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Simon Seojoon Kim is CEO and partner of Hashed, an accelerator focused on cryptography focused on community building and the impact of investments.
The following is an exclusive contribution for the 2018 year of CoinDesk under consideration.
In early 2018, the blockchain community reached the apex of the ICO bubble.
The ICOs slogan, which promised that "anyone can invest in an initial project", seemed wonderful and future-oriented. However, as the prices of most ICO tokens continued to fall in the last year, it seems that the first chapter of this great experiment ended up bankrupt.
Why do most ICOs fail to succeed? Some will cite the greed of individuals who blindly seek to make a fortune, incompetent project teams led by entrepreneurs without experience, the technical limitations of platform blockchain lacking in scalability and inadequate regulation in countries that have not been able to keep up with changing market conditions.
These are all true. However, there is little to learn from this, since it is a matter of difficulty that all innovative and paradigm-oriented technologies are facing when they forge new markets in their early stages.
In this article, I aim to take stock of the current situation by examining the inherent limitations of international product organizations, in particular the belief that "anyone can invest in an initial project" and discuss some potential solutions.
The popularity of group shopping channels
Despite the ICO bubble burst, blockchain mania in Asian markets is not diminishing.
In fact, the interest in new technology trends and ecosystem expansion is growing. In particular, in markets such as China and Korea, where cryptocurrencies have gained greater consensus, retail investors continue to take part in initial investments for blockchain projects through a variety of methods.
In China, the secondary market has become popular because Chinese citizens are limited by participation in ICOs by law, while in Korea, a certain number of channels of "buying money groups" are managed surreptitiously through the messenger KakaoTalk or other communities .
By putting government regulation aside, there are other important reasons behind these trends.
Until mid-2017, anyone interested in blockchain projects could participate in an ICO without much difficulty. However, starting from the second half of 2017, there has been a movement towards a series of larger private shifts instead of public sales and a smaller participation by individual investors.
In particular, projects that were more confident in their fundraising capacity increasingly sought more investment from institutional investors or dedicated cryptographic VCs than through public sales. Key examples of this are Ontology or Handshake, who simply engaged in community flights after a private sale, without conducting an ICO.
Individual investors interested in these projects attempt to be involved by influential brokers who can grant them access to the private round. At the same time, there are many complaints within the community on the growing trend of institutional investors who collect the lion's share of private shifts.
A reluctance to accept individual investors
There is a big gap between the role that many projects had hoped that individual investors would play during the ICO and the reality they faced later.
While providing the public with a fair investment opportunity, project teams also hoped to create a loyal community that was aligned with the incentives of the project and to share its growth.
Compared to the existing start-up model, in which the company grows based on the investments received by a limited number of institutional investors through closed channels, the teams believed that the ICOs would facilitate the creation of a more open ecosystem that would have led to a virtuous circle of rapid growth.
However, in many cases individual investors in blockchain projects have not been able to provide much help to the projects.
Most of the ICO participants who formed the community personality were often "creditors" who cared only about the symbolic price, rather than the "contributors". Many of these individuals jumped on the bandwagon of popular projects without a clear understanding or trust in the technology or main activity of the project.
As a result, they have contributed very little to productive activities that promote healthy growth within the community. In addition to this, few of the individual investors who took part in the ICO for blockchain projects have actually used tokens received for the intended purpose once the first or platform has been released. Instead, they were essentially free riders who sold their tokens as soon as the price reached a certain level.
This has led to growing awareness among teams that could effectively threaten the long-term development of projects. From the point of view of the project teams, it seems more efficient to manage a small number of professional investors rather than having to communicate and provide explanations to a community of individual investors who constantly ask for price and exchange rates, especially during the launch phase when the team naturally spends most of its development energies.
Institutional investors also tend to have their own networks and greater knowledge of the blockchain sector. In many cases, institutional investors have provided practical assistance to contribute to the project's growth by acting as a consultant for entrepreneurs or by recruiting team members during the early stages. These investors can provide support in a variety of ways, including setting up local communities in key positions, hosting hackathons to connect developers to the project or acting as a link with the major media channels.
Since in private shifts there is a longer lock-up period than public rounds, institutional investors have no choice but to believe in the medium to long-term growth of the project and offer assistance where they can . Of course, not all institutional investors contribute effectively to the development of a project. The behavior of some institutional investors who fail to provide promised support or lack of experience and judgment has also been a source of complaints within the communities.
However, the competitive nature of the markets is helping to correct this problem.
Because of the flow of free and transparent information in the hyperlinked cryptographic ecosystem, information on reputable and less reliable institutional investors spread rapidly among blockchain entrepreneurs. Over time, only respectable encryption funds will have the opportunity to invest in promising projects, similar to the growth process that venture capital markets have undergone.
