The initial coin offering (ICO) crowdfunding model represents a modern-day financial Wild West. Its promise as a technological marvel and unique strategy for freeing ambitious startups from their reliance on venture capital has drawn numerous enthusiasts, but also many detractors. The only whims that an ICO must tolerate are those of its many investors, who can’t explicitly claim any kind of rights within the company and instead turn to these opportunities for the speculation component. As such, it’s a hassle-free way to raise capital without the regulatory or liability constraints that would otherwise burden an initial public offering of stock, for example.
It was wondrous to watch these small projects reaching funding goals in mere hours during the cryptocurrency boom of 2017. Big-ticket names in today’s crypto market such as Bancor and Golem originated as ICOs, the former of which raised over $150 million in less than three hours and the latter $8.2 million in just 20 minutes. At a time when every coin held the possibility of untold riches, it’s no surprise that even the most absurd ideas collected capital without much scrutiny.
ICOs were raising money prolifically before there was any indication of market trouble, but the swift and universal decline of cryptocurrency prices that began late in 2017 had little effect. They’re still finding willing investors—and have already raised more than all last year’s ICOs combined—but new market dynamics have catalyzed a trend whereby ICOs tend to be “greedier” than they once were. They can accomplish this feat by tweaking the economics behind their token, but it’s difficult to know the true motivations behind it.
How to Be Selfish
An ICO is relatively simple compared to the hoops that a company preparing for its IPO must jump through. It needs to provide a safe smart contract that exchanges popular cryptocurrencies for an ICO’s token, as well as marketing and informational materials that outline the roadmap, utility, and of course, a plan for the economics behind the token itself.
Managing these economies is crucial and is generally a function of how many tokens are being “minted” and their utility. By adjusting the math and policies behind a token’s economy, such as total number in circulation, percentage sold, kept, and burned, and the exchange rate between counter-cryptocurrencies, it’s possible to manipulate how value flows in the ecosystem.
An ICO will typically set a minimum price for its token, which can be calculated by determining the number of tokens that an investor will get for their ETH or BTC, and then the current price of ETH or BTC. For example, if one will receive 1000 tokens in exchange for 1 ETH, and 1 ETH is worth $500, the initial value for these new tokens is $0.50.
Investors are speculating that the token will eventually be worth more than $0.50, which may happen if the project does well, gaining both popularity and more widespread exposure. Investors tend to lend just as much credence to a well-balanced token economy as they do the business idea behind it.
Using the minimum price, an ICO can determine the real amount of ETH or BTC they want to raise to meet growth milestones, and therefore the number of tokens earmarked for sale during the event. They rarely sell all the tokens that they mint, and almost always choose to keep some for the company for various reasons. Lately, they are keeping a much higher percentage of the total, leading some to believe that ICOs are “greedier” than they used to be.
Exercising Control Over Crypto Economies
Other trends also indicate a certain selfishness on the part of ICOs, namely that they “burn” unsold tokens less often. Burning tokens simply means that any tokens marked for sale in the ICO event that aren’t sold, are destroyed. This is usually viewed as a good thing for investors as it reduces the total supply and boosts the price. Instead, ICOs are simply keeping the unsold tokens for future use.
ICO participants see these trends as greedy because of their impact on the total market capitalization of the token and how much of this cap belongs to the public. A larger market cap with fewer tokens for investors typically means that the economy can be more easily disrupted when the ICO chooses to give away or sell the tokens in its coffers. See the examples below:
ICO AAA decides to raise $30 million and sells 75% of the total number of tokens to investors. This means that the total market cap is $40 million including the 25% kept by the ICO.
ICO ZZZ decides to raise $30 million and sells only 25% of the total supply of tokens to investors. In this example, the total market cap is $120 million including the 75% kept by the ICO.
Most people understand that market cap is an illustration of sentiment more than an indicator of success. If an ICO decided to sell only one token at a price of $5, and printed 1 billion of them, they could technically claim a market cap of $5 billion. Still, with a higher on-paper value and more tokens hidden at the bidding of the company, the risks for investors are greater should the company decide to sell their holdings or give them away.
There are many reasons for companies to hoard more coins relative to their investors. Potential altruistic reasons for greediness include:
Greater sustainability of capital - The ICO has a larger fund for hiring, paying overheads, and otherwise pursuing sustainable growth
More tokens set aside for miners - This encourages early mining and a strong, uncongested decentralized network
“Productive bribing” that isn’t directly related to price - Incentivizing productive partnerships and motivating developers to build dApps is encouraging for an entire ecosystem
However, the rationale for greediness might be negatively framed:
Pumping the price - Reducing the outstanding supply support dumping the coin in greater numbers for profit
Bribing exchanges for listings - Listing is also a price booster that ultimately provides no real value to the project itself apart from added fungibility
Striking a balance between sustainability and a valuable, thriving base of investors is difficult. ICOs must do what’s best for the underlying project without scaring away investors, many of whom are only interested in a quick return. Unfortunately, investors of this type are all too common, so even the most responsible ICOs must cater to this mindset or risk foregoing their funding goals. Whether their tactics are considered “greedy” is ultimately subjective, and it’s up to potential investors to determine the quality and intentions of any project before contributing.