When Vitalik Buterin created Ethereum in 2014 he did so by proposing a more ambitious model than bitcoin: the cryptocurrency was only part of an equation in which smart contracts (Smart Contracts) could pose a small economic revolution.
That revolution is already being felt in the world of investments. Traditional venture capital companies already have an interesting alternative in those Initial Coin Offering (ICO) that generate their own tokens or appcoins: scarce digital assets based on bitcoin technology and that nowadays have a joint value of billions of dollars. Dollars.
A Super Vitamin Kickstarter
The concept of a token, like that of everything that surrounds this new digital economy based on platforms such as bitcoin or ether, is still confusing for many users. These tokens are something like the shares we buy when investing in the company, but they go further because with them we rather buy the right to something like access to the API payment of the product or service in which we invest.
Tokens are also more volatile by nature (they inherit that characteristic of cryptocurrencies such as bitcoin or ether on which they are based), and therefore it is possible that the possibilities in terms of liquidity time improve (or worsen) in a critical way. The access to these tokens, now somewhat restricted because the entry barrier of the “understanding” of the system, is nonetheless universal, so the number of investors in a project can be enormous compared to what usually occurs in funding rounds and conventional investment.
In fact there is a more direct and simple comparison: the tokens give access to a kind of super-skilled kickstarter. Financing projects, products, ideas or services through these new tokens is the current trend among technology companies.
We saw it with the Brave browser, which managed to raise 30 million dollars in its ICO in just 24 seconds. Those who invested in that round -who managed to invest, and here there is controversy- became participants in the future of a project that wants to raise important changes in the future of web browsers and content. And like this one, there are niches in which this type of projects can draw on a singular alternative to finance themselves.
Where do the tokens come from?
As the analyst Balaji S. Srinivasan indicates in a fantastic article on Medium, the appearance of the tokens has not been fortuitous. The evolution of bitcoin and the virtues of this virtual currency have meant that entities of all types (not just financial ones) end up paying a lot of attention not just to the cryptocurrency as such, but to its base, the block chain. The emergence of bitcoin alternatives such as ether has also been important for the application of that basic blockchain concept to many more areas.
These cryptocurrencies continue to show their volatility with drops and falls that go far beyond what conventional stock values do, but as we say it is the chain of blocks that has become the most interesting concept. This “accounting book” in which all transactions are recorded allows us to know where each fraction of the currency comes from, where it has gone and where it is going. The transactions are public and can be consulted by anyone, although the identity of those who have a portfolio with any type of cryptocurrency remains anonymous.
All these virtues have made cryptocurrencies a useful way to avoid intermediaries and to conduct economic transactions traceable without problems. That has been one of the triggers of the appearance of os tokens, and as with bitcoin or ether, each token has its own chain of blocks, although equivalences are then offered to place the reference price of the different tokens.
Although some tokens are based on the bitcoin code but with new block chains, such as Dogecoin, Litecoin ZCash or Dash. Each one contributes its own “advantages” to bitcoin or tries to contribute them, but the important thing is that although they share the original code from which they create forks, the chain of blocks is different for each of these tokens.
There are also tokens developed from scratch and with different block chains, as is the case with Ethererum, which, although it is inspired by bitcoin, has that broad scope we talked about with intelligent contracts. And Ethereum Classic came out of its code and chain of blocks.
The case of Ethereum, which is becoming the de facto referent to create new tokens, is especially striking here. The people in charge of Ethereum explain how to create a digital token in their tutorials, so mounting your own cryptocurrency based on Ethereum is (relatively) simple, and that is what is giving rise to this “fever” by the tokens.
Tokens as payment currency (APIs)
When you create tokens you get a private key that identifies that token and has the token value associated with it. A certain ether has a certain private key, a bitcoin another and a BAT another. That private key can not be recovered if you lose it (if you lose a 50 euro note you can not recover it but someone can find it, something similar happens here), and it has an inherent value that is used for all kinds of areas.
The most comparable today is the API keys that for example one buys in the Amazon Web Services to be able to use their services and servers during a certain time. They are not like the actions because the latter do not have an intrinsic use, but they have the advantage that they can be bought by anyone: in other investment processes only certain authorized people can access that option.
Another advantage that tokens have in these rounds of financing is that one can sell them almost as soon as they want and there are no waiting times needed to achieve liquidity with their investment. It is true that here those who generate the tokens can (and should, as Srinivvasan says) cryptographically block the tokens to prevent short-term speculation, but the advantage with other investment formats is evident.
This decentralization of this payment method also favors the participation of all types of projects from anywhere in the world, but there is another advantage: a “better than free” business model is proposed in which users earn money for being early investors of that project, something that for example has happened with the Kik messaging application. This poses a way for all types of companies (with Open Source projects in particular) to finance themselves and share their wealth among those who have bet on them.
The other great advantage, already mentioned in the article, is that anyone can become an investor in projects that he believes in. There is a direct analogy with the world of social networks and the internet, which allowed anyone to become a journalist, popularizer or simply showman. The tokens give anyone the ability to become an amateur investor who may have more or less success with their bets, but at least have the option to invest in what they believe.
Beware of ICOs for everyone and everything
This new gold rush that has taken over all those who extol the virtues of these new platforms for the future has made these ICO are beginning to raise some doubts. The SEC (Securities and Exchange Commission) recently indicated how to properly participate in these investment rounds one should have access to complete information on these projects in addition to having the technical knowledge to assess their validity.
That handicap is joined by others that for example revealed in Coindesk: many startups will be without experienced managers when implementing these ICOs, and many of the investors are probably not interested in these long-term projects unless the token behave as they expect.
In summary: the attractive investment process can become a problem for the future of the development of the company if those investors retire at the first exchange.
There is a recent example in the ironic Useless Ethereum Token (UET), an ICO organized by a person who has not created any associated company or will give any service. As he himself says, with this ICO “you’re going to give a person random money through the internet, and they’ll just take it and buy things with it.” Probably electronic devices, to be honest. giant”. You give money and you may receive more than you give … or maybe not. It’s a 3.0 tombola, you could say.
This is a good example of how the Intelligent Contracts on which this and other ICOs are based can be applied to everything and everyone, but like many other tools are just that, tools.
To that example it is easy to give the opposite example: the company Omise dedicated to the fintech segment has also just completed its own ICO, but its managers have taken a series of “responsible” measures. Investors had to identify themselves “to avoid the real possibility that one or two millionaire people would end up buying almost all the tokens, as has happened with the BAT of Brave”.
They also did not allow the investment to exceed the 25 million dollars they were looking for “we do not need more to fulfill our objective, it is irresponsible and counterproductive to take more than we think we need”. Another point in his favor: Vitalik Buterin was one of the advisors of this company when developing its financial product.
In the end, as in any other field, the advice is the same. If you enter these types of markets, do it with caution and inform yourself well: the volatility is huge and the risk (for good and for bad) too.
The truth is that these tokens will also be a bargaining chip for all kinds of products and services, and we are seeing how each project precisely poses a different token – we will see how the confusion generated by this growing diversity of tokens is solved – that we can use not only as an investment (as we have said, the token has an inherent value to use it) but as a way of paying to take advantage of that product or service for some time.