Is investment the only way to contribute to a project?
So far I have seen the growing trend of small public shifts in 2018.
I am not trying to raise the dichotomy on the question of whether individual or institutional investors are more suited to investing in initial projects. The most fundamental question is: "How do we create an ecosystem in which those contributing to projects can become initial shareholders?" And I think the mechanism to allow this is the Proof of Contribution.
Think back to the advent of the world's first cryptocurrency, bitcoin, which represented the beginning of the decentralization paradigm and the process by which tokens were emitted. Bitcoin has issued tokens to the community exclusively through mining, without any token sales to investors. When miners supplied hash energy, their contribution would be verified to improve network security, and they were rewarded with bitcoins in return.
Although the method of network contribution defined by the protocol was simple, it was basically a work proof concept (PoW), which could also be seen as a form of "Contribution test" that reflected the philosophy of compensating who to contribute to a project . During the long run when no one paid attention to the price of Bitcoin, most of the network's first shareholders were people who strongly believed in decentralized currencies rather than those who wanted to make a short-term profit.
In the IT sector, there is a clear distinction between the role of 1) investors, 2) the company and 3) the employees during the early stages of a startup. Investors receive share capital in return for the provision of initial capital. It is therefore the task of the company to use these funds effectively to grow society. Employees receive stock options upon joining the company and are incentivized to work hard because of the clear upside potential of a higher share price.
I believe this stock option system has been the main engine of innovation in today's Silicon Valley startups.
As a result, it is a pity that most blockchain projects have reduced the role of external stakeholders joining the project in its early stages to that of "investors" in traditional IT startups. This is evidenced by the fact that the token allocation section in the white papers of most blockchain projects resembles a business development plan and marketing budget that was determined entirely by the project team, instead of a token distribution system autonomous through the protocol. In most cases, the token model is only described briefly, with special attention to the main activities that will take place once the network has been sufficiently established.
In other words, the model for network growth is selling tokens to investors through marketing, sales or partnerships, with the use of such funds arbitrarily determined by the project team. This suggests that blockchain projects to date have not fully exploited the benefits of decentralization. Instead of treating people who make early contributions as mere financial investors, projects that truly pursue decentralization should recognize them as more similar to employees who receive stock options (and can actively contribute to the network from outside the organization). and adopt a philosophy of & # 39; compensation through the protocol & # 39; to exploit them.
Blockchain projects have the potential to design detailed and effective reward systems adapted to the nature of their token model that can verify members' contributions and compensate them accordingly. For example, even if initial investors are granted premiums as a reward for financial contributions, the calculation and payment of the bonus may take place later after it has been shown that the individual has achieved a certain level of use of the project's sapphires. o has contributed to public relations activities through a method defined by the protocol.
This would encourage investors to participate more substantially. Beyond that, it is possible to design a variety of protocols that encourage non-investors to contribute through participation in networks without authorization and distribute tokens for such involvement.
In the future we will see blockchain projects with more complex value chains that have a greater crossover with the real world. The ultimate goal of decentralized projects should be decentralization of the entire project value chain. To achieve this, all the key sections of the value chain of ordinary companies, from research and development to marketing and sales, should be turned into protocols as detailed as possible and companies should also consider mechanisms to incentivize top experts. external to the organization to contribute to the growth of the project efficiently by offering rewards.
Tokens can be used as effective tools in this scenario, but it is essential that the method for calculating incentives for contributions is based on a transparent and defined protocol made public, unlike centralized startups based on fleeting and arbitrary decisions. of the management team.
This can give protocol-based organizations the competitive edge over centralized companies.
Distribute tokens only to real contributors
Investments are just one of many ways to contribute to the growth of a project.
I think the reason for the failure of so many ICOs these days is that communities are full of initial shareholders who care only about the symbolic price because they joined as investors.
The identity of any organization is determined by the nature of its initial shareholders. This leads to a chain reaction that subsequently influences those who join the community and also has a critical influence on the direction and speed of network growth. To succeed, blockchain projects from 2019 on will have to demonstrate more advanced methods than their predecessors when it comes to determining the composition of their initial shareholder pools.
They should try to distance themselves from the current methods of donating tokens to anyone investing, launch random launches and rely on partnerships based on centralized decisions when they form the initial shareholder communities.
Despite the failure of so many ICOs, many still believe in the strong value behind blockchain technology, which has the potential to completely change the foundations of our economic systems.
Going forward, I hope that other blockchain projects will accept the challenge of using token distribution models in which "not just anyone can become an initial shareholder" and consider a "proof of contribution" model that only distributes tokens to those who made a substantial contribution.
Have an opinion of 2018? CoinDesk is looking for proposals for our 2018 under consideration. News via e-mail [at] coindesk.com to learn how to be involved.
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