The Initial Coin Offering concept came about as part of a fast series of changes, many of them positive.
In 2009 Bitcoin was launched. It drew stupendous, deserved attention in the ensuing years. The viability of its single core purpose has not vanished, as evidenced by its ongoing durability at the end of 2018. At the same time, the limits of Bitcoin (even when operating in a sympathetic environment) were noticed early and are still present: limits to how it can be used, to the speed and scale of transactions, to links with physical stores of value.
The innovation of Ethereum was to run further with the ‘Smart contract” concept initiated by Nick Szabo and others, which had been applied in Bitcoin in a restrained way. Now smart contracts could be written directly into the blockchain. An interconnected ecosystem of applications and coins began to emerge. One smart contract, the ERC-20, standardized basic tradable cryptocurrencies. Countless companies came into existence or sought to revive themselves by “tokenizing”, eyeing the spectacular flow of value into Ethereum’s ICO and its rising valuation after going online. The disaster of the DAO hack did not halt the flow of man hours and money.
The optimism of developers and investors in 2014-17 was not entirely delusional. There has never been such an innovative means of connecting investors (anyone with a will and means to invest) with startups. In the background, the conjoined rise of Bitcoin and Ether as stores of value seemed to legitimize the excitement. Decentralization as an ideal spoke to the egalitarian (or libertarian, for some) beginnings of the Internet and a perfect storm of factors caused ICO and blockchain mania to take hold from 2015, entering full speed by 2016-17.
So what went wrong?
No single party is to blame. The patience and cooperation that had preceded Bitcoin and Ethereum were left aside in favor of a feeding frenzy on the part of developers and investors, all hoping to make a faster turnover than any realistic project could have enabled. Sincere, but for practical purposes doomed projects were launched, followed by waves of insincere scammers.
The money moved too fast for regulators to react intelligently, so these actors mostly held back. They did however apply pressure to the mushrooming exchanges. Even as new (and again, either doomed or fraudulent) exchanges kept being launched, different legislatures applied instruments to the successful ones that made them relocate, a pattern which continues. In the background to this was the ICO: a digital asset could be launched and spiral upwards in value before a crash or plateau. Retail investors around the globe could be easily drawn in.
Where was the incentive not to engage in what the Chinese would come to call “Cutting Leeks” (割韭菜) – meaning using any leverage to pump such an unregulated (and usually misunderstood) asset before abandoning it?
Estimating that 90% of ICOs being launched in China were frauds, the Central Bank of that country banned the funding model and crypto exchanges in late 2016. Government actions around the world have taken on many forms. In the U.S., for example, New York came in early with a “BitLicense” law for crypto-companies, yet different states and bodies within the federal democracy have moved in different directions and at different speeds, resulting in “haphazard” legal responses. As Laura Shin compared it in the New York Times (June 27 2018) regulators are like the six blind men in the Indian parable, each one feeling a different part and coming up with a different conclusion: snake, tree, spear.
What makes the SkyLedger tech and ShellPay Exchange approach to tokenomics (The Community Voted Offering model) a source of improvement in this context?
Without entering a legal rabbit hole, consider the principal ethical questions that legislators and lawyers ask when classifying any new phenomenon requiring categorization. Now that cryptocurrencies and the related blockchain technology are continuing to permeate, even the most stubborn public servants the world over will have to enter debate over what to do. Different systems of course are at play, but a general attitude – at least in face value – can be described.
Protecting individual investors / users / citizens
If a new technology have shown that it is dangerous in some way, it can be banned or restricted. If people wish to use it, and society is not harmed, the law will put instruments into play that regulate to protect individuals who engage in it. Those providing a profit or service should not be negligent. ICOs multiplied because they could launch with a minimal initial investment in the underlying technology and little community oversight – often the principal investments were in marketing and listing fees. In the CVO model, there is an emphasis on community engagement here that should result in strong market self-regulation and solid engineering on the part of projects. A coin cannot be launched unless it receives substantial votes. Votes should come as the community does deep research and discussion on the project. By the time the coin is launched, the validity and purpose of the project is known.
Adding to the general social good
As well as protecting individuals legislators/regulators may ask about the general good. Over time, we have seen how many ICO projects promised social benefit. One reason that these have been slow to emerge is the slow scaling of the blockchain structures underlying them. The SkyLedger/ ShellPay structure will enhance scalability whilst preserving decentralization and security. The hardware involves localization – but with the users who then benefit. The blockchain is not public and the Skywire network requires a SkyBox device – but the fast regulating mechanism is made to quickly reward trust and punish bad behavior by nodes. In addition, the ShellPay ecosystem involves linking new projects to pre-existing ones within the same market vertical – and these umbrella projects now being assembled are valid ones vis-à-vis the core decentralizing, distributing potential of blockchain.