An Israeli company raised today over $140M, and it’s very likely that you read it first here. The name of the company is Bancor and while it is registered as a Swiss company, its founding team and core developers are mostly Israeli. In fact, one of the founders and main spokesman is Eyal Hertzog who you may remember as the co-founder of Metacafe, the video sharing website, that back then gave YouTube a run for the money. To make your jaws drop even further, you should know that that amount of money was actually raised in less than 3 hours!! and the reason this went pretty much all under the radar, is because the team used a fairly new investment vehicle known as Initial Coin Offering or ICO. This term is one of the hottest phenomena in the blockchain community (and known very little anywhere else), where instead of raising money through traditional VCs or private investors, the company in fact issues a new digital token and sells it to the crowd in return to some other, current, digital token – typically Bitcoins (BTC) or Ether (ETH). Naturally, since the new digital token has not much value at the point of issuance (given the fact it was pretty much “invented” that day), you may ask what are the reasons to spend good bitcoins (themselves purchased with good US dollars) for a made-up token. The short answer is that if you believe in the idea underlying the new company, then you can expect over time an appreciation of the token, as more people use it to drive the new application usage, causing greater demand both by investors and users for that token, in kind of a virtuous circle. While this is true, in practice, it is more likely that many people, enthused by the whole cryptocurrency frenzy, are just herd-running in a hope for short-term gains. This way or another, in 2016 more than $236M were raised using ICOs. In the first quarter of 2017, blockchain startups raised more money using ICOs than VCs money, and with the Bancor ICO today, which turns out to be the biggest in ICOs history so far, the numbers are expected to grow much higher. VCs should definitely take notice. If you follow the community around blockchain, there’s much controversy around this model and opinions ranging from calling it ‘the death of VC’ to a ‘one big Ponzi scheme”. Personally, while the size and speed do suggest a potential bubble, generally speaking, I am very favorable to that model which to me, its biggest value is in democratizing the investment space, allowing laymen like myself to make small investments in ideas that I like. (take a look at the Bancor transaction history, for example, and you will find investments as small as tens of dollars from a single ‘investor’). Still, like anywhere else in life, a common sense is always a virtue, and it’s advisable for any investor to try and make some judgement, what it is that they invest in, what is the utility of this new token (will you use it in some way), and why do you expect to make a profit out of it. The specific case of Bancor, at least to my somewhat limited understanding in finance, is quite interesting. They have devised a new currency-protocol that will allow anyone to create a digital token of their own. Now, why, you may ask, would I want to create my own token. But in fact, there are all kind of use cases which the Bancor white paper does excellent job in iterating over, but for a simpler example just think loyalty programs, community-based marketplaces, non-profits who wish to create some value to their proceedings, and countless other examples where goods and services are exchanged for some value in some micro-cosmos economy. The promise of Bancor is in the fact that by building your token on top of their protocol, you are guaranteed two things – (1) a full liquidity – that is, holders of your token could exchange it with other ‘respectful currencies’ like BTC and ETH at any time, and (2) an automatic, smart-contract governed, price discovery mechanism that will set the exchange rate. And anyone who tried running small digital conversions through exchanges out-there know just are much this is cumbersome, so I think Bancor solves a big and immediate need. Herzog hopes by that to create the ‘Long-tail of currency’, a remorse act on his past overlooking of the ‘long-tail of video’ back at the days of metacafe. So, in essence the Bancor token (BNT) that was issued today is kind of a meta-token, that all user-generated tokens are tied to through the implementation of the protocol, making its success sharing fortune with the aggregated success of everything that will derive from it – kind of a fair-game of you ask me. There are also lots of goods and bads to learn from the ICO process itself. Bancor took a pretty transparent attitude by posting detailed terms & conditions on their website. In practice, however, there were all kinds of hiccups during the ICO itself. Bancor has set an (initially unknown, later revealed as 250,000 ETH) cap to the fundraising, but have advertised that the first hour they will accept all transfers, even if they exceed the cap. That was put in place, to fight off ‘whales’ who may take an unproportioned part of BNT, In fact, it created an overload on Bancor system to the point they needed to extend this initial period to 3 hours. This has pissed off some of the users, who complained it is not fair to change the T&C, while still not solving the problem entirety (a proper disclosure – I tried investing 2 ETH worth of BNT but couldn’t get in). After the dust settled (at the end of 3 hrs), Bancor announced a total of 396,619 ETH raised (~ 60% over their initial target). Since this represent only 50% of BNT total allocation, that puts Bancor evaluation at $280M – 10% of it goes to team and advisors (subject to a 3 yrs vesting period with 6 months cliff) – not bad for 3 hours. But there are also few takeaways to consider: 1. While the Etherium blockchain seems pretty solid and scalable, the ‘smart contracts’ deployed on top of it are a big vulnerability. TheDAO case was a strong example for a security vulnerability, and in Bancor case there was a scalability vulnerability as too many transactions were hitting their code. Both must be solved if we hope to make it a mass-market technology. 2. While the Bancor ICO was governed with a ‘smart contract’ (what Nick Szabbo calls a ‘dry exercise’), some of the T&Cs, especially the initial minimum period was left out as a ‘wet exercise’, that is – it was not protected by the contract and the team could, and in fact, did change it down the line. That is a practice might need to be called into question ethically. 3. The whole arena is very much ‘wild west’. In some cases, practices don’t feel right ethically. As an example, Bancor have bombarded their blog site and twitter account throughout the day with announcements about partnerships and endorsements. One couldn’t ignore the fact this looked like ‘artificially arranged’ to drive demand to the token. While this might come across as a ‘legit aggressive marketing tool’, one could argue that ICO-backed startups should use the same restraints like ‘quiet period’ as is the law in public offerings like IPO. But with all these caveats, I believe these are early days’ hurdles of a technology and model that haven’t matured yet. This is typical for every big disruption and is likely to stabilize over time. Bottom line, the advantages here much outweigh the drawbacks. These are indeed exciting times!
