How to launch ICO part 1. Do you need that?
ICO is growing popular as a way of crowdfunding. Many of us have heard of those crazy stories about Brave ICO raising $35M in 30 seconds or Pincoin and iFan scum ICOs that raised $660M and then disappeared. Such stories make us think that ICO is an easy way to raise money. Blockchain projects attract more attention from potential investors these days just because the blockchain technology is used there.
At datarockets we have got some production experience in the blockchain area and we are happy to share our findings of how to launch ICO. This particular post may be useful for those entrepreneurs and startup founders who consider ICO for their projects and wants to find out if ICO is a good fit for their particular case.
First, let’s start with 2 simple questions:
Do you need a blockchain in your product?
Does it make sense to create your own cryptocurrency?
Blockchain Use Cases
Blockchain is a wonderful technology that resolves certain challenges. It is a miracle, that a set of machines can negotiate on what is true and what is false like human beings (except you can’t trick them easily). But these days because of all the hype around cryptocurrencies blockchains get intensively misused.
Blockchains work perfectly if you need to eliminate the third party. When you have 2 or more sides that do not trust each other and your solution helps them to find a consensus. Cryptocurrency has become a synonym of blockchain because the financial industry fits this use case perfectly. With blockchain you can eliminate banks (a third-party) and help the parties to agree on who owns how much currency (reach a consensus). Of course, cryptocurrencies are not an easy thing as that, it is just a very basic description.
The first thing you should ask yourself if whether or not you need a blockchain in the product.
Yes, you can run ICO even if you don’t use blockchain in any way, but the question is: why don’t you just raise venture funds then? That requires significantly fewer efforts and not as risky as running ICO.
Here is a quick test to determine if you really need a blockchain.
Ask yourself: “what gets changed if I use a centralized database in my product?”. If it changes nothing from the business perspective, you don’t need a blockchain.
Beware of pitfalls when answering this question! It is a commonly held excuse for blockchain usage is that decentralization brings more security & availability. But security & availability have no relation to business processes, that is a technical challenge. And that challenge can be resolved much easier using database sharding, for example.
Create Own Cryptocurrency When It Makes Sense
When you hear “ICO” you can imagine yourself producing tokens from nowhere, people buying them and making you rich. If you can see this picture clearly, just give this idea up and quit thinking about ICO.
Creating your own cryptocurrency should make sense. We all have seen a few examples of random ICOs that succeeded just because of the hype around this whole industry but don’t think that people are stupid and don’t learn from their mistakes. Moreover, their many cryptocurrency regulators appeared and the average education level in this area is growing.
To understand whether or not it makes sense to create your own token, you should think of how the token will be used. What is represented by your token? If it represents your company’s shares, why don’t you just sell your shares to investors directly? Does it make the life of your users easier somehow?
You can recall Bitcoin. It was the first digital representation of a tradeable/transferable asset on blockchain. You can introduce your own crypto like Bitcoin for sure, but why do people need it?
Ethereum was a brilliant idea. It brought us an advanced ecosystem for decentralized applications with its smart contracts concept. Ethereum has its own complex economy that is powered by Ether.
I know what you are thinking: you’d like to create an economics that is powered by your token like Ethereum did. You can imagine how the price per token raises as well as your product adoption in the market. That is what those guys in suits tell us from the stage on cryptocurrency conferences.
The truth is that creating whole economics is a huge challenge.
It requires strong financial education and a deep understanding of how money works in our world. It is not just about creating a token and a product that uses it (provides “liquidity”), that is a much bigger challenge. We will cover tokenomics in our further posts.
Of course, you can always create a token and exchange it for your services as a return of investments. But how is it different from crowdfunding on Kickstarter?
ICO Part 1 – Next steps
If after reading this post you still think that ICO works well for your product, please refer to our next post “How to launch ICO. Security vs Utility Tokens” and some pitfalls you may encounter when running ICO.