Since the introduction of Bitcoin in 2009, cryptocurrencies and the blockchain technology behind them have grown in popularity. A new funding mechanism has emerged from blockchain technology, referred to as Initial Coin Offering (hereafter abbreviated as ICO). Recently, this instrument has been increasingly used to finance blockchain-based projects and represents a new alternative to traditional forms of capital raising such as venture capital financing.
Although the investors often receive neither co-determination rights nor a share in the profits of the project in return for their financial resources, the organizations implementing the ICOs manage to collect millions of euros within a few hours. The venture capital raised through ICOs has grown from around $300 million to around $19.4 billion since January 2017 to June 2018. Due to the rapidly increasing popularity of ICOs, the new financing mechanism is the focus of this bachelor thesis. This serves as introductory literature for the reader and gives him an understanding of the new form of corporate financing. In addition, it should be examined whether the recent success of the ICOs can be justified.
Table of contents
1 Introduction
2 Blockchain technology
3 Introduction to the Initial Coin Offerings
3.1 Definition
3.2 Development
3.3 Roadmap
3.4 Design
3.5 Token typology
3.6 Legal considerations
4 Assessment of the new financial mechanism
4.1 Opportunities of ICOs
4.2 Risks of ICOs
5 Conclusion
6 Appendix
7 Bibliography
List of figures
illustration 1 - Development of ICO volume
illustration 2 - Representative representation of an ICO process
illustration 3 - Classification of tokens as a financial instrument i. S. d. WpHG and MiFID II
illustration 4 - Cumulative return of tokens after start of trading
List of abbreviations
Abbildung in dieser Leseprobe nicht enthalten
1 Introduction
Since the introduction of Bitcoin in 2009, cryptocurrencies and the blockchain technology behind them have gained high popularity.1 Blockchain technology has given rise to a new financing mechanism called Initial Coin Offering (hereinafter abbreviated as ICO). This tool has recently been increasingly used to finance blockchain-based projects and represents a new alternative to traditional forms of capital raising such as venture capital financing.2
Although the investors often do not receive co-determination rights or participate in the profits of the project in return for their financial resources, the implementing organizations of the ICOs manage to collect millions of dollars within a few hours.3 Venture capital raised through ICOs has increased from about $300 million to about $19.4 billion from January 2017 to June 2018.4
Due to the rapidly increasing popularity of ICOs, the new financing mechanism is the focus of this bachelor thesis. This is intended to serve the reader as introductory literature and to give him an understanding of the new form of corporate financing. In addition, it will be examined whether the recent success of ICOs can be justified.
The evaluation of ICOs shows that the new financing mechanism is associated with advantages for both companies and investors. However, the implementation of ICOs is also accompanied by risks that must be limited in order for their upswing to continue.
The work is divided into four further chapters. Since blockchain technology is used to perform the ICOs, the features of this technology are presented in Chapter 2. In addition, relevant definitions are introduced. Chapter 3 then sets out in detail the basis of the newly created financing mechanism and the design options of the implementing organisation. Chapter 4 critically assesses ICOs and contrasts them with traditional financial instruments. The effects on investors, the capital-raising organizations and the overall market are analyzed. A conclusion and a brief outlook conclude the work in Chapter 5.
2 Blockchain technology
The aim of this chapter is to explain the basic features of blockchain technology. The basic definitions are introduced to understand how the ICOs work. Furthermore, the two best-known forms of application of blockchain technology Bitcoin and Ethereum are presented.
