Pascal Leblanc is a distributed ledger technology strategic advisor for financial services clients at global professional services firm EY.
In this opinion piece, Leblanc discusses alternative approaches to initial coin offerings (ICOs), putting forth a new model that could potentially mitigate the price volatility of tokens.
Initial coin offerings (ICOs) are dramatically increasing in popularity.
According to CoinDesk data, from January to the end of May, 2017, ICOs attracted $327m in capital, a figure that surpasses the amount raised in VC deals for the same period.
This makes sense. As a new alternative to crowdfunding, ICOs provide a way for project creators to acquire money for their operations in exchange for cryptocurrency tokens related to their project.
Investors from around the globe are starting to notice this new capital raising model, and we're also beginning to understand that it involves three major milestones:
- Initial investments in the project in exchange for tokens
- The listing of those tokens on an open market of exchanges
- The sale of those tokens by project creators in the secondary market to maximize returns.
Yet, the fact that the market price is largely driven by the speculation on those secondary markets makes the value of the token highly volatile. This is precisely why most investors are choosing cryptocurrencies, as they are looking for a high-risk, high-reward investment.
However, on the other hand the volatility can be an issue for users of the token. According to TechCrunch, "the largest barriers to mainstream adoption is the price volatility of cryptocurrencies." That being said, investors and users don’t necessarily have their interests aligned.
This doesn't mean ICOs must be driven by speculation. I believe the current model to be a good one for certain projects, but I don't feel like this model is a one-size-fits-all. Some projects may require more stability, more control and more governance.
Achieving price stability
In particular, a client of mine wanted to leverage the ability to raise funds through an ICO, but the purpose of their tokens required the price to be stable. Consequently, I had to come up with a new model that would put forward stability and the experience of end users.
This new model features two major differences from the popular model because it targets a different use case for a different crowd. As I said earlier, the reason for the volatility is due to the nature of trading on secondary markets, where price is driven by speculation.
Instead, the suggested model only has a primary market hosted by the creator of the currency and the price only gets updated every quarter. To make sure there is someone buying on both sides, the market has to have a reserve in both currencies they want to trade.
Basically, this means the market host is doing the market making to keep the price stable. In the case of the client, they are keeping 40% in reserve for buying coins in their own market, making the price stable as long as the reserve doesn't run out.
This mechanism transfers the risk from seeing the price tanking to having more people leaving the currency than people joining it.
It's important to note that the targeted users for the purpose of the project were not necessarily "crypto geeks" and that, to make it more accessible to all audiences, every private and public key would be managed by the project hosts.
This brings three advantages, allowing for:
- A recovery mechanism that ensures fraudulent transactions are mitigated
- A mechanism for ensuring the market is the only one in operation
- The ability to create a user experience closer to online banking by using the classic username and password combination.
I strongly believe that there is more than one way to conduct a successful ICO, and that it is important to align the objectives of the investors with users. The new model I just described would attract a different type of investor who would be looking for medium-risk, medium-reward type of investment and a different type of end users.
That being said, I think both models are viable and should coexist.
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