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Initial Coin Offerings: An Overview [Digital Ventures]

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Some thoughts on the recent trends in token crowdsales, presented to Siam Commercial Bank's top management as part of Digital Ventures' briefings on latest trends in the Fintech world.

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Initial Coin Offerings: An Overview [Digital Ventures]

  3. 3. ICO FUNDRAISING DWARFSVC FUNDING Source: CB Insights, Fortune Tezos $232M Self-amending cryptographic ledger Bancor $153M Price discovery and liquidity mechanism for tokens Top ICOs (to Aug ‘17) Initial coin offerings (ICOs) have become the preferred avenue for blockchain startups to raise funds. Even non-blockchain and non-fintech startups are starting to look at ICOs EOS $185M Open source platform for scalable decentralized apps Filecoin $250M Decentralized storage network 0 200 400 600 800 1000 1200 1400 1600 2016 2017 YTD Investment in Bitcoin & Blockchain Startups (US$m) VC ICO US$1.5 billion in ICO funding in 2017 through August nearly 3x global VC funding for bitcoin & blockchain startups in 2016
  4. 4. WHAT IS AN ICO? Create blockchain protocol layer Token Issuer Generate tokens Send cryptocurrency Tokens Token Buyers Features of an ICO § Tokens are digital claims to future rewards or services § Transacted on blockchains (typically Ethereum); tokens purchased via cryptocurrencies (typically BTC or ETH) § Tokens can be freely and immediately tradeable on cryptocurrency exchanges § Tokens are not strictly claims on equity or debt § Funds are not raised throughVC or financial institutions § Not currenly regulated § Not a new phenomenon; the first token crowdsale happened in early 2013 What an ICO isn’t Initial coin offerings, also known as crowdsales, are a method of startup fundraising via the sale of digital tokens over a blockchain
  5. 5. COMPARISON OF FUNDRAISING METHODS ICO Equity Crowdfunding Reward Crowdfunding VC IPO Startup stage Prototype Prototype Prototype Prototypeàlate stage Late stage Equity No Yes No Yes Yes Requirement White paper (optional) - Desired amount - Project milestones - Team - Types of tokens - Exchange ratio Educational materials - Investment description - Types of securities - Investment limits Educational materials - Project description - Marketing deck - Types of rewards Pitch deck - Management - Use of funds - Business model Prospectus - Company description - Types of securities - Management - Financial info Investors Blockchain enthusiasts Angel investors Early adopters Limited partners Public Period 3-6 months 1-3 months 1-2 months 3-12 months >1 year Fundraising cost Low Medium Low High High Channel Online Online Online Offline Offline Liquidity Medium Low Low Low High Downside risks Project fails, fraud Bankrupt Project fails Devalue, bankrupt Price drops
  6. 6. FUNDRAISING STEPS ICO IPO 1. Initiate Write a summary; announce to crypto community to gather interest and feedback Hire an investment bank to underwrite the IPO 2. Documentation - White paper - Website Filings with SEC - Registration statement - Prospectus 3. Marketing PR-campaign - Crypto forums - Slack Roadshow - Pre-sale IPO to institutional investors - Set pricing 4. Sales process Buyers send cryptocurrencies to a digital address; smart contracts issue tokens according to exchange ratio Allocate shares according to book building 5. Listing Tokens listed on a crypto exchange Shares listed on an exchange Though there are similarities in the process steps between ICOs and IPOs, token sales are faster to execute at a fraction of the cost of traditional equity offerings
  7. 7. TYPICAL TOKEN USE CASES Company Use of funds Use of tokens OmiseGo Proprietary blockchain for interoperable digital wallets Right to validate Tezos Proprietary blockchain that is decentralized and self-governing Right to vote EOS.io Proprietary blockchain that targets higher transaction speeds and scalability than Ethereum Right to use Bancor Protocol with built-in price discovery and a liquidity mechanism, allowing users to issue tokens or exchange them automatically Right to use Status Protocol that has a messaging platform and mobile browser to interact with decentralized applications Payment for service TenX Protocol for crypto debit cards Profit sharing rights BAT Protocol for digital advertising Payment for service Civic Protocol for on-demand, secure and low-cost access to identity verification services Payment for service
  8. 8. REGULATORY TREATMENT AROUND THE WORLD § No definitive regulation, but have viewed cryptocurrencies with a light touch § MAS has launched a tokenized version of the SGD via Project Ubin § Application of the HoweyTest (investment of money in a common enterprise with an expectation of profits predominantly from the efforts of others) to ICOs to determine if a particular token should be classified as a security falling under securities law § Issued a ban on ICOs on Sept 4.Top 30+ cryptocurrencies saw significant, double-digit percentage price drops, but most have begun recovery § Concerns over fraud and pyramid schemes § No regulation at current time; cryptocurrencies viewed as assets. Regulators have started weighing in on ICOs, some declaring or contemplating outright bans. But many are taking more cautious approaches. Cryptocurrency markets remain volatile, but highly resilient. § Issued a statement on Sept 5 that certain ICO structures would classify the token issuance as a security, which would be a regulated activity that requires license § Following similar approach to U.S. SEC § Like Japan, Korea has legalized bitcoin (July 2017) as a remittance method § However, a digital currency task force led by the central bank intends to crackdown on ICO issuances and intends to introduce regulations
