After the last bull run and the raft of lawsuits that came out of the initial coin offering mania of 2017 and 2018, it was generally believed that ICOs were dead in the water.
A combination of regulatory scrutiny, especially in the U.S., spectacular pump-and-dump schemes and an overall flakiness not witnessed since the back-of-the-beermat ideas of the Dot.com boom appeared to have sealed the fate of ICOs.
Which was a shame. Because, despite the scams and hype, tokens are an innovative way to raise money.
Stylianos Kampakis, CEO of The Tesseract Academy, says fundraising for new projects was never easier than in those days.
“During the ICO era, it was easy to raise money, but obviously, regulation killed that. With IEO (Initial Exchange Offerings), maybe you still have to go through regulation and scrutiny, things like that.”
As Kampakis hints, a range of alternatives sprang up, including initial exchange offerings (IEOs) or token generation events and even more innovative three-letter acronyms, such as initial node offerings (INOs).
Jamie Elkaleh, global relationships manager with crypto exchange Bitget, says that while the halving and Bitcoin ETFs have sparked bullish conditions, token-raising events are smaller than they used to be.
“Any organization that wants to fundraise through selling tokens can use transparency as a feature, and it doesn’t really matter what they call them — ICOs or token events — these are ways to engage with a community and raise money in a transparent fashion,” he says.
“The difference between 2021 and this bull market is that sums are smaller. Before, they might have raised in double or even triple digits; now it’s smaller, single-digit raises, so $4 million, not $40 [million],” he says.
Token fundraising methods: Crypto projects with airdrops
Newer forms of token raises differ in other important ways, too.
Many Web3 companies looking to raise money in 2024 are excluding citizens of the U.S., where the security-token crackdown is the most extreme. And companies have been forced to become more innovative in how they approach using tokens to raise funds.
Airdrops are chief among them. Hand out tokens for free in exchange for market awareness, and watch as the token rises in value. This enhances a project’s profile, attracts users, and enables secondary sales and funding rounds.
As a marketing technique for a new ecosystem, particularly one without heavy VC backing, airdrops can make a lot of sense. Building a community costs significant money via advertising, key opinion leaders (KOLs) and other traditional marketing channels and trying to grow organically takes a long time.
Nick Campion, head of marketing with Flare Network, says airdrops have pluses and minuses. He says that even if some recipients are not interested in the chain long term, an airdrop might still be considered a success if the campaign delivers early numbers and generates sufficient public awareness to catalyze early community growth.
“The question is how to design an airdrop to maximize the short- and long-term benefits while minimizing waste and any possible negative side effects,” says Campion. The trick is designing the incentives correctly.
“The incentive design needs to look at what behaviors are being rewarded, how to minimize Sybil attacks to ensure a broad distribution, and what long-term benefits this will have on the wider ecosystem,” says Campion.
Sybil attacks can be common in the case of airdrops, where a bad actor sets up multiple identities, thereby claiming multiple airdrops.
ICO alternatives: Crypto presales
David Dobrovitsky, CEO of FUNToken, is a serial entrepreneur who works often in the Solana ecosystem. He sees airdrops as basically a marketing technique, which means the project can gather wallet addresses that are infinitely more valuable than mere emails.
Dobrovitsky sees the renewal of interest in token raises as a reaction to the U.S. SEC clampdown on ICOs, which shows the ingenuity of the Web3 community.
“The term ICO is just not used anymore, but there are a plethora of equivalent terms such as token sale, presale — they kinda all equate to the same thing. If you are a new protocol or startup and you have native tokens, then a token sale makes sense. Equity is incredibly complicated, cumbersome, and it’s not decentralized.Entrepreneurs that want to raise money and build a community are definitely better off looking at tokens.”
He points out that a number of projects have opted to avoid venture capital funding, which results in a large portion of the supply ending up in the hands of VCs.
“There are new variations this time around. Some people want to do a giant round and skip all the intermediary rounds, especially as these early rounds include VCs and VC control,” he says.
“The biggest difference, though, between the ICOs then and now is the amount. Before, it was typical to raise a double-digit figure; now, it’s much more common to raise, say, $1 million.”
Blockchain fundraising: Gaming tokens and NFTs
Gaming projects are very bullish on using in-game rewards and mechanics.
Simon Vieira is the CEO of MixMob, a Solana gaming platform, and hails from a Triple-A gaming background.
Like many in the industry, he sees the big challenge as combining the excitement of Web2 games with Web3 mechanics.
“The tokenomics have to work,” he says. “We need fun games that are competitive and use blockchain for [what] it is good for: payments, microtransactions and ownership.”
Rather than looking at a traditional token raise, MixMob opted for an NFT sale instead. In 2021, it launched its first NFT collection, which sold out in less than a day.
“We didn’t want to do an ordinary token launch where people just sell the tokens. We had an idea to make it like a kid going into a toy shop to buy their toy. The difference is that the NFT toy comes with coupons that are redeemable for tokens to play in the game.”
“It was a gamified way to launch our token.”
