The ICO Market Needs a Stable Unit of Account
As ether’s price has crashed spectacularly over the last couple months, a lot of people have been talking about ICOs. And for good reason: it’s no secret that ether’s rise to over $1,200 earlier this year was due in large part to the ICO frenzy happening at the same time. Instead of pursuing traditional financing routes, companies were raising millions of dollars worth of crypto, often from ordinary people who could never get in on a traditional investment round. Many of these startups were building ERC-20 tokens and were raising funds in ether, which in turn drove up the price of the token.
As the ICO boom has subsided, ether has lost a major source of demand. Furthermore, startups that raised funds in crypto but need fiat money to pay their expenses have been selling their ether for U.S. dollars or other fiat currencies. This sell-off is pushing down the price of ether, and has the potential to push it down even further. Meanwhile, everyone is suffering the consequences of a volatile market.
This close relationship between ether and the ICO market isn’t good for anyone. The most obvious risk is to startups who face enormous uncertainty about how much funding they actually have. A sustained bear market like the one we’ve been in for the past couple months could all but wipe out their funding. Of course, projects that raise funds in ether and then see the price increase could end up with more funding than they anticipated, but I’d argue that these gains aren’t worth the uncertainty that comes with them. How can you possibly follow a product roadmap when you can’t even create a reliable budget?
What’s not talked about as much is the fact that this situation is also bad for investors. The primary measure of success for these people is return on investment, but it’s much harder to predict or measure ROI when you’re not actually sure how much you’re investing. What was intended to be an investment worth $1,000 could be worth $500 or $2000 two months later. If you’re trying to measure ROI in fiat terms, this is a problem. Furthermore, if the price of ether is expected to increase, the expected return to make an investment worthwhile will have to be higher than the expected return of simply holding ether, potentially disincentivizing investment and making it more difficult for companies to raise funds.
In order for ICOs to be solidified as a legitimate and useful fundraising scheme, they need a stable unit of account. This will give certainly to both startups and investors about how much funds are being raised, how much the company is worth, and how much return investors are making down the road.
One possibility is for blockchain startups to simply raise funds in fiat. This type of ICO would have one foot on the blockchain and one foot off, with investors providing fiat investment in return for the startup’s tokens. However, this sort of solution seems to go against the spirit of ICOs as a new, on-chain fundraising method. It could also introduce new layers of friction, where crypto investors who want to invest in a blockchain startup, potentially with their profits from the cryptocurrency market, have to take their wealth off the blockchain, just to put it right back on when they acquire the ICO tokens.
A much better option would be for startups to raise ICO funding using stable coins, such as EURS for European companies or TrueUSD for their American counterparts. These tokens provide a stable unit of account, giving clarity to both startups and investors about the amount of capital invested. They also allow the entire process to happen on the blockchain, removing unnecessary friction and promoting cryptocurrency markets as a robust financial ecosystem.
Of course, these days you can’t talk about ICOs without mentioning fraud. After so many scammy projects, the perception of ICOs has gotten so bad that even legitimate projects are associated with fraud. Stablecoins can help with this as well. Having a stable unit of account gives both investors and regulators clarity about how much money a startup actually has, making it easier to demand transparency about how they spend that money. If a startup raises funds in ether, and you’re not sure how much cash they actually have, then it’s more difficult to infer whether they’re spending that cash responsibly or appropriately. There are plenty of other issues with fraudulent ICOs that using stablecoins won’t solve, but it’s a move in the right direction.
It’s time for the ICO market to move out of infancy and start to mature, allowing more accountability and providing more protection to investors, hopefully without cutting off access for everyday people. There are projects, such as Civil’s upcoming ICO, that are guiding us in the right direction. Using stablecoins to establish a reliable unit of account and bring clarity to ICOs would be a significant step toward a safer, more legitimate ICO market.