Pole, which would permit people to remain in control of their private information by piggybacking on the blockchain — a digital decentralised ledger underpinning cryptocurrencies such as Bitcoin.

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But when Siegel pitched his company Twenty Thirty to venture capital firms, he was met with blank looks. Investors weren’t interested in Pile, and Siegel couldn’t get funding to build it.

After months of rejections, Siegel determined do something different: instead of phoning just another investor, he resolved to get help from future users.

READ NEXT

ICOs are disrupting my industry beyond belief. The funny thing is, I like it

On fifteen July, he is going to sell five hundred sixty million “tokens” — digital units of payment that will be necessary to use Pile, once it’s ready — in exchange for ether, an up-and-coming cryptocurrency exchanged on public blockchain Ethereum. His target is the equivalent of $50 million; if that sounds like a lot, be aware that Pillar’s “token pre-sale”, some days ago, raised $Four million worth of Ethereum’s currency, ether — in thirty four minutes.

“I couldn’t raise any money for Twenty Thirty from investors, because they didn’t get what we were doing; now we have ordinary people hammering our email about Pole,” Siegel says. “These people truly want to fund this open source project.”

Siegel’s fund-raising model is called Initial Coin Suggesting, or ICO — and you might have heard of it, as it is the latest big thing in the frantic world of cryptocurrencies.

ADVERTISEMENT

READ NEXT

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An ICO’s functioning is elementary: a team with an idea, but brief of funds, use blockchain technology to issue a certain amount of digital tokens (aka “coins”) sold in an auction to people paying in ether, Bitcoin or, seldom, regular money like dollars or pounds.

Apart from infrequent cases, tokens’ only ostensible function is permitting their holders to use the platform that issued them: they could be used, for example, to buy storage space on a Dropbox-style service, or converted into special objects on a gaming platform. They are the equivalent of coupons for a supermarket under construction.

But tokens often grow into mini-currencies in their own right: they are traded for cryptocurrency or fiat on blockchain marketplaces, and the more successful their related project grows, the more valuable its tokens become. This dynamic is inevitably attracting a fine deal of speculation.

ADVERTISEMENT

READ NEXT

Confused about blockchain? You should be

The mechanism has been around for a while — the very first example was MasterCoin in 2013, followed in two thousand fourteen by Ethereum’s very first ether sale, and more recently by the ill-fated autonomous VC rock hard The DAO — but it truly surged over the very first half of 2017. Ems of projects have amassed millions of dollar within days, hours, or seconds, with superstars such as blockchain architecture firms EOS and Tezos soaring over $150 million and $200 million. In June, bitcoin news website Coindesk announced that funds raised through ICOs had overcome VC money as the very first source of investment in the blockchain sector in 2017. “Tokens” might sound like Monopoly money, but their influence on the real world is growing by the day.

The positive one is that ICOs are a fresh, clever way to finance projects that fight to get VC’s backing.

Etienne Brunet, an investment executive at FinTech VC stiff Illuminate Financial, points to investors’ latest interest in private blockchains (members-only ledgers banks and financial institutions are experimenting with) as the root cause for ICOs. “In two thousand sixteen it was very hard to raise funding unless you were doing private blockchains,” he says. “So, all the people attempting to build open source projects for the public blockchain had to find a fresh way to get funds.”

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  • Bitcoin
  • 08 Jun 2016

READ NEXT

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That view is collective by Jamie Burke, the founder and CEO of blockchain-focussed VC hard Outlier Ventures, who calls ICOs “the blockchain ecosystem’s killer app.”

The way Burke sees it, ICOs are eventually lowering the barriers to entry for technology investment, as whoever has some cryptocurrency can join the party; more than that, coins’ speculative potential is permitting open-source projects to raise more funds than ever before.

“The point is that now, for the very first time ever, open-source initiatives can be profitable for investors,” he says. “Previously, they were relying upon donations and they were inherently unprofitable — people would just do them for an ethical objective. Now there is a financial incentive for people to participate.”

There is a stick-it-to-the-man undertone behind this take on ICO: the idea that brainy, independent teams are raking in millions from the anarchic crypto-crowd to take on blindsided VCs and bank-loving private blockchainers. And increasingly, ICOs are being used by companies outside of the blockchain field, such as messaging service Kik, which portrayed its upcoming ICO as a last-ditch attempt to rival with juggernauts such as Facebook.

READ NEXT

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Burke has no doubts where this leaves traditional investors. “The VC model is dead,” he says. “Over time people like us will stop being the main source of capital. VCs will become more like auditors. I’ve got people in ICOs telling, ‘We don’t need your money, what we want is your validation.’”

