Why Are ICOs Dying?

Crowdfunding has existed for centuries. It has been used for many purposes and under many forms. It has helped the funding of wars by the use of war bonds, books through subscription models, and even exceptional art from famous artists like Leonardo Da Vinci and Michelangelo.

A form of alternative finance, crowdfunding really started to gain momentum at the turn of the century with the invention of the internet. It started being used globally to finance entrepreneurial, social, artistic, scientific and many other kinds of projects. Crowdfunding platforms like Kickstarter and Kiva grew and in 2015 were responsible for raising a staggering amount of $34 billion dollars, funding an immense number of dreams and projects.

Nowadays most crowdfunding is done online. It is no surprise since the internet revolutionized the way crowdfunding is done by offering a wider reach and making it more presentable, secure, and efficient. However, can the same be said about crypto crowdfunding?

Crowdfunding and Crypto

Cryptocurrencies entered the scene and brought many twists to crowdfunding. They contributed to the growth of peer-to-peer lending, or debt-based crowdfunding, through platforms like Bitbond and EthLend. By facilitating the transfer of money, they also contributed to donation-based crowdfunding as many institutions and websites now accept crypto donations. But most of all, they helped reform equity-based crowdfunding through ICOs (Initial Coin Offerings).

A Brief History of ICOs

The first ever ICO took place in 2013 and 5,000 Bitcoins, roughly $500,000 at the time, were raised to fund Mastercoin (now know as Omni). Then, after Bitcoin’s success, blockchain and distributed ledger technologies evolved and started being used for numerous purposes besides just digital currencies.

A new project, called Ethereum, received the funding necessary and in 2015 it was launched. The first-ever second-generation cryptocurrency, Ethereum Introduced smart contract technology. This paved the way for decentralized applications (Dapps), decentralized autonomous organizations (DAOs) and the popularization of ICOs.

The next year was marked by the infamous DAO project. Designed to be the first decentralized venture capital fund, it received an astounding $150 million in funding, equivalent to 5% of all existing Ether. Unfortunately, a vulnerability in the code was found by hackers that enabled them to get away with one-third of all funds collected. However, this didn’t seem to affect investors trust because in 2017 we witness a big boom in the ICO market. The amount invested went up from $106 million the previous year to $6,1 billion.

How ICOs Helped Changed Crowdfunding

Just like the internet completely changed crowdfunding, ICOs helped reshaped equity-based crowdfunding It contributed to making crowdfunding even more accessible and global, reducing fees and complications inherent to moving capital internationally. Put simply, by taking advantage of blockchain technology, ICOs made startup investment available to the public. Before that, only venture capitalists firms had the privilege or capital necessary to invest.

“An estimated $331 million has flowed into ICOs in the past year: a third of a billion dollars, eclipsing the $140 million VC investment in blockchain startups. And the trend is only accelerating. Eight-figure raises are no longer rare, and it has become the de facto way for blockchain organizations to fund their initiatives.” – Kayrat Kaliyev, economist.

2018: Are ICOs Dying?

After reviewing the short history and success of ICOs comes the billion dollar question: are ICOs really dying? According to data from Coindesk, ICOs raised more money in the first 3 months of this year ($6.3 billion) than the whole of 2017. ICOs are not showing any signs of slowing down but somehow, some industry specialists say that ICOs are going to die out. In order to get a more panoramic view of the issue lets review some of the problems ICOs have had.

The first problem we are facing is that most ICOs fail. To be more precise, only 44.2% of startups survive after 120 days from the end of their ICOs. Taking into account the number of absurd projects and scams out there it might not come as a surprise to some of you. In fact, scams are a very common problem. From projects with made up teams, to projects with the unfair distribution of tokens, to simply teams not delivering on their promises.

These scams are related to a lack of regulation. While some crypto purists despise it, others welcome regulation. And the fact is that slowly regulation is taken place, has many Security Token Offerings (STO) have taken place (which are basically regulated ICOs).

And finally, many complain that ICOs are overvalued. And they are right, has it has become normal for many projects to receive millions with only a simple whitepaper. It’s habitual for startups to receive investment at early stages of development but, without regulation, it takes a lot of integrity and passion from the teams to not simply run away after the ICO.

Conclusion

Although most ICOs are now allocating a portion of tokens to be airdropped, some say that airdrops will completely substitute ICOs and that respected projects don’t resort to ICOs anymore. Others say that regulation will sweep the floor and make every ICO into a Security Token Offering (STO), possibly closing investment to the public in the process. It’s hard to know who is right, especially when new ideas are being developed that intend to improve the ICO model (Interactive Initial Coin Offerings(IICO), Initial Loan Procurement (ILP)), but with time we will see what other innovations the future will bring us.