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ICO vs STO: Struggle For The Markets of The Future

26 September 2018 12:16, UTC
ICO vs STO: Struggle For The Markets of The Future
By Daniil Danchenko, Anna Zhygalina

This whole term “Initial Coin Offering” or more common one - ICO, has been feeling itself at home in the hearts and minds of the participants of the “startup crowd”. No wonder - to “cook up” a good ICO means to pull out a “golden ticket” out of the rubbish bin. Just see yourself - according to the statistics, amount of money that was gathered throughout first half of 2018 is pretty impressive, projects that held an ICO has managed to secure $13.7 bln. And all this despite of the fact that one out of the two startups in 2018 had been a fail. And according to some reports, up to 80% of the ICOs are nothing but a blatant scam, while more than modest 8% can be called real projects. The variety of projects, available on the market becomes larger with an each passing day, but the quality of said choice leaves much to be desired.

So this is pretty natural that market began to look for alternative ways of gathering funds. And one of the most promising is called security token offering or an STO and here is why. Basically, most of the ICOs are gathering funds for the utility tokens that work inside of the project infrastructure. In theory this makes it a great tool that helps working with the project, as managers and development team can easier choose the right direction and gather money for the further development of said project.

But this is a theory that works only when they sell an “instrument” for the really existing project with real infrastructure and ecosystem that can be influenced.  But in reality - so-called “utility” tokens issued by the most ICO are sold during pre-sale stage, when there is no project and\or company. And utility of an instrument for the non-existing protocols of a project is questionable at best. So in the end this is pretty much a form of business crowdfunding, where all funds go to the person or a team behind the project. And all other things, like the question “Can this startup’s team really pull that highly ambitious project” is left without an answer. All that investors have is faith, good luck and hope for the best.

And even successful ICO doesn’t mean all that much - on the next stage, good half of the project teams managed to roll out a literal ghost town with a laughably small user base where all possible utility is out of the question because user base of the project is like 10 people. Global market looked at them and figured out that it would not get anything out of it and ignored it, simple as that.

But why ICO market continues to grow? And that's not just a “feeling” but a fact - market specialists and participants we talked with during Blockchain Seoul summit confirmed that it’s not simply growing, it became “Way too crowded” to make a right decision about investment.

And the reason for that is pretty simple - it’s mostly hype and greed. Typical investor in a ICO is almost the same thing as a typical gambler roaming a casino. Lucky and good ones are able to make a decent living out of it. Greedy and curious ones, that came to the siren call of the “TO THE MOON” and “Lambos” are going to give their money to the first group eventually.

So it is understandable why idea of the so called ICO 2.0 or regulated ICO started to become common. The Market was on the prowl for the structurally new product and STO became and answer for that. However this does not mean that some assets are bad or good, and market sees it, this can be seen from the comments that has received from the active participants of the market.

“You can’t say that some of this things are particularly good or bad. Either token can be bad or good, since they serve different purposes. Binance token is a utility token and it gives me a discount on Binance and that is good, but it has no use beyond trading on Binance so its value should be limited to that. Security tokens give me ability to buy any asset anywhere in the world from my phone or computer. I can buy a percentage of a tokenized building in Tokyo or while leaving in NY or share in a car rental business in Brazil. These are the opportunity that until now didn’t exist. So I think overall security tokens are great but the link between the token and underlying asset,” - said Dan RAYKHMAN, СEO from New-York.

Here lies the main difference between those two: ICO are issuing tokens, coins or utilities while STO are selling tokenized assets, which makes them closer to the traditional securities.

So now, market continues to grow and becomes more and more complicated and less open for scammers and fraudsters, slowly becoming heavily regulated and much more safer than it used to be. This is a horrible news for the investors that “Play” the market as “ICO 2.0” because it is going to make half of the behavior typical for them unsustainable or unviable on the new markets, which means that they will either be forced to leave or to adapt to the fact that wash trades are now highly punishable offence.

And for the well defined and formed business such things as KYC and AML are not annoying and hostile, but this is an entrance to a long awaited era of cryptomaturity, when digital market offers them a well defined tool to solve business tasks they might have combining regulator’s involvement mixed in with the DLT benefits. This is why business picks STO instead of ICO and here is reason why the market participants like Jordan COHEN has chosen STO for his pharma company is the following: ”I was looking for a new way of fundraising. And for the entrepreneurs like me, the biggest issue is scaling and dealing with the task to find exchanges that can actually list the token that I'll issue. This is why STO is perfect for us - they combine versatility of tokens and can be used as equity, dividends, profit share rights, voting rights, buy-back rights while I have a proof of ownership as each shareholders wallet is registered on the blockchain with a unique address. And all of this without the downsides associated with traditional VC fundraising which can be generally summed up as slow, offline, closed-off, paperwork-intensive, regional and not easily accessible for the public process. And STOs basically have their benefits but don’t suffer from the issues that haunt it.”

What will happen with the world of crypto? This is a good question, that we have no answer for. But it’s clear now that cryptoverse is separating into two main directions. One is strictly professional. For it pointless risk is unacceptable and its participants are here in search for the business opportunity.  And there are daredevils of the cryptoverse: guru’s, advisers, fraudsters, scammers and all the other people like that. For the business segment of the cryptoverse STO starts to overshadow the ICO. For the people living on the blockchain wild west ICOs will always seem better as they come with a promise of the x1000 returns and  insane riches. Those will pick an ICO over STO any time.

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