Vitalik Buterin: Revolutionizing ICO
Main page Analytics, Ethereum, Cryptocurrency, ICO
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Sept. 28, 2017

The Ethereum co-founder, Vitalik Buterin, spoke about the promises of his own creation and the strengths and weaknesses of Initial Coin Offerings (ICO), in an interview with South Korean two largest publications: JoongAng Daily and JoongAng Ilbo.

Initial Coin Offering

Over the past year, the Initial Coin Offerings grew into a popular method of crowd funding for Blockchain startups, having raised over $1.5 billion, with some well-off ICO projects such as EOS and Bancor.

The phenomenon of ICO allows raising money in a decentralized manner, from a distributed ecosystem of investors, enabling blockchain startups to make money in a short span of time and correspondingly show their valuations through the market cap of their tokens.

However, according to Buterin there are some flaws in ICOs, many of which come from the centralization issue. Although ICOs are based on a truly decentralized and peer-to-peer Blockchain protocol in Ethereum (ETH/USD), they are frequently run by companies or single development teams with large funding.

Vitalik Buterin: Revolutionizing ICO
Vitalik Buterin

“However, they also have their flaws, and I think many of these flaws arise from the fact that even though the ICOs are happening on a decentralized platform, the ICOs themselves are hardly centralized; they inherently involve many people trusting a single development team with potentially over $200 million of funding. There are also not very good incentives for people to produce information to help people determine which projects are worth participating in. I think in the medium term, getting funds with ICOs will get harder, regardless of whether or not regulation is implemented,”

Buterin elaborated. The problem lies in the fact that the majority of the ICO market investors do not conduct any detailed analysis and evaluation on the technicalities of the ICO projects and Blockchain networks. That is why many call for ICO regulations. On the other hand, any regulation would negate the purpose of exploiting decentralized methods of crowd funding.

According to Buterin it might take two to five years to solve most of the scaling flaws in Ethereum and unlike other blockchain projects that are developed for concrete tasks, the Ethereum protocol was designed to run as a framework and infrastructure for decentralized applications.

The Ethereum Foundation and the Ethereum development community developers have been working on several scaling solutions:

“I would say two to five, with early prototypes in one year. The various scaling solutions, including sharding, plasma and various state channel systems such as Raiden and Perun, are already quite well thought out, and development has already started. Raiden is the earliest, and its developer preview release is out already.”

Buterin said his research team is developing a system that will transform the way people obtain coins and probably make miners obsolete, at least for Ethereum.

While, mining is considered a vital aspect for the survival of the cryptocurrencies and comprises a crucial part of any cryptocurrency ecosystem, Buterin and his team have been working on a system called “proof of stake,” allowing coins to be rewarded based on how much Ethereum one owns. In other words, you could get tokens without having to solve any of the computational problems.

“We have a proof of concept for proof of stake,” Buterin said. “Going from proof of concept to actual adoption would take maybe one year. After ethereum adopts proof of stake, there will be other cryptocurrencies that miners can mine. And also, I hope that by then, there will applications on top of ethereum that they can earn money by participating in them.”

Revolutionizing ICO

Last week, Vitalik Buterin and Jason Teutsch, the founder of TrueBit, a blockchain verification project, published a 15-page white paper introducing a new kind of ICO, which they refer to as an "Interactive Coin Offering."

“While token crowdsales cannot simultaneously guarantee buyers both certainty of valuation and certainty of participation, we show that if each token buyer specifies a desired purchase quantity at each valuation then everyone can successfully participate. Our implementation introduces smart contract techniques which recruit outside participants in order to circumvent computational complexity barriers”

states the abstract of the paper.

What the authors suggest is the way to bring fundamental principles of market value to ICOs, which have to this point suffered from a lack of coherent free-market economics.

ICOs, or the token crowdsales, would have no upfront cap on the amount of money raised. Such specification will likely get rid of the stampede mentality, which has beaten the rational buying behavior in certain capped ICOs, such as one in June, for example, that raised its maximum $35 million in just 30 seconds, with only 130 people able to buy tokens.

"Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated,"

the authors write. Buterin’s and Teutsch’s plan would let the ICO cancel their purchases, something which has up to now not been possible in token sales. This brings the law of supply and demand, which would play a beneficial role with the ability to withdraw offers in an ICO, leading to an “Interactive” component.

“Potential buyers may enter and exit the crowdsale based on behaviors of other buyers, and in doing so tend the valuation towards a market equilibrium."

In order for this to work, the developers’ new system introduces a concept that has long existed in stock trading to the ICO market and is called a "limit order." This new method would allow buyers to enter bids for how many tokens they would be ready to buy at different valuations, instead of asking investors to purchase tokens at an arbitrarily set price. The buyers could also fix a limit price, at which they are comfortable participating.

In practice, these corrections, which Buterin and Teutsch present in their paper, would in fact make token prices more reasonable and fair and prevent heavy-pursed investors from ‘swallowing’ up huge chunks of the market.

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