Still, Burke admits that, while this is the direction he sees ICOs evolving over the next few months and years, the current state of affairs is far from optimal.

Confused about blockchain? You should be

  • WIRED Money 2017
  • 08 May 2017

“Most of the projects which have launched ICOs are poorly designed and won’t scale,” he says. “But I look past that: I still think we have the capability to kick-start this fresh economy.”

READ NEXT

How the blockchain is helping stop the spread of conflict diamonds

That brings us to the 2nd narrative, which portrays the ICO madness as a massive speculation game, or worse.

ICOs might have lowered barriers to entry, but most token sales are predominated by a handful of large investors —“whales” in crypto parlance — snarfing up almost all the cake. In the $35 million ICO for Plucky, a browser created by Mozilla co-founder Brendan Eich, only one hundred thirty people bought coins — and half of them were purchased by just five buyers.

Albeit most projects specify — risibly— that tokens are “not for speculation”, token speculation is at the core of ICO’s success at raising so much money so quickly. Big crypto owners are throwing money at token sales hoping that coin value will increase in the brief run, diversifying their crypto portfolio in the process.

“The point is: if you have $200 million worth of bitcoin or ether, what should you do?” Illuminate’s Brunet says.

READ NEXT

The blockchain came after bankers and now it's going after lawyers

The side effect is that millions are going to entities which, apart from tokens and a project outline — crypto parlance: “white paper” — have very little to suggest. Take for example “Useless Ethereum Token”, a parody initiative which still managed to raise $40,000 in funding. Or, for a grimmer story, look at OneCoin: a Ponzi scheme which had amassed over $350 million before being busted by the Indian police.

Some of the more visible security problems are being addressed by the crypto community at large: it has been recommended that funds from ICO be locked in an escrow mechanism — providing access only to limited sums after milestones have been reached — in order to prevent crypto heists. And Ethereum’s wunderkind guru Vitalik Buterin has turned to game theory to suggest some tips for designing fairer ICO auctions, such as as splitting them up in smaller, spaced out sales over time.

The elephant in the room, has to do with financial regulation: with tokens being auctioned, traded, and speculated on as if they were securities, should we regard them and regulate them as securities? (The fact that ICO is even phonetically reminiscent of IPO, or initial public suggesting, is hardly a coincidence.)

In most countries, the response would be no: if something is not formally a security, it won’t be treated as such. But that is different in the US, whose security regulation extends to “investment contracts” — defined in a landmark case (centered on an orange orchard in Florida) as investments made with an “expectation of profits.”

Whether that applies to tokens— bizarre entities that have a sort of intrinsic value (as theoretical payment units) but are also being flipped around like stocks, is anybody’s guess. Right now, the US Securities and Exchange Commission has been silent on the matter, explains Peter Van Valkenburgh, a researcher at blockchain-focussed think tank Coin Center.

“SEC’s default position is ‘we’re proceeding cautiously because, while we are worried about investor protection, we’re not certain this is within our purview, and we don’t want to stifle innovation’,” he says. “There’s no indication that anything is gonna happen in the very brief term.”

ADVERTISEMENT

If SEC did determine to do act any ICO project which has sold coins to US citizens would have to conform with much more stringent regulation. That is very likely why many current ICOs are labelled as “not for US investors”. (Ontario’s authorities recently warned that blockchain firms might be breaching the Canadian region’s financial laws.)

For the time being, ICO’s real challenge is whether it can thrive without being a anguish in the side for the blockchain ecosystem itself. ICOs are likely behind the latest spike in the value of ether — with investors buying the cryptocurrency in order to take part in token sales; ICOs might also be behind ether’s unexpected thirty percent drop in value, as many ether-loaded projects are converting their ICO-generated ether into fiat currency to pay their staff.

And the Ethereum network itself — which less than one year ago went through a traumatic restructuring following the collapse of The DAO — is being put under strain by the ICO onslaught, as relentless, massive volume of transactions generated by token sales commandeer the ledger’s computing power.

But that is not necessarily a bad thing, Van Valkenburgh says. “It could be a way to battle-harden the network: there have been issues with transaction delays and scaling because of the popularity of ICOs put strain on the network,” he says. “But if the blockchain has to grow, ICOs are a good way to test the infrastructure.”

The $ Initial Coin Suggesting bubble is a hefty deal

The $Three.8bn cryptocurrency bubble is a ample deal. But it could break the blockchain

How did the equivalent of coupons for a supermarket under construction come to be worth $Three.8bn, and counting?

