Runa Capital Principal and former Coinbase employee Nick Tomaino recently revealed that Blockchain-related organizations and projects have raised 2.4 times more from initial coin offerings (ICOs) than venture capital firms and early-stage investors.
Through ICOs, Blockchain-related projects have raised over $331 mln in the past 12 months, while Blockchain projects only raised $140 mln in the past year through venture capital firms and early-stage investors.
Conceptually, ICO is a phenomenal and revolutionary method that allows a company, startup or organization to raise money with the absence of intermediaries. The involvement of third party service providers inevitably results in high fees and delays in settlement. Transparently and securely, through cryptocurrencies such as Bitcoin, anyone can purchase tokens of an ICO-initiating startup.
Admittedly, a bubble is building within the ICO market. The entire market has become overly hyped and as two-layer micropayments solution Lightning co-founder and former Stanford professor Elizabeth Stark explained, ICOs often demonstrate a low level of actual development work and high demand for capital. Stark wrote:
“The problem with ICOs: Everyone wants to make money, no one wants to do the hard work. To IPO, it's *years* of hard work. A market has been tested and proven out. Only a few survive, most fail. No longer.”
Gnosis, for example, the prediction market based on Ethereum, which successfully raised a multi-million dollar investment through its ICO at nearly a $300 mln valuation through investors that put in $12.5 mln to a project which hasn’t even entered its beta development phase. Simply put, a platform which hasn’t successfully conducted beta testing of its platform was valued at $300 mln by investors.
To the Gnosis team’s credit, prior to the ICO, the team demonstrated two proof of concepts, including a Gnosis.js developer library for third party developers and companies. Ultimately, Gnosis is aiming for the launch of a platform wherein decentralized applications (DAPPS) can be launched on top of the Gnosis protocol and this flexible network or platform of applications is where investors see its value at.
However, due to the nature of ICO’s, which pressures investors by providing a short window of time to invest, it was said that the Gnosis ICO was wildly overvalued, considering the fact that the entire ICO process ended in 10 minutes.
Jamie Pitts, a member of the Ethereum Foundation wrote:
“Crowd knowledge can work, so long as you are aware of human behavior and design accordingly. One key questions is: did Gnosis design this outcome, or did they not understand that FOMO exists?
It is always ‘buyer beware’ with any investment situation. But we as a community can work to foster an economic and social environment in which the utility of all parties is as high as possible, and in which unfair or predatory situations are avoided.”
Gnosis is one of the few examples of a legitimate project that was overhyped due to the nature of ICO. Its legitimacy can be proven solely with its board of advisors, participated by Ethereum co-founder Vitalik Buterin, inventor of prediction markets Robert Hanson and Smarts sports betting Jason Trust.
It is important to note that there are some serious economic issues that need to be dealt with in order to ensure ICOs can benefit both investors and startups.