Cryptocurrency enthusiasts have found a way to raise hundreds of millions of dollars without the hassle of registering with the Securities and Exchange Commission: selling digital tokens on a blockchain. Bubbly as this new market looks, it might actually serve a useful purpose.
The token sales are known as ICOs, or Initial Coin Offerings. Digital tokens are transferable assets that can be redeemed for future goods and services, just like Amazon gift cards or Chuck E. Cheese tokens. But in this case, the token peddler hasn’t built anything yet, and plans to use the acquired funds to create the proposed service.
This crowdfunding model is similar to Kickstarter, with the added benefit of immediate liquidity and global access. Andreessen-Horowitz partner Balaji Srinivasan calls token sales “Kickstarter on Steroids.” Given all the recent hype, they look more like Kickstarter on crack.
At a conference last week called the Token Summit, panelists boasted that early-stage blockchain projects have raised more than $150 million since January, an amount that makes venture capital investments look like a stingy tip jar. Last month, a prediction market called Gnosis raised $12.5 million worth of ether — a sort of analog to bitcoin — in an ICO that floated 5 percent of its total tokens. The market price of ether has since grown eightfold, which in a way gives Gnosis an implied valuation of about $2 billion. On Wednesday, a blockchain-based advertising company called Brave raised $35 million worth of ether in just 30 seconds. Thousands of attempted purchasers were rejected for being just a bit too slow.
The token financing boom has two main drivers: Sky-high cryptocurrency valuations and the lack of an economic ecosystem to absorb such gains. Most of the token sales are conducted on the Ethereum blockchain, which itself was funded by a 2014 token sale using Bitcoin. 1 The initial ether tokens were acquired for an average price of less than 25 cents, but today they trade at more than $230. 2
Beyond gambling and speculation, there aren’t many popular uses for digital currency right now. A recent token offering called PonzICO promises to apply the proceeds towards buying the founder a Tesla. Token holders get nothing more than the right to vote on the color of the car, and somehow even that project collected nearly $3,000.
In a more humble proposal, Albert Wenger of Union Square Ventures suggests that token funding could be used to finance digital infrastructure. The software protocols that power the internet were created decades ago, largely with the help of government funding. Today, that software is in critical need of maintenance, but no one wants to pay for a public good.
Internet pioneers recognized that widespread adoption could take place only if software was free, in the sense of both free beer and free speech. This open-source movement created software libraries where developers have the freedom to view, modify and distribute source code without cost. Some of the most important pieces of today’s digital world are derived from open-source building blocks: Android uses the Linux kernel, Mac OS employs parts of FreeBSD, and OpenSSL encrypts all our email and web pages.
It seems that there ought to be a way to extract a profit from contributions used by so many, but giving away free software is rarely a good business model. Decentralized projects are necessarily free and open if they are to have any hope of adoption, so digital tokens may turn out to be a similarly poor investment. Nevertheless, even financial sinkholes can benefit the ecosystem: Just look at all the bandwidth that the late-1990s tech boom built.
All the buyers of tokens probably aren’t doing it for charity. Some see it as a way to get in on the next Uber. The token’s most attractive feature is its distinctness from the underlying transaction. Colorful casino chips make gambling feel like a game. A child dropping Chuck E. Cheese tokens into a skee-ball arcade doesn’t elicit the same concern as a kid feeding buckets of quarters into a slot machine. It could be that the real value of a blockchain token is to preserve the illusion of gambling while actually financing a public good.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
In 2014, Ethereum’s founders issued 72 million ether in a crowdsale that raised 31,529 bitcoins, or about $15 million at the time. By the following year, the price of bitcoin had fallen by half, significantly reducing their budget.
Disclosure: I contribute software to the Ethereum Classic Project, which is a different blockchain from Ethereum even though the technology is nearly identical. I have some ether and classic ether that I got for free. I don’t have any tokens.
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