But launching a token is not for the fainthearted, according to Vieira. It costs a lot of money; you have to go through multiple interviews with exchanges, engage market makers, and hook up APIs for both centralized and decentralized exchanges.
“It’s very complicated, and we are on both, including top tier exchanges. It is a lot more complex than before, and you need money in advance. The mechanics might be easier, but the success rate is much tougher.”
NFT backed INOs or Initial Node Offerings
In a similar vein to the NFT sale undertaken by MixMob, Web3 companies are also turning to selling “things” or licenses to fundraise.
Typically, in the form of an NFT, these items guarantee income, often in the form of native tokens, which can be redeemed on exchanges. The highest profile one currently is Aethir, a leader in decentralized GPU cloud infrastructure, which announced a node sale last month.
Node sales are becoming more topical as they help to enable decentralized physical infrastructure (DePIN) projects. These projects see members of an ecosystem provide hardware as well as capital, says Amar Bedi, chief operating officer of Tashi — a DePIN project that has partnered with Aethir.
“The trend towards decentralization has only begun, and we expect it to change the way many industries pay for infrastructure services. INOs enable the average retail investor to be part of this movement in a more meaningful way by providing more than just capital.”
Upland’s reverses blockchain fundraising model
In an uncommon move in the blockchain industry, German-American Dirk Lueth decided with his co-founders to headquarter their metaverse project, Upland, in Silicon Valley, the tech heart of the United States.
While many companies building in the Web3 space have since decided to do so outside the U.S., Upland was designed with regulatory compliance in mind to deal with the harsh token climate since the SEC began actively pursuing ICOs in 2017.
Instead of launching a tradable token, Upland focused on the development of the gaming platform and saw it grow from a metaverse replica of planet Earth to an increasingly complex ecosystem complete with user-generated features, games and entertainment in an open economy.
Upland introduced Spark into its economy at inception as a foundational in-platform utility token. Spark is required for any stakeholder to create value in the form of world-building, community development, user-generated content and the unrestricted development of games, experiences and services.
However, Spark has never been sold to investors or given out to the team, and it cannot be traded within the Upland metaverse. There are currently over 130,000 Spark holders in Upland, and 93.6% of those who purchased Spark have used it to build in Upland.
The ruling in the Ripple case in the U.S. in July 2023, which ruled that secondary sales of tokens are not themselves securities, created a new path for Upland to bridge out its existing in-game token to other chains. In addition to true ownership, this would allow holders to trade it.
In October, the community voted by an impressive 87.25% to approve the decision to launch Sparket as an ERC-20 token on Ethereum in a governance vote. The support that followed a community review and comment process greenlit the initiative to bridge Spark to Ethereum, where it will be mirrored and minted, equivalent to a one-thousandth Spark named Sparklet.
Lueth explains that they are now preparing the bridging event, marking a unique case in the Web3 space where rather than launching a token and then building an ecosystem, Upland has built the ecosystem and is taking its two-year-old in-app token out to the market.
“Sparklet allows us to take the next step towards progressive decentralization in a responsible way while having mechanisms in place that can shield and protect Upland’s economy from unwanted externalities,” says Lueth.
“The upside of Sparklet availability outside the Upland app includes higher visibility within the Web3 gaming community, a higher degree of true ownership of digital assets for our users and ways to incentivize new creators, developers and builders to join the ecosystem.”
The return of utility tokens
Undrgrnd is an underground Web3 media company focused on writing articles and podcasts and seeking underground artists and musicians. Founder Joe Gisondi tried to attract VC money but could not get any traction. Instead, he turned to a token and a membership card.
“As I was trying to fundraise with VCs, then it hit me that I needed a community first and give back to the people who believed in the project.”
Undrgrnd has launched what might be termed a social token with utility.
“I’m not doing a traditional token where you open a liquidity pool and everyone can buy it. This token for the marketplace will allow people to buy spots on the front page and promote their own work or another artist’s work,” he says.
“Overall, my goal is to keep the token value low so that it continues to have utility. It will be used to highlight art and music. If it becomes too expensive, then people won’t use it, which would defeat the purpose,” says Gisondi.
Crypto IEO and IDO launchpads: Back to the future with token sales
And, of course, more traditional token sales are still around, even if they’ve sharpened up their act since the ICO boom.
Dan Thomson is the founder and CEO of Sensay, a platform that uses AI to preserve and replicate people’s personalities and characters as digital simulations. The team is also putting together realistic digital versions of celebrities, historical figures and even fictional characters, such as Mr. Grey.
Still in beta, the platform already has 20,000 users from word of mouth.
The co-founders have been using token sales via an IDO on Fjord Foundary, Uniswap and elsewhere to generate funding, with different rounds at different prices, each lasting three weeks. All up, they had hoped to raise between $1 million and $2 million but have managed to get $3.4 million.
Thomson sees his token sale as being very different from those of the ICOs back in 2017, which were often vaporware sold on a promise.
“We are doing serious risk management for starters with not one but two sets of top-quality auditors checking the contracts and details. We also have a working product, which is much more than many of the ICOs before.
“We are also serious about the utility of the token, which is not a copy of something on another chain but designed for our own niche.”
week.
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