  • 14 Jul 2017

David Siegel had a problem. For years, the American entrepreneur had been working on an idea: an open-source platform, called Pole, which would permit people to remain in control of their individual information by piggybacking on the blockchain — a digital decentralised ledger underpinning cryptocurrencies such as Bitcoin.

ADVERTISEMENT

But when Siegel pitched his company Twenty Thirty to venture capital firms, he was met with blank looks. Investors weren’t interested in Pile, and Siegel couldn’t get funding to build it.

After months of rejections, Siegel determined do something different: instead of phoning just another investor, he resolved to get help from future users.

READ NEXT

ICOs are disrupting my industry beyond belief. The funny thing is, I like it

On fifteen July, he is going to sell five hundred sixty million “tokens” — digital units of payment that will be necessary to use Pole, once it’s ready — in exchange for ether, an up-and-coming cryptocurrency exchanged on public blockchain Ethereum. His target is the equivalent of $50 million; if that sounds like a lot, be aware that Pillar’s “token pre-sale”, some days ago, raised $Four million worth of Ethereum’s currency, ether — in thirty four minutes.

“I couldn’t raise any money for Twenty Thirty from investors, because they didn’t get what we were doing; now we have ordinary people hammering our email about Pole,” Siegel says. “These people truly want to fund this open source project.”

Siegel’s fund-raising model is called Initial Coin Suggesting, or ICO — and you might have heard of it, as it is the latest big thing in the rabid world of cryptocurrencies.

ADVERTISEMENT

READ NEXT

Live tracker exposes how much NHS hackers are making from their ransomware requests

An ICO’s functioning is plain: a team with an idea, but brief of funds, use blockchain technology to issue a certain amount of digital tokens (aka “coins”) sold in an auction to people paying in ether, Bitcoin or, seldom, regular money like dollars or pounds.

Apart from uncommon cases, tokens’ only ostensible function is permitting their holders to use the platform that issued them: they could be used, for example, to buy storage space on a Dropbox-style service, or converted into special objects on a gaming platform. They are the equivalent of coupons for a supermarket under construction.

But tokens often grow into mini-currencies in their own right: they are traded for cryptocurrency or fiat on blockchain marketplaces, and the more successful their related project grows, the more valuable its tokens become. This dynamic is inevitably attracting a excellent deal of speculation.

ADVERTISEMENT

READ NEXT

Confused about blockchain? You should be

The mechanism has been around for a while — the very first example was MasterCoin in 2013, followed in two thousand fourteen by Ethereum’s very first ether sale, and more recently by the ill-fated autonomous VC rock-hard The DAO — but it truly surged over the very first half of 2017. Ems of projects have amassed millions of dollar within days, hours, or seconds, with superstars such as blockchain architecture firms EOS and Tezos soaring over $150 million and $200 million. In June, bitcoin news website Coindesk announced that funds raised through ICOs had overcome VC money as the very first source of investment in the blockchain sector in 2017. “Tokens” might sound like Monopoly money, but their influence on the real world is growing by the day.

The positive one is that ICOs are a fresh, brainy way to finance projects that fight to get VC’s backing.

Etienne Brunet, an investment executive at FinTech VC stiff Illuminate Financial, points to investors’ latest interest in private blockchains (members-only ledgers banks and financial institutions are experimenting with) as the root cause for ICOs. “In two thousand sixteen it was very hard to raise funding unless you were doing private blockchains,” he says. “So, all the people attempting to build open source projects for the public blockchain had to find a fresh way to get funds.”

Beyond bitcoin. Your life is destined for the blockchain

  • Bitcoin
  • 08 Jun 2016

READ NEXT

The Blockchain will save healthcare and shipping billions of pounds

That view is collective by Jamie Burke, the founder and CEO of blockchain-focussed VC rigid Outlier Ventures, who calls ICOs “the blockchain ecosystem’s killer app.”

The way Burke sees it, ICOs are eventually lowering the barriers to entry for technology investment, as whoever has some cryptocurrency can join the party; more than that, coins’ speculative potential is permitting open-source projects to raise more funds than ever before.

“The point is that now, for the very first time ever, open-source initiatives can be profitable for investors,” he says. “Previously, they were relying upon donations and they were inherently unprofitable — people would just do them for an ethical purpose. Now there is a financial incentive for people to participate.”

There is a stick-it-to-the-man undertone behind this take on ICO: the idea that wise, independent teams are raking in millions from the anarchic crypto-crowd to take on blindsided VCs and bank-loving private blockchainers. And increasingly, ICOs are being used by companies outside of the blockchain field, such as messaging service Kik, which portrayed its upcoming ICO as a last-ditch attempt to rival with juggernauts such as Facebook.

