As of October 12, 2017, the capitalization of the cryptocurrency market has reached $162 billion.
The capitalization of the asset market – the cryptographic tokens produced by ICO projects -
amounts to $7.8 billion. The appearance of a separate asset market indicates the growing role of ICO projects’ tokens. These digital assets are not only designed to be a means of exchange speculation, but also to have functions significant for business: they provide access to services, allow voting, accumulate a passive income and are used for internal settlements in companies and ecosystems.
Evolution of the blockchain from a distributed accounting system to ICOs
The blockchain technology is a distributed database that is supported by a number of nodes. There is no single regulatory body in the system. The history of operations and any changes become noticeable to all network members. It is advantageous for businesses to use blockchain for processes in which data transparency and authenticity is important.
For example, AgriLedger’s startup
reports on its official page that farmers lose up to 50% of harvested crops along the way to sales outlets. The project offers agricultural producers a mobile application that keeps records of documents based on blockchain technology. Prior to this, farmers relied on paper contracts or oral agreements, which were rather inefficient.
33 Elephants, a Russian company, is an
example of the introduction of the blockchain into regular business operations in Russia. It uses technology to prepare and conduct transactions with real estate. This excludes the possibility of forgery and fraud in purchases and sales of apartments or houses. In addition to the distributed transaction accounting tool, the blockchain offered the market a solution for raising pooled investment – an ICO.
From February 2014 to October 2017, more than $2.7 billion was attracted by means of ICOs. In 2017, investment in the five largest ICOs exceeded $1 billion. Filecoin, EOS, Tezos, Bancor and Status were among the most capitalized. According to
Coinschedule, 148 ICOs were conducted between January and August 2017, and the total amount of proceeds were $2.2 billion.
During any ICO, the project issues its own cryptocurrency – tokens – on the blockchain, which are then placed on the open market for interested participants – investors and users of services – at a predetermined price. In such a way, the startup arranges the fundraising. To issue tokens, the project can either develop its own blockchain or use a third-party platform, for example, Ethereum or Waves. The investors are entitled to sell tokens received during placement on the stock exchange after completing the ICO.
However, tokens of blockchain startups, companies, or venture funds are not only a means of speculation, they also have additional functionality: they provide access to services, allow voting, accumulate a passive income and are designed for internal settlements.
For general purposes, all tokens can be divided into five types: token coins, token assets, credit tokens, tokens for payment inside services and legal tokens.
Token coins are necessary for access to services. They play the role of a coin in an entertainment park. Such tokens can be bought or purchased by creating custom values in projects. For example, value creation is mining for Bitcoin and Ethereum networks, and it is the publication of posts for the Steemit social media platform.
A user of Sia, a distributed file storage network, can use Siacoin tokens, which gives him/her permission to record information to the network. In the
Emercoin project, tokens are used to pay for decentralized services, such as LNX, an advertising network with a pay per click; TTS, a digital label store operating on the blockchain; or InfoCard, an electronic business card database.
Token assets are similar to shares that a project sells during any ICO. Holders of such tokens are entitled to receive dividends after the startup makes a profit. The dividends are proportional to the investment contribution of the ICO’s participant. In addition, these tokens allow voting on the project’s future.
For example, tokens holders of Digix, a service for gold asset digitization, receive a part of commissions from transactions of Digix Network Gold. The Sia project distributes 3.9% of all successful payments for the disk space among its investors.
Credit tokens, or debt tokens, are very similar to token assets. However, here it is a short-term investment in the project. In this case, companies consider the means of investors as a form of a loan. Investors buy tokens and receive an income in the form of interest on the amount spent.
An example of credit tokens can be found in the Steemit social network. A
Steem Dollar (SD) token offers investors a fixed income in the amount of 10% annually. The Steem Dollar peculiarity is that they cannot be mined, but only received for the investments made. They can be purchased for the Steem cryptocurrency, and the income itself is charged in SD. In this case, Steem’s credit token can be sold on the exchange, and the new owner will also receive a fixed income in the amount of 10% annually.
Tokens for payment inside services are a tool for carrying out purchases and sales. The MobileGO project
offers smart contracts for purchases and sales of game items. IBM-Natixis-Trafigura
digitizes transactions with crude oil, and Vaultoro and Orebits tokenize the market for the sale of precious metals.
