The Other ICO: Some Thoughts About Interactive Coin Offerings Part I
The world of initial coin offerings(ICOs) has become one of the most innovative ecosystems in financial markets in the last couple of years. Like an other new money exchange vehicle, ICOs have been subjected to misuse by bad actors and have surfaced some of the drawbacks of token sales. Recently, a new model called interactive coin offerings(IntCOs) was proposed to address some of the limitations of ICOs. Created by Ethereum’s founder Vitalik Buterin and Jason Teutsch from the TrueBit foundation, IntCOs leverage the advantages of smart contracts to circumvent some of the main challenges of traditional token sales.
The Number One Advantage of ICOs
Somewhat ironically, the thing that allows Buttering and Teutsch to create IntCOs can be considered, at the same time, the main innovation behind traditional token sales. A lot has been written about the limitations of ICOs. However, token sales hold a fundamental advantage that makes innovations such as IntCOs possible: they are programmable.
I know I am stating the obvious but think about it in the broader context of financial markets. Programmability drastically reduces the time that takes to create improvements in digital token sales. Imagine that you would like to improve upon a traditional capital raising mechanism such as IPOs or bond sales. Just to think about the amount of paperwork, attorneys or testing that a small change would entail results overwhelming. More importantly, any possible change to those vehicles would be mostly based on processes instead of the underlying financial protocols.
Given that token sales rely on programmable smart contracts, changes can be made by simply modifying exiting protocols or creating brand new ones. That capability is what has made possible to envision models such as IntCOs and we should expect new protocols that improve token sales to continue come out in the near future.
Key Limitations of ICOs
Before we start deep diving into IntCOs, we should understand the challenges of traditional token sales that motivated the creation of a new protocol. Without neglecting the tremendous innovation and value of token sales, we should admit that the first wave of ICOs have surfaced a series of basic concerns. Let’s look at a few of those challenges:
Buyers in ICOs face the fundamental challenge of estimating the potential valuation of tokens without a lot of information. Traditional valuation modeling techniques such as security analysis don’t apply to ICOs as there is very little information available about the companies. In the absence of fundamentals, buyers rely on market signals and the influence of other buyers to setup a price.
Another limitation of ICOs, is the fact that token sales are not available to everyone. Many ICOs offer pre-sales to a reduced number of investors which sorts of anchor the price of the official token offering. also, hot ICOs can selloff in a matter of minutes leaving many investors out.
The current structure of ICOs is prompt to different types of market manipulations. From inflating the value of a toke via social channels to obtaining unfair advantage using large pools of capital or sophisticated mining capabilities, the price of ICOs can, and frequently is, manipulated by smart buyers.
How does the IntCOs proposal address some of these challenges? That will be the subject of the next post.