Deciphering Token Sales

A Look At The $2 Billion ICO Landscape

Bruno Sousa |

On September 11, the People’s Bank of China announced a freeze on raising capital through ICO’s. For years, the Venture Capital industry invested in businesses that navigated uncharted waters. Today, a unique form of Venture Capital finds itself in uncharted waters with Initial Coin Offerings (ICO’s) receiving differing treatment by regulators across the world. Many experts warn against using the term ‘ICO’ and choose to use the words ‘Token Sales’ instead. This article traces the history of ICO’s and describes the current state of play. As to the future, it will be an interesting journey. Destination Unknown.

Unlikely Origins

In the early days of arcade gaming, the use of coins in slot machines to power up the game was common. In 2004, however, Blizzard Entertainment released a game titled World of Warcraft (WoW).

As per wikipedia: “As characters progress in World of Warcraft and take on some of the toughest challenges, many of the rewards received are bound to that character and cannot be traded, generating a market for the trading of accounts with well-equipped characters” . These rewards were in the form of virtual gold coins and the practice was known, at the time, as gold farming much like mining Bitcoins. The practice of using virtual currencies, can be traced back to gaming. WoW also had it’s own inbuilt economics that mirrored free market economics and can possibly teach concepts such as demand, supply, inflation, currency etc. in a game setting.

Today, cryptoeconomics is a special type of economics that deals with crypto currency (mathematical proofs), economic theory such as game theory and computational labor etc. The common thread between gaming, cryptocurrencies and ICO’s? Mathematics

Thinking Capital

Just as the human brain evolved from a dominant Amygdala (animal spirits that prompt a fight or flight mode) to a dominant Pre Frontal Cortex (reasoning, logical brain), capital moves from unregulated modes to more regulated mainstream modes. One such unregulated mode is ICO’s which regulators are trying to regulate or block altogether until they figure out whether it provides utility to common investors in addition to sophisticated investors also known as Qualified Investors. Before understanding ICO’s, it would be useful to understand the basics of crypto economics.

A Blockchain is a distributed recording system (ledger) that provides an additional layer of security because every machine on the network (powering the Blockchain) maintains a complete record of all transactions from beginning to end. This distributed recording system is run on a virtual machine which is an emulation (replica in crude terms) of a giant supercomputer that is created by combining the computing power of several computers on a network. For instance, the Blockchain powering Bitcoin is a special purpose Blockchain that is used to ‘mine’ (create using cryptography) and to record a cryptocurrency called Bitcoin.

The Blockchain powering Ethereum, on the other hand, is a general purpose Blockchain of which like an operating system that runs decentralized applications (Dapps for short) one of which is a cryptocurrency called Ether. Very similar to iOS or Android powering apps on a cellphone of which a digital wallet is one such application. An example of a decentralized application built on the Ethereum operating system (general purpose Blockchain) is a prediction market called Gnosis:

Initial Coin Offerings (ICO’s)

ICO’s are a form of crowdsourcing venture capital from qualified and non qualified investors to fund the creation of Blockchain applications/Decentralized applications (DApps) primarily based on the Ethereum Blockchain. Think of it as money raised by a startup working on creating a decentralized application. One of the major utilization of the capital raised would be to pay the salaries of developers working on creating or coding the application. Thus, ICO tokens are similar to equity shares issued during Initial Public Offerings (IPO’s). Hence, the moniker ICO. However, it differs from equity as shown below:

As per my brain analogy above, the speculative value is driven by the Amygdala (or animal instincts) or speculative mindset. However, there could be an intrinsic value to an ICO. For instance, the intrinsic value of Bitcoin is to demonstrate a functioning digital currency. Although, it has limited value as a medium of exchange like fiat currencies, Bitcoin demonstrates a proof of concept should countries think of implementing digital currencies of their own. However, speculation has played an oversized role in driving up prices.

So, imagine if you are an investor in an ICO, the pre-frontal cortex (logical brain) is needed to discern the intrinsic value of an ICO. Questions such as what is the business model?, can you even calculate cash flows?, how are cash flows generated and distributed? etc will help you arrive at an intrinsic value if it truly exists.

Thus, digital currencies stop short of being a medium of exchange and a store of value whereas ICO’s stop short of being equity instruments. Quite often, this is because the workings of a Blockchain/Ethereum based startup cannot be discerned as clearly as existing listed or private companies.


According to Vlad Zamfir, of the Ethereum project, cryptoeconomics as a field might be defined as:

A formal discipline that studies protocols that govern the production, distribution and consumption of goods and services in a decentralized digital economy. Cryptoeconomics is a practical science that focuses on the design and characterization of these protocols.

