Bitcoin was steadily building up momentum having hit $1000 in January. But it was starting to look a bit oldfashioned compared to new projects like Ethereum – which had a built-in smart contract language called Solidity. A large and dedicated community of developers could see countless applications of this combination of cryptocurrency and programming language.
Support from Ethereum Enterprise Alliance, a consortium of fortune 500 companies, startups and crypto experts gave it the aura of the next big thing and made clear that unlike with Bitcoin – the conventional business world was willing to jump onboard. In March the Ether price shot up from $10 to $360 in a few months. For a time, it actually looked like it might overtake Bitcoin as #1 in market cap, an event they humorously termed the Flippening. Ethereum had created a standard known as an ERC20 token. This definition allowed developers to build their own token, as well as the methods for investors to purchase it. These tokens lived on the Ethereum blockchain, so they didn’t need a blockchain of their own, avoiding complex issues like mining – instead being endowed from the start with the same security as Ethereum itself. This standardization also meant that ERC20 tokens are compatible with each other and could all reside in the same wallet, like Metamask.
This led to a very large number of Initial Coin offerings (ICOs) using Ethereum ERC20 tokens.
Ethereum’s own launch back in July 2014 with a pre-sale of its Ether token was one of the earliest ICOs.
On July 22, 2014 Ethereum’s inventor Vitalik Buterin announced: “Ether is a product, NOT a security or investment offering. Ether is simply a token useful for paying transaction fees or building or purchasing decentralized application services on the Ethereum platform; it does not give you voting rights over anything, and we make no guarantees of its future value.”
This became the model for ICO startups to use. These Initial Coin Offerings allowed startups to dance around the strict securities laws for IPOs or conventional Venture Capital funding where you gave up some equity ownership of your venture – instead you could simply sell tokens which provide no ownership rights or control. The investor was buying a utility token which would hopefully be an intrinsic part of the future ecosystem should the startup’s product achieve significant adoption.
This created a Wild West of companies attempting to ICOize their projects. ICOs exploded and the money raised was incredible. By the end of Q2 2017 ICOs had brought in $797 million, more than 3 times the $235 million invested by VC’s in the blockchain space! VC’s were suddenly obsolete! Many were reduced to simply buying tokens in these startups projects, just like everyone else.
Companies were raising these huge sums with just the release of a whitepaper and on the strength of their management team. Bancor raised $253 million with the idea of a decentralized exchange for ERC20 tokens.
EOS – a potential Ethereum killer, was one of the rare ICOs with really strong fundamentals based on Dan Larimer’s previous successes with Bitshares and Steemit. And it was specifically designed to address the inherent scaling issues and centralized nature of Ethereum. EOS had an unusual crowd sale which started on June 26th and will continue daily sales for a year. They have already raised about $500 million worth of ETH making them the greatest crowdfunded project of all time. They’ve pledged a billion in funding for applications built on the EOS platform with an official launch in 2018.
By the end of Q3 2017 ICOs had raised $1.24 billion led by Filecoin and Tezos. Coinbase received an extra $100 million through more traditional funding, giving it a valuation of $1.6 billion. Filecoin raised an astounding $253 million for a project quite similar to the earlier cryptocurrency projects Storj and Maidsafe.
Tezos raised $232 million for a project which sounded vaguely like a vanilla proof-of-stake blockchain with voting, perhaps a bit similar to the voting features in Dash. Ironically the company whose main innovation was “governance” – has now devolved into internal governance disputes which threaten the whole project. Will the Tezos token ever be issued? Will the class action lawsuit against them succeed? Will the investors’ ETH be returned (worth double or triple now)? Will somebody pocket the millions? Projects like Tezos may unfortunately be used to justify strict new regulation of the ICO space by the SEC.
Nevertheless – this is a self-funding revolution. The total market cap of all projects now is at least half a trillion dollars! Very few of those holding these billions want to turn their money back into the hot potato fiat currencies like US dollars or Euros. This is partly because it would generate a large taxable event, and because folks in the crypto space are an example of how rapidly the buying power of the dollar is shrinking away compared to crypto. The only thing to do with one’s winnings is to reinvest in other projects in the blockchain space.
Thus, promising new ICOs are nearly guaranteed to be showered with tons of startup money. What we will be seeing is a Cambrian explosion of projects where nearly every use of the blockchain that can possibly be conceived of will have an opportunity to be developed and tested. There will be plenty of dead ends and hopefully more than a handful of winners.
Governments have had very mixed reactions to the ICO boom. China and South Korea have banned them altogether, although South Korea may come out with more nuanced legislation later. On the other hand, Switzerland, Singapore and Gibraltar are still quite friendly to ICOs seeing them as huge potential business opportunities. They are attempting to make Goldilocks legislation – that on the one hand weeds out complete scams that give the industry a bad name and other the other hand welcomes the fantastic new business opportunities and job creation that this sector will bring.