READ NEXT

Say farewell to the Pound: millennials using the blockchain could lead to local currencies

Burke has no doubts where this leaves traditional investors. “The VC model is dead,” he says. “Over time people like us will stop being the main source of capital. VCs will become more like auditors. I’ve got people in ICOs telling, ‘We don’t need your money, what we want is your validation.’”

Still, Burke admits that, while this is the direction he sees ICOs evolving over the next few months and years, the current state of affairs is far from optimal.

Confused about blockchain? You should be

  • WIRED Money 2017
  • 08 May 2017

“Most of the projects which have launched ICOs are poorly designed and won’t scale,” he says. “But I look past that: I still think we have the capability to kick-start this fresh economy.”

READ NEXT

How the blockchain is helping stop the spread of conflict diamonds

That brings us to the 2nd narrative, which portrays the ICO madness as a massive speculation game, or worse.

ICOs might have lowered barriers to entry, but most token sales are predominated by a handful of large investors —“whales” in crypto parlance — snarfing up almost all the cake. In the $35 million ICO for Plucky, a browser created by Mozilla co-founder Brendan Eich, only one hundred thirty people bought coins — and half of them were purchased by just five buyers.

Albeit most projects specify — risibly— that tokens are “not for speculation”, token speculation is at the core of ICO’s success at raising so much money so quickly. Big crypto owners are throwing money at token sales hoping that coin value will increase in the brief run, diversifying their crypto portfolio in the process.

“The point is: if you have $200 million worth of bitcoin or ether, what should you do?” Illuminate’s Brunet says.

READ NEXT

The blockchain came after bankers and now it's going after lawyers

The side effect is that millions are going to entities which, apart from tokens and a project outline — crypto parlance: “white paper” — have very little to suggest. Take for example “Useless Ethereum Token”, a parody initiative which still managed to raise $40,000 in funding. Or, for a grimmer story, look at OneCoin: a Ponzi scheme which had amassed over $350 million before being busted by the Indian police.

Some of the more visible security problems are being addressed by the crypto community at large: it has been recommended that funds from ICO be locked in an escrow mechanism — providing access only to limited sums after milestones have been reached — in order to prevent crypto heists. And Ethereum’s wunderkind guru Vitalik Buterin has turned to game theory to suggest some tips for designing fairer ICO auctions, such as as splitting them up in smaller, spaced out sales over time.

The elephant in the room, has to do with financial regulation: with tokens being auctioned, traded, and speculated on as if they were securities, should we regard them and regulate them as securities? (The fact that ICO is even phonetically reminiscent of IPO, or initial public suggesting, is hardly a coincidence.)

In most countries, the reaction would be no: if something is not formally a security, it won’t be treated as such. But that is different in the US, whose security regulation extends to “investment contracts” — defined in a landmark case (centered on an orange orchard in Florida) as investments made with an “expectation of profits.”

Whether that applies to tokens— bizarre entities that have a sort of intrinsic value (as theoretical payment units) but are also being flipped around like stocks, is anybody’s guess. Right now, the US Securities and Exchange Commission has been silent on the matter, explains Peter Van Valkenburgh, a researcher at blockchain-focussed think tank Coin Center.

“SEC’s default position is ‘we’re proceeding cautiously because, while we are worried about investor protection, we’re not certain this is within our purview, and we don’t want to stifle innovation’,” he says. “There’s no indication that anything is gonna happen in the very brief term.”

ADVERTISEMENT

If SEC did determine to do act any ICO project which has sold coins to US citizens would have to serve with much more stringent regulation. That is very likely why many current ICOs are labelled as “not for US investors”. (Ontario’s authorities recently warned that blockchain firms might be breaching the Canadian region’s financial laws.)

For the time being, ICO’s real challenge is whether it can thrive without being a ache in the side for the blockchain ecosystem itself. ICOs are likely behind the latest spike in the value of ether — with investors buying the cryptocurrency in order to take part in token sales; ICOs might also be behind ether’s unexpected thirty percent drop in value, as many ether-loaded projects are converting their ICO-generated ether into fiat currency to pay their staff.

And the Ethereum network itself — which less than one year ago went through a traumatic restructuring following the collapse of The DAO — is being put under strain by the ICO onslaught, as relentless, massive volume of transactions generated by token sales commandeer the ledger’s computing power.

But that is not necessarily a bad thing, Van Valkenburgh says. “It could be a way to battle-harden the network: there have been issues with transaction delays and scaling because of the popularity of ICOs put strain on the network,” he says. “But if the blockchain has to grow, ICOs are a good way to test the infrastructure.”

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