  9. 9. Why SEC may not be able to directly regulate ICOs Self-regulatory framework May not involve equity They may not fit into the current definition of a security, and are technically outside of traditional legal frameworks. Global instruments They are funded using cryptocurrencies that are not controlled by any central authority or bank. Pseudo-anonymously It’s not impossible to find out who people are, but it’s not easy, either. Simple Agreement for FutureTokens (SAFT) § Based on SAFE (an agreement to raise money in exchange for equity without having to issue debt instruments like convertible notes). § SAFE is only offered to “accredited investors” ($200,000 or more a year or have a net worth of at least $1M). Crowdfunding § Guidance on when digital assets are deemed securities and whether the firms that trade digital assets must register. § Sell to accredited investor § Regulators to adopt a regulatory sandbox. SELF-REGULATORY FRAMEWORK Other mechanisms § Escrow account (third party releases funding once milestone is reached) § Setting a maximum investment amount § Use KYC process to vet investors In the absence of regulatory comment, the Ethereum and cryptocurrency community has taken it upon itself to explore self-policing of crowdsales
  10. 10. BEYOND THE HYPE:THE FUTURE OF ICOs • Individual regulatory bodies are starting to weigh in, often in piecemeal, uncoordinated fashion • The global, borderless nature of crowdsales will eventually require more coordinated global regulatory standards to fuel broader adoption • The Ethereum and cryptocurrency community is looking at self-regulation, but would possibly welcome official regulation that tempered bad actors without stifling innovation & growth • Rampant fraud and speculation, along with poor quality crowdsales, haven’t dampened enthusiasm for ICOs, but the crypto community fears that they could stifle long-term growth and sustainability of ICOs as a form of fundraising if its worst excesses are not managed • Streamlining and mainstreaming the crowdsale process is a matter of time, as tech development matures and better security and volatility mechanisms are created • Despite the hype, ramp-up in ICOs activity & token prices, and questionable startups issuing tokens, the ICO phenomenon has validated: 1) the technology to raise large sums of money quickly and cheaply over blockchains, and 2) the willingness of investors to invest large sums of money over blockchains • A robust regulatory framework could open the door for the tokenization or equity, debt, and other forms of financing.This could disrupt traditional lending and capital markets as blockchain- driven fundraising dramatically slashes execution time and costs Regulation Challenges Adoption & evolution Despite the short term volatility and uncertainty of ICOs and cryptocurrencies, the long term implications of blockchain-driven fundraising are significant for SCB, potentially transforming the entire capital market industry
  11. 11. APPENDIX
  12. 12. ICOs AS ETHEREUM’S KILLER APP? Ethereum’s unique characteristics • One of the most active Blockchain systems with large developers community. • Highest chances of fast recovery in case of errors. • The only production-ready Blockchain that supports smart contracts. • Turing-complete language is more complete than C+++ used in BTC blockchain, enabling freedom in features and security models. • The tokens issued through smart contracts are executed on EthereumVirtual Machine (EVM), making them independent from Ethereum public Blockchain. Active Ease of Development Independence Features • Tokens based on Ethereum Blockchain typically adhere to the same standard, called “ERC-20” • This allows tokens to be interchangeable and compatible with different protocols and projects adhering to the same standard. Interoperability ERC-20 Decentralized autonomous organizations (DAOs) Decentralized autonomous apps (Dapps) Smart contracts Ethereum’s characteristics & features are what makes it the most popular protocol for ICOs
  13. 13. ETHEREUM & DAPPs AT TECH CORE OF ICOs Decentralized application (Dapp) § A Dapp is a system – “Blockchain enabled” website, where the smart contract is what allows it to connect to the Blockchain. § The traditional web application uses HTML, CSS and javascript to render a page. It will also need to grab details from a database utilizing an API . § A Dapp uses similar technology as a web, but it uses a smart contract connecting to a Blockchain. Smart contract § Smart contracts are used to generate tokens, bound by their own rules. Front-endWebsite API Database Front-endDapp Smart contract Blockchain Manage money Money + another piece Governance systems To execute, smart contracts rely on “oracles” that relay up-to-date information about the outside world. Users exchange Ether as a mean to settle a contract with another user.The network's nodes facilitate the distribution of data. A decentralized autonomous organizations (DAO) is formed; Dapps set rule on voting and funding. Ethereum offers the ability to program different types of smart contracts, enabling users to build decentralized autonomous apps (DApps) and issue tokens