A blockchain is a decentralized network whose integrity is ensured by cryptographic procedures. The blockchain's naming is due to the underlying mechanisms of its technology, as its records are grouped into blocks within the network and then chained together.5 Instead of managing these data blocks in a central database, they are stored distributed on the systems of their network users.6 Due to the decentralized distribution of the amount of data, blockchain technology is also known as distributed ledger technology.7
For each blockchain, there are a variety of protocols that set the rules within the network. This means that the mechanisms acting in the blockchain vary depending on the defined protocols. For example, the logs record the agreements about who is allowed to make changes within the network, how those changes are verified, and which version of the database is the currently valid if multiple changes have been made at the same time.8
If a network participant wants to make changes in the data sets, he identifies himself with the help of a digital cryptographic key that has been assigned to him for this purpose. The validity of the key used is verified by the use of cryptographic methods by other network participants. It also checks whether the planned changes to the database are consistent with the current record. Using the example of a transaction, it would be examined whether the sender is the owner of the asset he wants to send and whether the sender and recipient are entitled to exchange assets. Subsequently, a final check for the change of the data set takes place. This process involves algorithms and mechanisms that avert changes that lead to conflicts in the database. For example, this prevents a network participant from sending an asset to multiple recipients at the same time.9
After the consent to the change of the data record has been made, it is combined with further changes to a new block and attached to the latest data block. The concatenation of the combined data blocks is sequential. As a result, the changes in the database can be traced chronologically back to the creation of the blockchain and manipulation can be proven.10 As soon as a new block has been chained to the blockchain, all eligible network participants will receive an identical copy of the record to ensure further chronological sequence.11
A change in the database of the blockchain takes place definitively . Each new block within the network receives information about the record of the previous block in the form of a cryptographic output. Its generation is carried out by highly power-intensive computing processes. The retroactive change of an entry would be observed quickly, as it would lead to changed outputs in all subsequent blocks.12
The software and services infrastructure used to develop and operate blockchain applications is called the blockchain platform. This operational platform for the operation of blockchain applications can be public or accessible to a specific group of people. The best-known blockchain platforms are Bitcoin and Ethereum.13
The technology of the Bitcoin platform is considered the origin of the blockchain.14 The goal of the Bitcoin developers was to create a platform that would enable electronic transactions between the network participants without relying on financial institutions as intermediaries.15 The means of payment within the decentralized network is the Bitcoin of the same name. The digital currencies that use cryptographic procedures to validate and encrypt transactions are commonly referred to as cryptocurrencies.16
Cryptocurrencies combine two characteristics that traditional means of payment possess either as cash or as book money. On the one hand, like cash, they offer their holder anonymity when transferring their means of payment. At the same time, cryptocurrencies such as book money can be transferred globally relatively quickly.17 However, due to these characteristics, it cannot be ruled out that the cryptocurrencies are involved in illegal activities. Cryptocurrencies are used to fund illegal activities, money laundering and tax evasion because they are outside the control of regulators and the identity of their owners is not known.18
Since the introduction of Bitcoin in 2009, a variety of other blockchain applications and platforms have been introduced to the market, each subject to a unique blockchain technology.19
The Ethereum platform is an example of a modified blockchain platform.20 Ethereum is used for programming smart contracts. These are contracts that are stored in the blockchain and executed automatically as soon as previously defined conditions are met. Smart contracts have proven to be very suitable for programming decentralized applications.21
3 Introduction to the Initial Coin Offerings
In this chapter, the basics of ICOs are taught. First, it defines what an ICO is and how an organization's capital needs can be met by the new financial instrument. Subsequently, the development of ICOs is presented and analyzed to which reasons the increasing popularity can be attributed. In the third section of this chapter, the basic process of an ICO is presented. Subsequently, it is explained what possibilities the organizations have to design their ICO. It also shows to what extent the assets that investors receive in return for their invested capital can be categorised. Finally, the legal consideration of ICOs will be discussed.
