ICO fever is in the air. If you don’t believe me, just have a quick glance at Twitter. The Initial Coin Offering, a method of fundraising for a blockchain project through the presale of tokens, is the increasingly popular method for generating obscene amounts of money to build new cryptocurrencies.
As much as ICOs are all the rage now, though, accusations and satire about their certain level of scamminess abound. Yes, for some, some (many?) of these crowdfunds may have started purely with the objective of deceitfully obtaining money from gullible investors new to the cryptoverse. That’s not what I’m here to talk about, though. I’m here to tell you why the best-intentioned ICOs create a sort of productivity problem, and present a better way to fund a development team.
ICOs are launched by future potential
The whole concept of the ICO is to raise money to fund the development of some cool, next-level project. The key is to generate hype around the potential of the project. This is typically achieved by publishing a white paper, assembling a team of respected developers, talk about the world-changing implications of the project’s successful completion, and, most importantly, talk about all the value that will go to the tokens in the future.
To summarize objectively, the single great key to a successful ICO is to hype it to high heaven. Could said hype be warranted? Absolutely. Does it have to be? Absolutely not. It just has to sound exciting enough to get enough people to believe they’ll make tons of money buying tokens.
Once funded, market incentives to deliver dry up
As soon as the ICO is completed, the job stops there. Mission accomplished. Sure, this is technically supposed to be just the beginning of a highly important project. However, as far as market incentives go, that’s it. A small minority may slowly abandon their projects and run off with the profits, but many of the remaining developers, while remaining committed, have a significantly lower sense of urgency, as observed by Swarm City developer Michael Thuy, enjoying the fruits of their not-yet hard work in between contributions. Even the rare eternally driven developer who continues to put in 80-hour work weeks while sitting on a presale fortune is still robbed of market signals. Without monetary indicators giving rewards and corrections, how is one to know if they’re maximizing their efficiency?
The “hype trap” affects investors as well. While many token holders got involved because of a genuine belief in the future of the project, many more are likely involved for one simple reason: the tokens will go up in value. Once the sale is completed, this goal will largely be achieved, and holders can either dump or continue hold and still retain a good return on investment. Even committed investors will have few indicators of how well the project is doing, and as long as the token holds while developers continue on with the occasional presentation or updated infographic, they will largely remain complacent.
Dash’s treasury system provides performance incentives
Dash’s development funding mechanism safeguards against ICO complacency. To begin with, payments happen monthly, rather that all at once. This means that, while a crowdfunded token only really needs to hold its value for the initial large hype burst, Dash must hold its value long-term in order for developers to continue to be paid. This incentivizes them to keep working on the coin with a sense of urgency, as their financial future depends on its continuing viability. Second, and most importantly, payment is not automatic, but must be voted on by the masternode stakeholders. Because of this, even if Dash gets an impressive and lasting burst of hype, if developers aren’t putting the kind of work into the project that satisfies investors, they can be defunded and replaced at any time.
This combination of market incentives keeps development focused and efficient, and far from complacent, solving the inertia issue that affects many crowdfunded projects in the cryptospace.