The blockchain could be the most disruptive technology released over the last 100 years. This could be an ambitious statement, as we have only 18 years in, but it may be true. The advent of distributed ledgers will bring new levels of efficiency and security to many business sectors, but so far none has made more of an impact than on the financial industry. Going deeper, aside from cryptocurrencies, smart contracts, and money transfers, its real power comes from its ability to tokenise financial assets, which allows them to be traded like shares during early-stage investment rounds.
This method of fundraising is called an initial coin offering (ICO), and is the equivalent to an initial public offering. Companies may choose to launch an ICO for a multitude of reasons, but it always involves raising money. And when compared to IPOs, an ICO is cheaper, quicker to market, and does not involve cutting through the red tape of regulated markets.
Interestingly, most ICOs today are used as a misnomer. Technically, an ICO should be used for the launch of new cryptocurrencies such as Litecoin or Dash, yet most of the launches you read about today involve shares in a business, not a virtual currency. This misunderstanding is a result of media frenzy and entrepreneurs positioning themselves with the hype of Bitcoin and its Ethereum derivative.
So keep in mind that when you buy tokens in an ICO, you are not really buying a cryptocurrency; those tokens are just an arbitrary means of transferring some of the company’s equity to you, which means they are the same as buying shares.
What ICOs Offer The Investment World
Now that we have clarified the meaning of what initial coin offerings are, let’s return to the possibilities that the blockchain and initial coin offerings offer startups and the finance world. For new businesses, initial coin offerings allow them to tap into a worldwide audience. Through the issuance of an ERC20 token, which is the standard for Ethereum tokens, allows a startup to list itself on a number of exchanges that facilitate the trade of tokens. Anyone can launch an initial coin offering today, with business equity spread out to every part of the world. This makes the logistics of organising and distributing the value of a company much easier when compared to an IPO. Companies do not need to report their performance for each market, nor do they need to pass new resolutions or issue shares. This all add ups to costly headaches for bootstrapped businesses.
Even just looking at a single market, the barriers to entry of being in a regulated environment puts many companies off the idea of going public. While on the other hand, issuing a virtual token is both time and cost efficient, and has the bonus of exposure to the cryptocurrency market. This means that the idea of ICOs for many founders are simply too good of an idea to miss out on. ICOs give some promising benefits to investors too.
The key issues that investors face when putting money into a startup are that new companies are likely to fail, and the fact that people often cannot withdraw their investments. It is not uncommon for angel investors to be put into contracts that last for 5 to 10 years, sometimes even longer. These contracts usually have clauses that prohibit investors from selling their shares. While going to a private buyer is always an option, most will need to wait until there is an IPO or a trade sale takes place to cash out.
Secondary markets for IPOs have been tested in the past, and have amounted to nothing more than simple bulletin boards for people who are looking to buy and sell. Selling shares or business equity is a slow, manual process, which is another reason why people love tokens, as their resale value is built to ERC20.
Why The Future Of ICOs Remains Uncertain
In terms of technology and ease of use, ICOs could easily be the way forward. However, the future adoption and use of ICOs for fundraising will be contingent upon the regulation and tolerance of governments worldwide. Countries such as China and South Korea have already banned ICOs from being launched within their borders, and the SEC in the United States has classified tokens as securities, which puts them in the same category as stocks, bonds, or any other financial instrument under its jurisdiction. The heightened scrutiny of ICOs is due to the lack of a due diligence process; there is no way to know if an ICO is legitimate or not, or even if their team and business exists at all. Anyone can launch an ICO and have a whitepaper, website, and code put up within days, meaning there is little protection for the general public against fraud.
The ICO phenomenon is experiencing the same kind of backlash as crowdsourcing when it was first introduced. People eagerly bought into companies that offered the world but provided very little. Compared with today, investors are now being sucked into the glamor of ICOs and not considering what the company can do or what it is capable of.
The Way Forward: Obstacles & Opportunities
The regulatory landscape for initial coin offerings needs to change, and it will. We will witness the same changes that the equity-based crowd funding experienced. This shift is both desirable and necessary for the fundraising model to stay alive. Without it, ICOs, and its underlying blockchain technology will both be mired with a bad reputation that could hurt its long-term adoption by conventional businesses.
What will happen is that the lessons learned from crowdsourcing will be applied to ICOs. These lessons include adopting a structured due diligence process, as well as background screening of the company’s founders before an ICO launch.
With these regulatory plays in motion, the future of the Ethereum blockchain looks optimistic, as blockchain offer far more than just the ability to write decentralized smart contracts.