3.1 Definition
An Initial Coin Offering is a newly created mechanism for financing blockchain-based projects. ICOs are usually run by start-ups in the early stages of starting a business to finance the necessary costs to start operations. However, even mature companies with an established technology can use ICOs to stimulate the use of their platform and finance further growth.22
As part of an ICO, interested investors are offered the acquisition of digital assets of the organization, called tokens, against payment of a purchase price in legal tender or cryptocurrencies. These issued tokens represent a cryptographic bundle of rights for their holder.23
Before the token sale begins, a document will be published by the developers summarizing information about the organization's business model and the terms of the token sale. This document is referred to as a white paper. Depending on the terms of the token sale, the rights and claims of the token holders vary.24 The possible rights of token holders may include both the use of the blockchain application, the redemption of the tokens against payment of monetary units or goods, as well as a voting right or participation in subsequent payment flows. Tokens that allow the holder to participate in the equity of the organization and give him a voting right are comparable to shares. As a rule, however, the tokens issued do not include voting or ownership rights or a right to profit sharing. Instead, they regularly grant the owner a right to use the organization's service or product.25
ICOs have proven to be a practical tool for raising capital for start-ups, as they spare them the difficult and regulated path of traditional venture capital raising. Instead of raising venture capital from investors in several rounds and granting them shares in the equity of the new company in return, tokens are issued that can represent a bundle of all conceivable rights for their holder.26
An ICO platform is the platform used to conduct ICOs and transfer the tokens to be issued. Ethereum has established itself as the most popular platform for ICOs. With the help of smart contracts, the properties of the tokens can be programmed and the transfer of the tokens can be processed automatically against payment of the purchase price.27 In addition, the Ethereum platform has developed a protocol for creating the tokens, known as the ERC token standard. This standard significantly simplifies the programming of ICOs because it requires less than 100 lines of programming code.28
If the ICO was carried out against payment of cryptocurrencies, the management of the organization usually sells the received cryptocurrencies directly after completion of the token sale on the cryptocurrency trading venues, thus procuring a high stock of means of payment. Due to the lack of regulation, there are often no restrictions or regulations for the issuing company on how the collected capital is to be used. Investors, on the other hand, only have the choice of holding their tokens and using the rights granted to them or selling the tokens on secondary markets for cryptocurrencies and tokens.29
3.2 Development
Various factors have recently made it difficult for start-ups to finance start-up capital, thereby contributing to the rapid growth of ICOs.30 Increasing banking regulation following the financial crisis in 2008/2009 and the introduction of Basel III have put increasing pressure on traditional investors and inhibited their willingness to finance venture capital. While regulation led to more careful business practices by banks, it limited financing options for small and medium-sized enterprises.31 Due to the negative market environment, a financing gap has grown. Developers of ICOs are trying to close them by introducing a democratized financing process.32
In addition, the increasing popularity of cryptocurrencies has contributed to the growth of the new financing mechanism. Many investors have seen great success through their investments in cryptocurrencies and tend to continue to invest their surplus profits in digital assets. In addition, the market for ICOs is another method for institutional investors to diversify their portfolio.33
In July 2013, the first token sale of Mastercoin, a cryptocurrency based on the Bitcoin blockchain, was carried out. The developers managed to collect a total of 5,000 Bitcoins from about 500 investors worth 500,000 US dollars at the time.34 Since then, hundreds more ICOs have been conducted.
In figure 1 is illustrates the development of ICOs from 2014 to June 2018. The blue columns represent the total volume of ICOs per half-year. The average volume of ICOs is described by the green graph. The new financing mechanism achieved its breakthrough in 2017. While the total funding volume raised through ICOs at the beginning of 2017 was about $300 million, according to statistics from CoinDesk, about $5.5 billion was raised by 343 ICOs in 2017. The significant growth of ICOs continues in 2018 and by June 2018, the volume of ICOs performed adds up to approximately $13.6 billion. Among the ICOs in 2018, the volume of the EOS platform's largest ICO to date alone amounts to about 4.2 billion US dollars.35
The increasing popularity of ICOs has led to the fact that not only the total ICO volume has increased, but also the average volume of ICOs has increased. The outlier of the average ICO volume in the first half of 2016 is explained by the token sale of the DAO organization, which managed to raise $150 million through the token sale.36 37
illustration 1 - Development of ICO volume
Abbildung in dieser Leseprobe nicht enthalten
The study of the development of the ICO volume has shown that the surveys of the different providers can differ significantly from each other.38
A study by Rowley (2018) concludes that the volume of ICOs-funded capital for blockchain-based startups in 2017 and the first months of 2018 was more than three times what could be raised through venture capital financing.39
3.3 Roadmap
Once a project team has decided to develop a blockchain application, the preparatory steps for carrying out the project begin. After the team has made the important decisions regarding the business model and infrastructure of the application, it analyzes whether an ICO is necessary for a successful launch. Before the token sale is initiated, the team decides on open points such as the platform to be used for the ICO and the structuring of the token sale.40 Although ICOs are a young phenomenon that is constantly evolving, a structural pattern has emerged for the process of an ICO, which is described below and in Figure 2 is shown.4142
illustration 2 - Representative representation of an ICO process
Abbildung in dieser Leseprobe nicht enthalten
