In July 2017, a young startup called Tezos caused a stir. It was a little-known project with an esoteric purpose: to build, in the words of its website, "a new decentralised blockchain that governs itself by establishing a true digital commonwealth". Yet it succeeded in raising finance to the tune of $232 million (£178m) - and not a cent of it was traditional venture capital. Instead, Tezos had scored the money from the crowd via an emerging funding model called a token sale.
Token sales are a hot topic in the booming world of digital currencies. Sometimes more colourfully referred to as an initial coin offering (because ICO sounds pleasingly similar to IPO), it's a novel way to fund a project by creating a token that will have a role within its ecosystem. For instance, say you were founding Twitter. You could design a token - a tweetcoin, perhaps - that users would have to spend when they wanted to tweet. You could sell tweetcoins to the public pre-emptively to finance building the service. These could immediately be traded for other currencies, so backers would enjoy greater liquidity than if they had made a traditional VC investment. As well as being a way to fast-track capital, tweetcoins would later be used to remunerate people who offer their computing power to the service and keep it running. This would have an ideological benefit.
"It would be an open network," says Jerry Brito, executive director of the digital currency think tank Coin Center. "So there would be no company that China could go to and say, 'Please censor this.'"
ICOs have generated more than $1.67 billion to date, $1.38 billion of which was raised in 2017, according to the cryptocurrency news site CoinDesk. Such is the hysteria, when the web-browser startup Brave held its ICO in May, the sale reached its $35 million cap in just 30 seconds. All expectations are for this sector to grow further in 2018.
So far, so compelling. Yet, token sales are not without their detractors. It's an environment ripe for scams, and even when founder intentions are good, investors are often placing their trust in nothing more than an idea with a shiny website, clever marketing and a dollop of hype. Viewed pessimistically, it's akin to giving money to a man in a pub for tickets to a film that he says he will make. However, Johann Gevers, founder and president of the Tezos Foundation, argues that investing through a token sale isn't unique in its riskiness.
"It's exactly the same for traditional startups," he says. "Google did not have a revenue model when it started. The first investor was one of their professors who said, 'Look, here's $100,000, who do I make the cheque out to?' They said, 'Sorry, we don't even have a company yet.' So he just made the cheque out to Google Inc, then they had to create an entity and open a bank account to deposit the cheque. This is just startups."
Still, in 2018, token sales should become less of a Wild West. The Securities and Exchange Commission (SEC), which regulates tradable financial assets in America, has become increasingly interested in ICOs.
"What happens in the US is going to drive what happens to ICOs broadly," says Brito. "I think that we are going to see enforcement actions against clear scams."
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The need for token sales to comply with SEC rules, combined with investors' desire for greater confidence, may lead to a new trend, says Brito. "In 2018, we'll see the emergence of platforms for the offering of new tokens that will better qualify the tokens before they're allowed to be sold, and will help investors make better judgments about them."
Brito predicts that initially these platforms will only be open to accredited investors so, as the industry professionalises, we may perceive that the ICO bubble has burst. In fact, a slowdown would indicate that there are simply fewer scams.
"As a new funding model," he adds, "ICOs are here to stay."