Beyond Ethereum’s Solidity Programming Language
Due to the inexperience of developers in building Solidity-backed applications, some blockchains decided instead to go with a functional programming language. For example, the NEO blockchain states that it will offer support for .Net and Java to start with and will expand to Python and Go for applications on its platform. With these 4 languages in mind, NEO will be able to accommodate 90% of the developer community.
Qtum is an alternative blockchain that allows programmers to write smart contracts that are similar to Ethereum, except using Bitcoin’s UTXO format. The differences between these two languages differ in their how they track their users balances. With Bitcoin, there is no notion of account or balance. Instead of tracking each person’s amount in Bitcoins, the unspent coins are tracked instead. This then makes it easier to keep track of those records when compared with Ethereum, which tracks both the unspent and spent balances.
Also, by looking at how the various blockchains are adopting themselves to the market, one can see a clear divide between those that have positioned themselves for consumers, while others are for enterprise use.
Ethereum’s Pseudonymous Identity Model
With Ethereum, each smart contract that you deploy is given its own public address, or identity. This means that Ethereum could said to be pseudonymous. While others like NEO allow for a native identity to be used by apps deployed on its blockchain. The potential for native (persistent) identities on the open internet would mean you’d never have to create separate accounts for your email, social media, or other services.
Due to these disruptive changes made by the platforms Ethereum and NEO, some have compared the blockchain to the Internets early origins. The difference being that the blockchain could provide a native identity that can be used by any application on the network.
Already, there are several projects that are working to implement native identity with Ethereum. One example is Civic, which allows people to record their details that can then be used for any purpose or app on the blockchain.
On a network level, having a persistent identity will solve a potential issue with Ethereum. As if there no native identity built in, programmers that are developing platforms will fragment the ecosystem.
At present, the blockchains are criticized for the amount of energy they require to power their networks. The costs are high due to the consensus methodology that Bitcoin and Ethereum uses, which is called proof of work. With proof of work, each node attempts to notify the updated status of the network by through solving a cryptographic puzzle. Once this puzzle has been solved, each node agrees to this and proceeds ahead.
In addition to the high power consumption for using this method, the other downsides are its high costs and slow speeds. There are a few answers for this problem, with each having their individual strengths and weaknesses. Ethereum is beginning to move towards a proof of stake method, as are Qtum and Tezos. It could be argued that Tezos is a step ahead of the others through its decentralized governance. This means that any major upgrade or change to the network will be first proposed and then voted upon, thus making the headaches of a hard work an unlikely occurrence.
NEO is going with what they call a delegated Byzantine Fault Tolerance (dBFT) mechanism that allows the network to sync faster without having to consume a copious amount of energy in the process. dBFT will support a maximum of 10,000 transactions each second, which is an astronomic improvement to Ethereum’s 15.
Blockchain Is The Future — But How Will It Look?
Looking back through the history of the internet, we know that Google was not the first search engine, nor was Facebook the original social networking site. These platforms grew out of the demand for the best product. We could see something similar happen to do with the blockchain. Bitcoin and Ethereum might always be the coins and dapps that all others will be measured against, yet they are not without their imperfections.
While the blockchain technology will be the future for governments, large businesses and startups, the future that we see today will not be its final product. We live in a time now of experimentation.
The irony of the ICO craze that has cast doubt of the crypto ecosystem is that its glamor and popularization has led to a trove of new protocols, networks, and other technical building blocks that will benefit everyone in the near future. If the Blockchain manages to get replaced by something else, its successors will continue to rely on it as something rudimentary as the metric system. Despite the current technological and economic limitations, the blockchain technology will continue to develop and allow for different computational models (blockchain oracles).
And just as we have seen with its far-ranging technological implications, the financial sector has also been transformed by tokens. This is just the start for their use, with ICOs being the most obvious go-to option for startups to raise funds. Tokens could one day rearrange the organizational structure of business as we know them, and create new, democratic entities (DAOs).
Whatever the future is exactly, no one is sure. But what we do know is that the blockchain and the crypto ecosystem has a lot of growing up to do. Perhaps what the industry needs more than anything is a swift kick up the behind to see things as they really are, and not through the lens of speculative nonsense. It has been suggested that with the new paradigm of cryptocurrencies (and all the dollar signs that come with it), has made people unrealistic in their appraisal of how the technology is going to work in the long-run.
Something severe as a bubble bursting (if there is one) would do the trick, although even a major price correction could be enough for people to see that they are not the be-all of the world’s problems.