In the first step, the ICO will be announced in order to attract the attention of as many investors as possible. For this purpose, the white paper of the organization is disseminated in relevant forums.43 In order to convince potential investors of the potential of the project, additional information about unique features of the project and the expertise of the team will be published.44 After the white paper has been published, the first questions about the planned project will be answered in the forums. The criticism of the forum members is analyzed to make necessary changes to the business model or the ICO. The first phase is completed once the adjustments to the business model have been completed and a detailed document on the terms of the ICO's offer has been prepared.45
In the offer, the business model and all essential conditions of the ICO are presented in detail. The information in this document usually includes the desired investment volume, the offer period for the acquisition of the tokens and the functions of the tokens, as well as the associated rights for the acquirer. The target group of the offer can be a limited or unlimited group of people. After the offer is published and the start date for the sale of the tokens is known, the marketing campaign begins.46
The marketing campaign plays a crucial role in the success of the ICO, as the executing organization is unknown to the majority of private investors until then. For this reason, this last marketing campaign before the token sale is especially aimed at retail investors. The majority of marketing activities are carried out on social networks, forums and special news services. At the same time, specialized agencies are also commissioned to make the sale of the tokens public at conferences and information events. Usually, the marketing campaign is completed after about a month.47
In the last phase, the ICO will be launched and the sale of the tokens will begin.48 Against payment of the purchase price, the tokens are transferred to the investors. The transaction is carried out according to the terms of the offer and is often handled by smart contracts.49 The issued tokens will be released for further trading either immediately after the transfer to the buyer or after the market entry of the application or platform of the organization.50
3.4 Design
The organization's project team has various options for structuring the sale of the tokens. Before the ICO is conducted, the organization decides whether to limit the issuance volume of the tokens and how to set the token price. Furthermore, a token pre-sale can be carried out to finance the start-up costs of the organization. The start-up should also not sell some of the available tokens as part of the ICO and reserve it for later financing needs. By using a milestone tracker, the risk for investors and the executing organization of the ICO can be reduced. In the following, the design options of the implementing organization are listed.
Limitation of the issue volume
As a rule, the issue volume of the ICO is limited, distinguishing between a hard cap and a soft cap. It is referred to as a hard cap if the issuing organization does not accept any further payments from investors after a certain investment volume. In the case of a soft cap, purchase bids are only accepted for a limited period of time from the time the cap is reached. In some cases, the restriction on the volume of output is not published in advance.51
If the issue volume is limited, the tokens can be sold either at a fixed price, as part of a Dutch auction or by using a model consisting of hard and soft caps.52 In the first model, the tokens are issued in a fixed ratio against the payment of legal tender or cryptocurrency. By specifying the number and price of the tokens to be issued, the value of the project can be determined.53 To reward early investors, the number of tokens issued per unit of money may decrease over time.54
At the Dutch auction, interested parties place bids in the amount of their maximum willingness to pay per token for a desired number of tokens. Subsequently, all bids of the interested parties are collected and sorted in descending order according to their amount. The highest bids will be accepted until the number of tokens requested equals the number of tokens offered. After the last bid is accepted, all bidders with an accepted bid will receive their desired number of tokens at the price of the last accepted bid.55
If the organization opts for the hybrid variant of hard and soft cap, the tokens will be sold for a short time after reaching the soft cap. However, if the hard cap is reached beforehand, the sale of the tokens ends immediately.56
Some organizations do not set a limit on the number of tokens to be issued. In this case, the tokens are sold at a certain price within a set period. This makes it possible for any interested investor to participate in the project. Since there is no upper limit, investors cannot determine the implied value of the application. Instead of an evaluation of the project by the issuing organization, the evaluation is carried out by the market.57
Token Presale
In order to finance the start-up costs of the organization, in some cases a token pre-sale is carried out. The proceeds from the pre-sale are intended to cover the costs of marketing, legal advice and for the development and implementation of the ICO. For this purpose, a predetermined number of tokens is sold to a limited circle of institutional and private investors. Occasionally, a certain minimum investment amount is required of investors. Early investors are rewarded for their trust by giving them a discount to the normal issue price or by receiving a certain percentage of additional tokens. The pre-sale increases the attention for the project. The organization also signals to future investors through the capital already collected that it is a good investment.58 The token presale is usually reserved for institutional investors such as venture capital funds.59
Token reserve
As a rule, the organizations do not sell all available tokens as part of the ICO. Instead, they reserve a majority of the tokens to create an incentive for founders and early employees to repay institutional investors, or to cover a later funding gap.60
As a rule, the executing organization of the ICO does not have a tangible product. Rather, investors already acquire the right to use the blockchain application by paying the token price. This is associated with the inability of most blockchain-based platforms to generate further revenue. While there are running costs for the further development and expansion of the blockchain application or platform, there is therefore no further income for the organization after the token sale. In order to cover the costs incurred by the organization, sufficient financial resources must be raised through the sale of tokens for the entire useful life of the project. For this reason, it is advisable for developers to cancel out a large part of their available tokens for later capital needs at the time of the first token sale.61
[...]
