The future of token issuance (STO, IEO & DAICO)
As everyone probably knows 2017 and early 2018 represented the ICO frenzy moment. Reminiscing those days we mostly think about how every new company had the best and most disruptive solution to X Problem, on (white)paper, and absolutely needed blockchain and a utility token to do that. Needless to say, most of these projects proved to be either impossible to implement or were outright frauds.
However, ICOs were not entirely bad, they were revolutionary as they democratised the access to early-stage investment; something that in traditional financial markets is mostly reserved to Angel Investors, Venture Capital Firms and Private Equity firms.
As the excitement for ICOs wanes and the flaws of this financing model become more evident, a number of contenders is emerging to leverage the untapped potential discovered through ICOs.
The most well known new model is the STO, but some new popular token issuance models are IEOs and DAICOs. So what are these new names and how do they stack against each other?
STO stands for Security Token Offering. After investing in the project, an investor receives a crypto-token (specifically a Security Token), just like in an ICO. However, an STO is different, because a Security Token represents an underlying asset, for example, the issuing company stocks (in which case an STO is similar to an IPO).
A company is not forced to tokenise its share, in an STO it could tokenise its revenue streams instead. In this case, the investor would receive a share of the company revenues proportional to the number of tokens they hold.
Compared to ICOs, STOs are heavily regulated. They are costlier, take longer time and are more difficult to launch; in exchange, they provide much more reassurance to the investor.
Another important difference is that ICOs required a company to have a blockchain-centred business model. In contrast, any company could potentially undertake an STO, even if its business model does not require the use of blockchain.
In turn, compared to IPOs, STOs give the company greater flexibility (as they are not limited to sell tokenised shares), while being more cost effective and less cumbersome. Of course, a traditional IPO usually offers a much larger liquidity pool.
The term DAICO was initially proposed by Vitalik Buterin in January 2018 as a solution to the dishonesty issues affecting ICOs. It stands for Decentralised Autonomous Initial Coin Offering.
It allows token holders to vote on the use of the capital raised by the DAICO.
For example, the token holders can decide to release the funds over time as the development team reaches certain milestones. In the most extreme case, the token holders can vote and decide for the project to shut down and return the contributed funds to the respective investors if they are not satisfied with the progress being made by developers.
Essentially, a DAICO makes the developer team accountable towards their investors.
IEO is another form of token issuance that relies on Cryptocurrency Exchanges. The term stands for Initial Exchange Offering.
In this case a project partners with an existing Exchange (the partnership includes and goes beyond the simple listing). The project gets directly and listed on an Exchange. In order to participate in the IEO, an investor has to open an account with that specific Exchange.
The project team is no longer the direct counterparty for the investors. The Exchange acts as a trusted third party overseeing the operation and acting as the point of contact for the investors. The exchange also performs the necessary due diligence to protect its existing customers. The regulation level is similar to the one of ICOs.
The Bottom Line / The Verdict
One of the obvious questions that come to mind is “Which method of token issuance will eventually prevail?”
Simply put there is no right answer as this is a complex matter, one can just try to make educated guesses. In my opinion, all of them will survive because they have different use cases and serve different niches.
STOs are more evolutionary than revolutionary and play an important role in bridging the crypto world with the classic finance world. Furthermore, they promote asset tokenisation, which is a use case with huge potential and implications.
IEOs are also revolutionary in a way, as they bring ICOs closer to IPOs (in a different way than STOs), as they also give more importance to the Exchanges as a key player.
For these reasons, I foresee a convergence of STOs and IEOs in the future.
The DAICO will probably be the best solution for pure-play ICOs that do actually need a utility token and who do not just use Blockchain as technology but also follow a decentralised philosophy in their business conduct. It will probably take longer for these projects to emerge compared to the two aforementioned methods.