Initial Coin Offering (ICO) is a fundraising tool for startups that sells cryptocoins in return for cash. More than 200 ICOs have raised over $3 billion USD this year. However, this unregulated way of crowdfunding has been getting a lot of scrutiny lately.
ICOs are notorious for their lack of rational free-market economics, giving rise to several difficulties which in turn cause nervousness among investors, especially among those who don't know how to invest in an ICO correctly. Some countries have gone so far as to issue a complete ban on them, while the US Securities and Exchange Commission (SEC) has declared digital tokens as 'securities'.
On September 26th, a 15-page white paper was published that outlined the proposal put forward by Vitalik Buterin, the founder of Ethereum, and Jason Teutsch, the founder of TrueBit. Their idea is to make ICOs a bit more regulated by instilling basic principles of market values into ICOs. In order to do so, ICOs should have no upfront cap on the amount of money raised and should make the cancellation of purchases possible.
In June, with only 130 people participating, a capped ICO raised its maximum $35 million in just 30 seconds. The first initiative of the proposal is aimed at giving every interested individual a chance to invest in ongoing ICOs – which the authors call “token crowdsales”. “Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated,” the authors write.
The second initiative introduces something that token sales have never seen: the cancellation of purchases. The authors write, “Potential buyers may enter and exit the crowdsale based on behaviors of other buyers, and in doing so, moves the valuation towards a market equilibrium.”
When a stock is offered through an initial public offering (IPO), financial information of the startup is released and a price is decided through dealings with the investors. ICO tokens have unproven functionality and have never been used before, making it impossible to reach an appropriate valuation. To ensure the observation of the law of supply and demand in ICO market, the concept of a “limit order” is also introduced. The authors hope that these small changes, discussed in detail in their paper, will help make the ICO market reasonable and fair.
ICOs are notorious for their lack of rational free-market economics, giving rise to several difficulties which in turn cause nervousness among investors, especially among those who don't know how to invest in an ICO correctly. Some countries have gone so far as to issue a complete ban on them, while the US Securities and Exchange Commission (SEC) has declared digital tokens as 'securities'.
On September 26th, a 15-page white paper was published that outlined the proposal put forward by Vitalik Buterin, the founder of Ethereum, and Jason Teutsch, the founder of TrueBit. Their idea is to make ICOs a bit more regulated by instilling basic principles of market values into ICOs. In order to do so, ICOs should have no upfront cap on the amount of money raised and should make the cancellation of purchases possible.
In June, with only 130 people participating, a capped ICO raised its maximum $35 million in just 30 seconds. The first initiative of the proposal is aimed at giving every interested individual a chance to invest in ongoing ICOs – which the authors call “token crowdsales”. “Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated,” the authors write.
The second initiative introduces something that token sales have never seen: the cancellation of purchases. The authors write, “Potential buyers may enter and exit the crowdsale based on behaviors of other buyers, and in doing so, moves the valuation towards a market equilibrium.”
When a stock is offered through an initial public offering (IPO), financial information of the startup is released and a price is decided through dealings with the investors. ICO tokens have unproven functionality and have never been used before, making it impossible to reach an appropriate valuation. To ensure the observation of the law of supply and demand in ICO market, the concept of a “limit order” is also introduced. The authors hope that these small changes, discussed in detail in their paper, will help make the ICO market reasonable and fair.