1 cf. Hacker/Thomale (2017), p. 1; cf. Rohr/Wright (2017), p. 1.
2 cf. Fisch (2018), p. 16.
3 cf. Birkholz (2017), p. 38; see Deloitte (2018), p. 3; see Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 6.
4 cf. CoinDesk (2018b).
5 cf. Bank for International Settlements (2017), p. 3; cf. Yermack (2017), p. 7.
6 cf. Burgwinkel (2016), p. 3.
7 cf. Lai/LEE Kuo Chen (2018), p. 147.
8 cf. Bank for International Settlements (2017), p. 3.
9 cf. Bank for International Settlements (2017), p. 4.
10 cf. Yermack (2017), p. 11.
11 cf. Bank for International Settlements (2017), p. 3.
12 cf. Yermack (2017), p. 11.
13 cf. Burgwinkel (2016), p. 10 f.
14 cf. Marr (2018).
15 cf. Nakamoto (2008), p. 1.
16 cf. Hahn/Wons (2018), p. 3.
17 cf. Nica/Piotrowska/Schenk-Hoppé (2017), p. 26.
18 cf. Nica/Piotrowska/Schenk-Hoppé (2017), p. 1.
19 cf. Benedetti/Kostovetsky, p. 8.
20 cf. Burgwinkel (2016), p. 11.
21 cf. Blockgeeks (2018).
22 cf. Deloitte (2018), p. 3; see Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 6.
23 cf. U.S. Securities and Exchange Commission (2017b), p. 3.
24 cf. U.S. Securities and Exchange Commission (2017b), p. 3.
25 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 6.
26 cf. Hacker/Thomale (2017), p. 11.
27 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 10.
28 cf. Ethereum (2018); cf. Hacker/Thomale (2017), p. 11.
29 cf. Hacker/Thomale (2017), p. 11.
30 cf. Kaal/DellâErba (2017), p. 8.
31 cf. Kaal/DellâErba (2017), p. 8; see Organisation for Economic Cooperation and Development (2013), p. 6, p. 39.
32 cf. Kaal/DellâErba (2017), p. 9.
33 cf. Pilkington (2018), p. 7.
34 cf. Fish (2018), p. 2; cf. Shin (2017a).
35 cf. CoinDesk (2018b).
36 cf. CoinDesk (2018b).
37 cf. CoinDesk (2018b).
38 cf. CoinDesk (2018b); cf. CoinSchedule (2018); cf. ICOdata (2018).
39 cf. Rowley (2018).
40 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 8.
41 cf. Kaal/DellâErba (2017), p. 5.
42 cf. Aitken (2017).
43 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 8.
44 cf. Deloitte (2018), p. 4.
45 cf. Aitken (2017).
46 cf. Aitken (2017).
47 cf. Deloitte (2018), p. 4.
48 cf. Aitken (2017).
49 cf. Aitken (2017); see Sehra/Cohen/Arulchandran (2018), p. 16.
50 cf. Deloitte (2018), p. 4.
51 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 11.
52 cf. White (2017b).
53 cf. White (2017a).
54 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 12.
55 cf. White (2017b).
56 cf. Stellar Development Foundation/The Luxembourg House of Financial Technology (2017), p. 12.
57 cf. White (2017a).
58 cf. Glazer (2018a).
59 cf. Brustein (2017).
60 cf. Kaal/DellâErba (2017), p. 15; cf. Wong (2017).
61 cf. Kaal/DellâErba (2017), p. 15.
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Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen. -
Laden Sie Ihre eigenen Arbeiten hoch! Geld verdienen und iPhone X gewinnen.