Since 2017, ICOs have become a popular fundraising model. But how these funds are really used by the projects managers? What are the rights of a token owner? Coinhouse tried to answer the fundamental questions.
Ethereum project as a starting point
In september 2014, the Ethereum Foundation raised 31 529 bitcoins and kept around 12 millions ethers, or $18.4M at that time. In 2015, however, after some poor management decisions, a fall of the Bitcoin price from $480 to $220 and quite lavish spendings, Vitalik Buterin wrote an article explaining the Foundation only had 200.000 CHF, 1800 bitcoins and 2.7M ETH remaining.
Eventually though, the success of Ethereum and the rise of its price, combined with stricter financial practices and new sources of income such as Devcon conferences, restored an healthy situation for the Foundation.
We currently are in a bear market, quite similar to the 2014-15 situation. So what are the options for the ICO managers? What are the risks and do they have actual control on how the funds will be spent? The Coinhouse research team explored this topic to help investors make better decisions.
An ICO manager role is not to bet on price fluctuations
An ICO is a new fundraising model: a team develops a project, presents a business plan and then people decide to invest, hedging their risk, on its potential success.
It makes sense that investors expect each single ether or bitcoin from the fundraising to be used towards the project success. ICOs managers are supposed to use funds in the most effective way, and not speculate with the raised funds.
What are best practices?
First of all, keeping funds in cryptocurrencies can be a problem because of high price fluctuations.
A suggestion is to sell the raised funds and convert them into fiat currencies. Unfortunately, little numbers of suppliers accept to be paid in cryptocurrencies today. So ICOs managers have to convert a part of the raised funds to assume operating costs. This kind of transactions can be operated by Coinhouse.
The DAI solution
Another option is using the DAI, an ERC-20 stablecoin developed by MakerDAO and correlated with the US dollar since December 19, 2017.
47M DAI are available, and with the Ether as a support, the DAI has proved remarkable resilience during strong price fluctuations. As for other stablecoins, ICOs managers can use DAI or other stablecoins in order to secure their capital through a high volatility market
Taking the time and preparing the future
A large part of ICOs are decentralised applications (dApps) developed on the Ethereum platform. During the last 2017 bull market, the Ethereum protocol had not grown enough to support a large amount of simultaneous operations. Moreover, current applications are not very user-friendly yet and only used by a few users.
Active users and transaction volume of the main decentralised applications. Source : Dappradar.com
This situation is planned to evolve thanks to technical improvements of the protocol. Sharding, State channels, PoS or sidechains are projects under development which will allow faster and cheaper transactions.
In the meantime, ICOs managers have to cut back spendings, release proto-dapps and focus on the non-blockchain aspects of their project.
The Decentraland example
Decentraland’s team didn’t answer our questions to confirm or deny the following facts. The majority of the data and figures are from app.santiment.net and Etherscan.io
Decentraland is a decentralised ‘’video game’’ operating on the Ethereum blockchain and developed by a small argentinian team. Decentraland released a simple dApp with a 2D map where players can acquire land and then speculate on virtual real estate value.
Aware of the technical limitations of the Ethereum network, the ‘’Onchain’’ version of the game is limited to these features. The team is currently focusing on writing a Software Development Kit for players to be able to create maps and items inside the land they own.
With the ICO having raised 68 205 Ethers (at an average price of $300/ETH for a $20M total), Decentraland remains a small team of 8 contributors and only makes strategic spendings to ensure the dApp development: 2170 ETH have been spent between august 2016 and January 2017, representing 3% of the total.
In response to the 2018 bear market, Decentraland modified its strategy, aiming to secure the project. A first sale of 9700 ETH occured on February 2, 2018, followed by two larger ones on March 1 and 9, 2018, for a total of 52 600 ETH.
- Chart on February 2 : $900/ETH (9700 ETH)
- Chart on March 1 : $865/ETH (32500 ETH)
- Chart on march 9 : $710/ETH (20100 ETH)
All these trades are profitable for the team, since prices are better than during the ICO.
We can estimate the amount of ‘’cash’’ owned by the Decentraland team along with current spendings. The team would own around $60M cash, probably in USDT, and 1900 ETH as well as MANA tokens for a value around $10M. This represents three times the amount raised during the ICO a year ago, and can finance the project development for years.
Tokens are not securities, talking about ‘’undervalued project’’ is inaccurate
In a bear market, a lot of projects have more ‘’cash’’ in reserve than the value represented by the total token valorisation. For instance Gnosis: the project now has the equivalent of 190 000 ETH in ‘’cash’’ while its token valorisation is 120 500 ETH, and we are not even considering Ether sales when the Ether price was higher than during the ICO (70 000 ETH)
Some investors are talking about ‘’undervalued’’ projects. But it is essential to remember that tokens are not securities, they are not directly related to an underlying asset and do not qualify the owner to be involved in the strategy or to receive dividends.
ICOs projects are not undervalued according to a strict financial definition: their managers literally own the ‘’cash’’ reserve and their financial success doesn’t necessary imply the success of the project or the token valorisation in the future.
The Coinhouse platform gives customers the opportunity to buy and sell a lot of tokens but we advise investors to always be very careful when considering ICOs.