3 Ways ICOs Go Wrong (and How the Industry Can Fix Them)

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ICOs have gained global popularity, but they are not without their own sets of challenges. In this post we evaluate 3 of the biggest challenges and how they can be fixed.

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With the Securities and Exchange Commission (SEC) in the U.S. skeptical of the nature of initial coin offerings (ICOs), there’s been a lot of talk about the future of the popular crowdfunding method. Though no clear answers are available for American investors, the SEC has created a dedicated ICO page to help investors learn more about the funding method and about its likely illegal nature. On top of that, countries like China and South Korea have been prohibiting citizens from participating in ICOs as well–though South Korea may likely be changing direction soon. But why are so many regulatory agencies critical of the new crowdfunding method? One answer is that there are quite a few ways ICOs go wrong. The industry is now working on alternatives.

One of the most common issues still plaguing the ICO funding method is a lack of accountability. According to a market research report for Q1 of 2018, 46% of the ICOs launched this year did so with nothing more than an idea. No product, no development, no code, nothing. This poses an issue for new projects coming to market. If it’s so easy to fund a project without having any real product or code ready for release, then the barrier for who starts collecting funds drops even more.

According to the report, around half of the ICO campaigns had no development whatsoever. Investors are sinking money into projects expecting something in return. However, many of the ICO campaigns either come up short on their promises or reach a point with no development whatsoever.

Another way for the ICO funding model to go wrong in a new project is the legality of their offerings, depending on where the team is looking to raise funds. In the current cryptocurrency climate, there are a variety of governments and regulatory officials highly skeptical of the ICO crowdfunding method. For American investors, ICO options are essentially all but nonexistent. This holds true as well for many otherwise interested investors in China and South Korea, all of whom are big players in the cryptosphere.

Lastly: usability. The ICO funding model was perfect for many of the early startups on the Ethereum network looking to fund their cryptocurrency project, but that’s not the case for every team out there. Before regulatory concerns started becoming more widespread, the industry witnessed companies with absolutely no ties to distributed ledger technology or cryptocurrencies release ICOs of their own. These typically have no minimum viable product (MVP) or any real relation to the industry. So why should’nt we give them another option for crowdfunding that doesn’t force them to create a token for no reason?

With many of the pain points in the ICO funding model, there has to be a better way to facilitate crowdfunding for projects in the crypto space. Between the legal concerns that not are limiting the amount of investor money coming into the markets via ICOs, the lack of accountability from the teams involved, and the creation of unnecessary tokens that serve no purpose, there are some projects looking to put out more efficient means of funding.

The DAICO is one improvement suggest by Vitalik Buterin that is looking to solve one of the major issues of ICOs: accountability. By using the strengths from decentralized autonomous organizations (DAOs) to attend to some of the shortcomings of ICOs, Buterin is developing a system where investors can actually vote for a refund of contributed funds if investors aren’t happy with the progress being made by the team. Any of the projects implementing the DAICO project will have a much stronger layer of accountability for the project and give investors a better reason to invest.

Another potential alternative is completely shifting from the ICO method altogether. A new project on the market, Blockhive, is introducing an alternative known as the ILP. Short for “initial loan procurement,” the ILP is being introduced to solve all of the current problems ICOs have in the markets. ILP does involve the use of tokens, but instead of being a security or serving as a utility token on a platform, tokens are loan agreements through legally binding smart contracts. Additionally, due to the nature of the tokens as debt, funding for new projects is open to global purchases without restriction, remains regulation-friendly, and free of tax burdens since the tokens are considered to be debt.

ILP could end up being the most important option the industry has for those looking to ease many of the pain points in the ICO space.