This is a series of 3 posts describing the rise of a Shared Prosperity economy enabled by the blockchain.
Part 1 is how ICOs are the beginning of an era of shared prosperity.
Part 2 (this text) is a more in depth analysis on how ICOs are changing the economics of organizations.
Part 3 is about how a world of shared prosperity created by ICOs will impact your life.
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By Edmilson Rodrigues (ed@swapy.network)
When I was a freshman studying business administration, one professor started a class with this quote:
"The business of business is business." Milton Friedman
This is a famous quote from [1] Milton Friedman´s interview to New York times in 70s in which he defends that the only reason a business exist is to make profits and value to its stockholders. Any social value would derive from the taxes it paid and any talk about social responsibility is "fundamentally subversive".
That is the business logic of the 20th century. Firms should maximize profits, and the way to do so is by creating value and capturing as much as possible of this value as profits for its stockholders. But the advent of the blockchain defies this logic.
After the invention of blockchain, startups gained the ability to create a scarce resource (tokens) that are as valuable as there is utility and demand for them. So, the best way to maximize profits is not by capturing all possible value to a single individual or central authority. Instead, it is by promoting a network of users and sharing the value with them to increase the demand for the tokens, and thus to profit from the increase of value of your tokens.
To illustrate, [3] In July 1st 2014 Tim Draper bought 30,000 bitcoins in an auction of the Silk Road bitcoins apprehended by the US Government. Back then, the [4] Market price of bitcoin was $604. But the Drapers did not sit back and relaxed after that. They created and promoted a support network for the bitcoin community, by making it part of [5]Draper University´s curriculum, making the world´s [6] first accelerator focused on Bitcoin (Boost VC), [7] creating educational materials about the technology and investing in dozens of bitcoin companies.
Those actions were partially responsible for bitcoin being known from the "drug money of the dark web" to, the currency of the future. And its value increased 9x to the current date.
But how much would bitcoin be worth today if the Drapers had 50% of the bitcoins in the world? What about 10% of it?
My point is: The key to profit maximization now is not centralization, but decentralization. It is not capturing all the value to me, but sharing the value to us!
That was the case of Bitcoin, the first Cryptocurrency. But since the advent of Ethereum and other second generation blockchain protocols, which are [8] Turing complete, it is easy to create a new cryptocurrency if you have decent programming skills.
This boosted the ICO Phenomenon, which is an explosion of innovation all around the world.
But what are the main differences of doing a traditional business and doing an ICO project?
Access to capital: Let´s face it. Venture capital itself was needed of disruption. It is concentrated in a few hubs around the world and the decision makers are mostly white, male and Ivy league educated. Because we are all humans and we have [9] Cognitive Biases (see video below), most entrepreneurs who have access to the capital also fit in the same profile as the investors.
But ICOs are defying this logic as well. The big VC names that are migrating to being ICO investors will continue to have access to the best deals and at a discounted price. But the big piece of the pie will come from the crowd itself. So, it is them that you have to convince, not the big investors. And the crowd is as diverse and diffused as are the potential entrepreneurs doing the ICOs.
Therefore, you do not have to be an insider or to have connections anymore. You just have to have a good idea, a good team and access to the internet.
Look at the Swapy Network team, for example. Our team work from the cities of Recife/Brazil and Belo Horizonte/Brazil. We are in the periphery of our country, whose wealth is concentrated in São Paulo. And Brazil is in the periphery of the world, whose wealth is concentrated in the US, Europe and South-East Asia. Yet, we are launching a project that can potentially provide Universal Access to Credit.
We are witnessing the beginning of the democratization of access to capital for entrepreneurs all around the world. And this is very exciting!
Upside potential: If you are investing in a startup you are purchasing stocks (or the option to purchase it in the future) with the hope that it will appreciate in value and that you will have liquidity in a 5 to 7 years horizon. The possible buyers of those stocks are either big corporations in the case of the liquidity event being an acquisition, or stock buyers in the case of the event being an Initial Public Offer.
However, if entrepreneurs are doing an ICO this logic changes too. Investors do not have to wait 5 years to have liquidity, as they do with stock. They can literally sell their tokens in a few days after the end of the crowd sale, when the token is listed in an exchange. Also, the potential buyers are not a limited number of big corporations or private individuals with access to the capital markets in the US, but literally anyone in the world who can purchase a cryptocurrency and is willing to invest in an ICO.
Therefore, it does not matter if the issuing organization is a non profit or a for profit, because the real upside potential lies in the token, not in the stocks.
A shift in the power dynamics of investors and entrepreneurs: If you remember [10] Macroeconomics, if you have an increase in the supply of a scarce resource (capital for innovation, for example) the equilibrium will be in a new price.
With the crowd eager to invest their cryptocurrencies in interesting projects, capital is not as scarse and concentrated as it used to be. This fundamentally changes the power dynamics of investors and entrepreneurs.
A radical cost reduction of going public: Another massive change that is already happening is in regard to the cost and complexity of "going public". By going public I mean to do an IPO or doing an ICO.
Jay Ritter in his [11] 2014 article for Forbes calculates that it costed around $20Mi in direct and indirect costs of accessing the capital markets in the US. On the other hand, two nerds in a basement can create and launch a new token, as it is evidenced by the interesting experiment [12] Useless Ethereum Token (UET), which has a [13] Market Capitalization of around USD$70,000 in this date.
However, to really launch a quality ICO, we estimate that a group needs at least USD$200,000 of capital to invest in technology, compliance and marketing. From USD$20Mi to $200k represents a 100 fold cost reduction. Not bad!
Those changes are only the beginning. Brace yourselves, the next post (Part 3) will be about how the ICOs will impact individuals and give birth to a world of shared prosperity.
Sources:
[1] http://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
[2] http://www.investopedia.com/terms/m/microeconomics.asp
[3] https://www.coindesk.com/bitcoin-milestones-adam-draper-silk-road-auction/
[4] https://www.tradingview.com/chart/BTCUSD/8CGBJXFm-Best-Bitcoin-Price-Chart-2012-to-2014/
[5] http://www.draperuniversity.com/
[6] https://www.boost.vc/
[7] http://www.bitcoincourse.co/
[8] https://stackoverflow.com/questions/7284/what-is-turing-complete
[11] https://www.forbes.com/sites/jayritter/2014/06/19/why-is-going-public-so-costly/#378b92184ff0
[12] https://uetoken.com/
[13] https://coinmarketcap.com/assets/useless-ethereum-token/