  14. 14. ETHEREUM’S TOKEN STANDARDS ERC-20 § A set of functions written into tokens’ smart contracts. It defines how tokens should behave, including: § How to get the total token supply § How to get the account balance § How to transfer the token § How to approve spending the token § ERC20 enables tokens to seamlessly interact through different Dapps and projects on Ethereum. Developers can predict how a token will operate and integrate with less fear of errors. ERC-223 A new development which aims to solve ERC-20 issues: § (1) Eliminates the problem of lost tokens: § Users lose tokens when they mistakenly use the instructions for sending tokens to a smart contract. § ERC-223 allows users to send their tokens to either wallet or contract with the same function transfer, eliminating confusion and lost tokens. § (2) Can handle incoming token transactions, and reject non-supported tokens § (3) Energy savings: § Involves a one step process vs a 2 step process (ERC-20), saving cost. Ethereum’s token standards, which define the functions of smart contracts, are the basis upon which the ICO market is built
  16. 16. The DAO Issuing company Slock.it Mission The first implementation of Decentralized Autonomous Organization (DAO) code to automate organizational governance and decision-making. It aims to codify the rules and decision-making apparatus of an organization, eliminating the need for documents and people in governing, creating a structure with decentralized control. Token DAO Platform Ethereum Amount intended 50,000 ETH / $500,000 Amount raised $160M Date 30 April 2016 Motivation DAO allows users to direct the DAO’s operations. Users use tokens to vote. Fund allocation 100% to the DAO Coin distribution 100% Token usage • The tokens represent ownership over the DAO, which includes being able to nominate and vote on DAO activities, nominate and vote on DAO curators. • Any profits the DAO makes on its investments will be given back to token holders as dividends. CASE STUDY:THE DAO The DAO was the largest ICO in history. The key to its success is its ideology of a self-governing organization.
  17. 17. Omise Go Issuing company Omise Mission OmiseGO is an Ethereum-based financial technology company offering a decentralized exchange (a blockchain) and a payments platform (a wallet). Token Omise Go (OMG) Platform Ethereum Amount intended Cap raised from $19M to $25M Amount raised $25M Date 27 June 2017 Motivation Owning Mechanism • Tokens buys the right to validate this Blockchain.Transaction fees on the network, including payment, interchange, trading, and clearinghouse use, are given to validators who enforce bonded contract states. • The token will have value derived from the fees derived from this network, with the cost of validating. CASE STUDY: OMISEGO OmiseGo’s use of KYC, fundraising caps, and maximum investment per investor greatly reduced the amount of speculation and volatility
  18. 18. Ripple Omise Mission Ripple’s distributed financial technology enables banks to send real-time international payments across networks. The complete set of powerful payment features that allows fast, flexible and seamless experiences all ready built-in. Value proposition • Access: Direct bank to bank settlement • Speed: instant (4 sec vs ETH 2+min) • Certainty: real-time traceability of funds • Cost: lowest total cost • White label, no redirect: invisible to users/not • Secure • Automate payouts: to stakeholders with API • Ease: one-click, no card (only bank a/c) Target customer Banks (remittances, corporate disbursement) E-commerce/Enterprise (payment, transfers) Blockchain platform Private Public Validators Participating institutions (banks) Anyone with Omise server Funding $93.6M in 7 Rounds from 27 Investors (Series B) $20.4M in 4 Rounds from 9 Investors (Series B) CASE STUDY: RIPPLEVS. OMISE Ripple has not raised funds through ICOs. Although it has similar mission to Omise, it’s less likely to raise funds via ICO because it’s success is less reliant on network effects and its associated externality.
  19. 19. CRYPTOCURRENCY GLOSSARY Virtual currency A type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community." Digital currency A form of virtual currency that is electronically created and stored. Some types of digital currencies are cryptocurrencies, but not all of them are. Crypto- currency A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transactions, preventing counterfeit and operating independently of a central bank. Alt-coin An abbreviation of “Bitcoin alternative,” and thus describes every single cryptocurrency except for Bitcoin. Coins Coins really only have one utility — to act as simple stores of value with limited-to-no other functionality. Usually referred to Bitcoin Tokens Are programmable, representing digital assets that can have a variety of values attached.They can represent assets as diverse as vouchers, IOUs, or even objects in the real world. Usually referred to Ether