By Adrian Krion, CEO and Co-Founder of Spielworks
The crypto industry found a simple solution for the ICOs that tarnished its reputation years before the most recent bull run: Call the pig by a different name and slap lipstick on it. Projects looking to raise funds through a token sale used vague language, such as the term token sale itself, or in the case of DeFi more precise language, such as the term IDO (Initial DEX Offering), in place of the term “ICO.”
For marketing and PR purposes, it worked. And indeed, there isn’t anything inherently wrong with token sales, which offer a way for startups to generate capital for a project by selling blockchain-based digital assets. The problem more so lies with the approach crypto companies have taken to raising funds, and that problem extends far beyond the obvious rug pulls out there.
Many blockchain projects follow the same formula. It starts with a token launch in a bid to raise the necessary funds to build the end product, assuming the project is in for more than a pump and dump, and only after this does the actual development of the originally envisioned project commence. Could this bear market finally be the catalyst for fixing this industry problem that has existed since the first projects began building on Ethereum?
There’s no valuation without value
Projects could easily launch token sales during the crypto summer, a time of inflated growth deprived of much change in terms of utility or real-world value backing. But as retail investors—many of whom lost a great deal during this crypto winter—tighten their non-virtual wallets, raising funds through ICOs is becoming increasingly challenging. In tough economic conditions, it simply doesn’t make sense to invest in a project without even a basic product or service.
The market downturn, scams, and inherent negativity surrounding these token launches makes raising funds through ICOs a challenge of epic proportions. During a bull run, where everyone is consumed by the hype, this model offers a shot at success—but even then it didn’t work for many. But projects that don’t have anything more than a token are being cleansed from the crypto ecosystem, and the memory of past lessons will remain when the next crypto summer arrives.
The industry can no longer keep spelling valuation without, well, value. Some of the DeFi titans, including Makerdao, are already pivoting to more exposure to the real-world economy to help scale their own economies in a sustainable manner.
Build first, launch later
Other blockchain projects should take notice and put more emphasis on the value they deliver before trying to push their token on the public. Facilitating exposure to real-world assets is one way for blockchain-based startups to establish a business model free from an ICO to raise funds, but it’s far from the only way. Blockchain technology inspires innovation, and a startup can come up with any use case it sees fit without the need to begin with an ICO.
The best way to not have to rely on a token launch from the start is to build at least a basic product first, utilizing conventional fundraising if needed, and only offer the token at the stage when it has utility within a supporting ecosystem. A token that offers real utility within an already existing ecosystem can enhance the entire ecosystem by facilitating an increase in transactions, and can potentially develop into a security token. But this only happens if there is a product first.
Having an initial product allows the startup to demonstrate it is a serious company and separate itself from any associations with being a scam or pump-and-dump ploy. More importantly, this also makes it much easier to approach venture capital firms and other avenues for fundraising. Even if the seed funding is a modest amount, it will enable a dedicated and hard-working project to continue building and unlock more funding along the way.
Most importantly, having a product prior to the ICO allows the startup to work on its community building, which to no surprise, is easier to do when you already have a product or service. When a project immediately starts with the token launch, its only tool towards community development is to resort to exuberant overhyping, which is becoming an increasingly ineffective tactic.
As the crypto and blockchain industry tries to power through a bear market ripe with scandals and controversy, the ICO first, product later method is no longer viable. From an investor’s standpoint, evaluating a project with only a token is nearly impossible because there are no traditional metrics to base the investment off of. This token first mentality provides way more risk than it does reward and that is a formula that isn’t compatible with any market condition.
About the author:
Adrian Krion is the CEO and Founder of the Berlin-based blockchain gaming startup Spielworks and maker of the user-friendly gaming wallet Wombat. Having started programming at age seven, Adrian has been successfully bridging business and tech for more than 15 years, currently working on projects that connect the emerging DeFi ecosystem to the gaming world.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.