#1 Tokenomics: ICOs - a misunderstood and by far underestimated construct

ICOs are often described as a new way of funding which combines elements of a classical IPO with crowdfunding concepts like Kickstarter – or the vice versa. While this description seems like a nice, simple and graphical explanation for people who never heard of cryptocurrencies or ICO, it also discloses the common misunderstanding of what an ICO constitutes: 

An ICO (of utility token) is the creation of a small economy with an own monetary system. This small economy is not located on an isolated dream island, it is placed in the middle of very competitive global markets. 

The project has to successfully establish a vital ecosystem and thereby set the right incentives, solve the conflicts of interest between the different stakeholders like investors, members who buy into the economy and members who want to cash out their earnings. 

A pricing mechanism must be induced which is on the one hand stable enough to create trust in the value of the cryptocurrency and on the other hand flexible enough to react on variation of supply and demand. The internal pricing mechanism must consider its external pricing in FIAT over its exchange rate against different FIAT and cryptocurrencies. 

Money is much more powerful – either constructive or destructive – and complex tool of distribution than shares and other securities. 

On the one hand, only project which recognize the complexity of this tool, take from the beginning the economic implications into account, build it into their business model and connect it with an applicable architecture for their token economic system will succeed in the long run. On the other, these projects will be rewarded and will be able to deploy the full forces of Blockchain technology and Cryptocurrencies. This will clearly create a substantial and sustainable competitive advantage.  

Many Projects do not take this task seriously (enough yet) and see the creation of Cryptocurrencies only as an easy and convenient way to raise money without giving vote to their investors and without authorities controlling them. At some point they might experience the destructive side of money and their small economy will collapse.  

One might say: “Why should entrepreneurs even care now? This is a problem of the future while the money is collected now!”. But don’t forget: “When there is no loss, there is usually no complainant. When there is no complainant, there is usually no lawsuit.” 

This might drastically change, once major parts of the investment are lost. As cautious the authorities of many jurisdiction are now when it comes to regulating ICOs, as forceful authorities will be once investors lost huge amount of money. 

Legal questions like whether the token was a security or "a means of payment"  and whether investors were informed well enough about what they bought might not even be examined till then - but therefore will then even receive extensive attention. Prosecutions and claims might be a painful, long-lasting, and life changing expedieren.

Better be smart and thoughtful now than sorry later.

But this should not only be a warning  to be cautious adressed to those who plan an ICO. It should encourage you to really discover the power of Blockchain, Cryptocurriencies and the creation of money in detail. Because Money is power(ful).

Spoken from the angle of an Economist, I have seen a greater beauty than cryptocurriencies in my life before.   

The architecture of token economic models should therefore receive more thought and attention, so that the power and blockchain can be deployed for constructive and meaningful cases.