The idea of crowdfunding isn’t a new one. Back in the 18th and 19th centuries, writers and philosophers would frequently secure investment, or the pledge of investment, for their next work.
In time, the concept was applied well beyond the arts; the pedestal for the Statue of Liberty was only completed after a public appeal and over 160,000 individual donations after government funding failed to come through. But it wasn’t until the rise of the internet that projects – again, first in the creative and entertainment industries – were widely funded through direct grassroots campaigns.
Then in 2013, around the time that the peer-to-peer online currency bitcoin was first garnering mainstream attention, the idea of crowdfunding was fused with the new technology of blockchain. The result was the ICO or Initial Coin Offering: a turbocharged way to raise money in the era of the Internet.
An ICO is a blockchain-powered crowdfunding campaign. It has much in common with conventional crowdfunding, but also key differences.
As with traditional crowdfunding, an ICO seeks to secure investment for a new project from an interested community. In this instance, funding is most likely to come in the form of bitcoin or other cryptocurrencies. The nature of these digital currencies means that they can be sent from all over the world, quickly and with almost zero cost, outside of the legacy banking system. Anyone who has tried moving money abroad will recognise the benefits of this.
In return for their investment, each supporter receives a proportional number of digital tokens. In the early days of ICOs, this often entailed the creation of a whole new blockchain, something typically achieved by copying bitcoin’s code and making a few changes to its core parameters – for example, to fix supply – though a few notable crypto platforms were built from scratch. More recently, tokens are hosted on an existing blockchain, making it a far simpler process. Revenues are delivered to these tokens by a variety of means, generally through increasing demand for them via a service on the platform (since dividends, whilst trivial to administrate on the blockchain, fall foul of securities legislation in many jurisdictions). Just like bitcoin or any other cryptographic currency, these tokens can be freely transferred and traded between users. If the idea for which the funding was secured gains traction, they increase in value.
One of the very first ICOs was for a cryptocurrency platform called Nxt, launched at the end of 2013. It was a bold idea for its time: a platform that would allow anyone to create their own tokens and trade them on a peer-to-peer exchange, as well as send encrypted messages and more. It collected just 21 bitcoins – then worth around $21,000. Nxt laid the groundwork for much that followed, but it was of its era: groundbreaking but somewhat clunky.
The gold standard for blockchain crowdfunding was Ethereum, which held its ICO in the summer of 2014. A smart contracts platform that executes code automatically, trustlessly and unstoppably, similar to what bitcoin does for money, Ethereum raised $18 million in bitcoins over the course of a month. It was an early success story for ICOs, and the Ethereum platform has gone from strength to strength on the back of that funding – it’s currently the second largest blockchain application, with a market cap of over $20 billion.
Buoyed by this precedent, ICO season began in earnest. When the bitcoin markets turned around and the currency began rising in value, interest surged. 2016 was a year of huge ICOs, and 2017 looks set to beat it hands down.
One of the biggest ICO stories of 2016 was Waves: a ‘custom tokens’ platform designed to allow anyone to crowdfund and launch their own token. Although this was already possible on Ethereum (and even older blockchains like Nxt, which in its heyday had a thriving multi-million-dollar ICO scene), Waves – taglined ‘blockchain for the people’ – was designed to make it truly easy and intuitive. The project enthused the community enough to collect 30,000 bitcoins, or $16 million at the time.
Today, many of the top projects launch their ICO tokens on either Ethereum or Waves. Hundreds of millions of dollars of investment have poured into ICOs on these platforms – though rather more on Ethereum to date, reflecting its larger community and market cap, and its head start over Waves. Just a few of the success stories have included the browser advertising application Basic Attention Token or BAT, an Ethereum project which raised $35 million in Ether (ETH) in less than a minute on 31 May; decentralised organisations management system Aragon (Ethereum, $25 million on 17 May, under 15 minutes); the Gnosis market predictions app (Ethereum, $12.5 million in April); private VoIP app EncryptoTel (Waves), which secured $4.5 million over the course of a month – the list goes on and on.
There is a growing trend towards using the Waves and Ethereum blockchains, for the sake of redundancy and leveraging both Waves and Ethereum communities. MobileGo, an initiative that will promote cryptocurrency payments among online gamers, recently raised a record-breaking $53 million this way. Neither is it only cryptocurrency or internet-based projects anymore. ICOs are moving into the realm of normal venture capital, resourcing real-world businesses. ZrCoin recently crowdfunded over $5 million on Waves to start an eco-friendly production plant for zirconium dioxide, a key industrial material.
An estimated $331 million has flowed into ICOs in the past year: a third of a billion dollars, eclipsing the $140 million VC investment in blockchain startups. And the trend is only accelerating. Eight-figure raises are no longer rare, and it has become the de facto way for blockchain organisations to fund their initiatives.
ICOs are a competitor to traditional VC funding, albeit a small one at present – whilst overall VC investment declined somewhat in 2016, it still stands at $127 billion. And there are big advantages. The ‘forward dollar’, or securing funding ahead of product development. The laxer regulatory position compared to an IPO. The communities that can be engaged in testing, marketing, and initial customers as well as investment.
But blockchain is simply a toolkit that can be used in whatever way required, and it is also being leveraged to complement conventional VC.
An interesting ICO case, Starta ICO, a project that takes promising tech start-ups in Eastern Europe and resources them with both the (crowd) funding and the training they need to access the lucrative American markets. Moreover, the company is opening the doors of VC to average citizens (with one dollar token).
More and more, it’s likely that we’ll see such an approach: the democratisation of VC using the blockchain, enabling people to invest in high-growth companies without the barriers that typically prevent ordinary investors from accessing these opportunities.
Kayrat Kaliyev is an economist, experienced in Financial Services, Business Development, and PR/Communications. Currently focused on FinTech development and building a Startup Ecosystem. Kairat has been working in a financial sector for more than 13 years, including managing positions in commercial banks, investment funds, and regulatory authorities. He is currently in the position of deputy director of the Financial Technology Department of Astana International Financial Centre in Kazakhstan, and Head of the Cross Coin company in Singapore, managing Starta ICO campaign.