Snovio, a lead generation service, offers the use of
SNOV tokens to pay for the collection of contact data of potential customers and pay for existing data in the system. In this case, the introduction of blockchain technology will help to resolve the issue of the relevance of databases through a transparent and fair system of remuneration for contributors, the information providers. Delivering data to such a system and updating them becomes profitable for contributors, and the system’s customers receive leads of better quality. The situation when a contributor’s data will be sold several times without accruing revenue for each transaction is eliminated, since all operations with leads are recorded to the blockchain. Currently, sales managers and recruiters can use the service as a marketplace for ordering data on a particular audience for existing needs and tasks, for example, for ordering data on specialists in some professional field or owners of Skoda Rapid cars in Sweden.
Snovio became a participant of the
Token Rockets development program of the Starta Accelerator, as this blockchain project helps to solve the problem of a wide range of users of the service and to increase its efficiency. Token Rockets works with projects whose business model can be significantly improved through the introduction of the blockchain technology. In such cases, the startup or its founders should have experience in the business sphere, and tokens should perform a useful function for the service or the ecosystem.
Tokens for establishing legal relations. In the future, they could substitute paper documents and contracts. For example, the
SingularDTV music licensing system confers rights to a song to a particular owner.
For both companies and investors, tokens are cryptographic equivalents. Therefore, a founder of any ICO project is free to determine the role of internal tokens as long as this does not contradict the business model and the current legislation. When the ICO-investor associates himself/herself with a user of services, the additional functionality of the tokens becomes a further motivation to acquire and hold digital assets until the project will start working and create a turnover. Therefore, for the company that conducts the ICO, it is important to correctly choose the purpose of the token.
In 2017, several projects immediately made records for raising funds at ICOs. As of October 12, 2017, the Filecoin project leads among all ICOs. It raised $257 million to create a decentralized data warehouse.
$232.3 million was invested in the Tezos project. It will accelerate the implementation of transactions through the Delegated Proof of Stake (DPoS) consensus algorithm, which allows confirming transactions without involving all miners, only selected ones.
The EOS project is an operating system based on blockchain technologies; $185 million was invested in it in the first round. The
Bancor currency exchange attracted $153 million at the time of completing the ICO. The Status mobile operating system
raised $90 million during the ICO.
Filecoin, Bancor and Status began to use tokens not only for fundraising, but also as additional tools. In the Filecoin service, the token will be used to pay for the file storage and as a payment system for users as well.
The Bancor project’s
tokens are called BNT and are traded on the exchange at a rate as of $2.23 per token as of October 12, 2017. The maximum price of the token was $4.49 only when releasing it at the stock exchange. There is a smart token inside the project, by which users exchange one cryptocurrency for another - i.e., a token is bought for cryptocurrency, for example, bitcoin, or Ethereum, and then it is exchanged for another currency. Founders of the project called such a mechanism a “stock token”. Its rate directly depends on the price of all cryptocurrencies that support smart contracts in the Bancor system.
token is used as an internal means of payment. For example, with it, you can buy a set of stickers or pay for a purchase in the application store as part of the project. The token is also used for voting when deciding questions about project development. As of October 12, 2017, the Status token price was 2.6 cents. The maximum price of the SNT token was 9 cents per unit on July 23, 2017.
At a time when governments of different countries are thinking about whether to prohibit or regulate cryptocurrencies, tokens are being implemented in projects from a wide variety of business sectors. Services for storing and accounting files, precious metals and stones, accelerating financial transactions, interaction of entrepreneurs between each other, game projects and many other startups and operating companies are looking for their way of applying cryptographic tokens in business and in relationships with users and partners.
Alexey Girin, co-founder and general partner of Starta Ventures
Alexey Girin is a business angel and a private investor. Aleksey Girin had been working in the field of audit and finance for more than 15 years, and in the venture capital industry for more than 10 years. He has a Master of Economics degree. Alexey Girin is a co-founder and Managing Director of the Starta Ventures. Starta is a global VC company that includes early-stage investment fund Starta Capital, Starta accelerator, blockchain accelerator Token Rockets in New-York, and a co-working space in New-York, which is a soft landing place for startups expanding from Europe to the US. Token Rockets is a program for startups which helps to implement or develop blockchain models within their businesses, as well as preparing and conducting crowdfunding campaigns to sell and distribute cryptographic tokens.