The above is a technical definition.

However, to understand the economics behind ICO’s, I prefer a more simpler approach i.e. breaking them down in terms of basic economic principles which involves asking two types of questions to determine if they are genuinely speculative:

a) Do you know who the buyers and sellers of tokens and cryptocurrencies are and what their motivations are?

b) Any money spent towards cryptocurrencies, tokens or any investment for that matter is a lump sum payment for future cash flows. The future cash flows are derived from economic activities (projects) that generate economic profits. These cash flows are then discounted to their present value to arrive at the value of an investment. For instance, in case of a company like Apple, you know some of your money will be spent on research to build a new product. You most certainly know the business Apple is in. Can you answer these questions for the ICO?

For the most part, if you cannot comfortably answer the above two type of questions, try to be a spectator.


1/ While India is experimenting with creating its own version of Bitcoin called ‘Lakshmi’ which would be controlled by the Central Bank to avoid the volatility that cryptocurrencies like Bitcoin entail, China has decided to stop people from subscribing to ICO’s

2/Estonia, is another country that is thinking of it’s own digital currency — the Estcoin.

3/Switzerland and Singapore have shown a more accommodating approach to cryptocurrencies such as Bitcoin.

4/Other countries such as China, the US and the UK are watching and contemplating regulations. The SEC recently announced that ICO’s should be treated as securities.


On a bright Sunday afternoon, I walked into my neighborhood grocery store to buy all the things I needed for the following week. But, as I was walking out, I did something unexpected. I looked at a machine with glowing white, yellow, red and blue lights that read “state lottery”. Subconsciously, I took out two dollar bills and bought myself a lottery ticket. Then, I signed up online to receive SMS alerts about the results of the draw. For the next two days, I could empathize with every single buyer of lottery tickets because it was not the money at the end of the draw. Rather, it was a much more powerful emotion leading up to the draw. It was a feeling of hope. Of something to look forward to. A feeling of positivity as much mental as it was physical.

Con-artists, Ponzi scheme operators, speculators, gamblers on one hand and genuine motivators, lotteries to support state infrastructure and investors on the other. The common man in the middle is buying into a brighter tomorrow. Sometimes, the sellers have good intentions. Many times, not so. If it’s hard to decide which is which, its wiser to be on the sidelines. What I described above are the players and emotions that anyone can encounter while navigating uncharted waters i.e. Crypto currencies such as Bitcoin and Initial Coin Offerings (ICO’s) in the world of finance.

I am not rationalizing speculation and gambling. Instead, I can empathize with people buying hope. Because, for some, that’s all there is. I have been there myself.

It could also be called ‘Fear of Missing Out (FOMO)’. People who missed the Bitcoin rally look up to ICO’s. Sometimes, without questioning the underlying business model. On the spectrum of human emotions, a lottery signals hope until the draw and provides meaning. It may not be a rational approach but it is human. So, is the case with investing in ICO’s.

Final Thoughts

A slower growing global economy is already prompting the search for alternate asset classes that can generate outsized returns. Today, Blockchains or the underlying technology behind ICO’s and Cryptocurrencies have demonstrated value. However, platforms such as the Ethereum Blockchain suffer from major issues holding back progress:

  1. Scalability is an issue. Imagine every node on the Blockchain saving all the transactions since inception. It becomes laborious as the demands on the platform increase. To put it in context, VISA handles on average around 2,000 transactions per second (tps), so call it a daily peak rate of 4,000 tps. It has a peak capacity of around 56,000 transactions per second, however they never actually use more than about a third of this even during peak shopping periods (source: wiki). Ethereum, today can only handle about 12–20 transactions per second and it uses electricity that can power a city. So, efficiency is traded off for additional security.
  2. Various methods of establishing security efficiently such as moving from a Proof of Work to a Proof of Stake system of confirming transactions are being thought about. Until such efficiency is established, mainstream adoption will remain a distant future. Ethereum will be moving to its next phase ‘Metropolis’ in October this year.
  3. Regulation, anonymity, cybersecurity and avoiding hard forks are the other problems that need to be overcome.

All said and done, Blockchains and ICO’s have sparked a debate for the need of disruption in financial services and venture capital respectively. Although, there exists a business case, there needs to be a way to transition innovations into the mainstream. Otherwise, great ideas will remain just that. In other words:

If you look at history, innovation doesn’t come just from giving people incentives; it comes from creating environments where their ideas can connect — Steven Johnson

Writer @ The Intersection of Finance, Tech & Humanity. Stories of a Global Language: “Money”. Contributor @ Startup Grind, HackerNoon, HBR. Twitter@akothari_mba

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