From Fluff to Function: How The Reverse ICO Can Tokenize Real Assets
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Rewind to mid-2018, and how we witnessed the end of ICO mania, during which blockchain startups were raising millions of dollars with a white paper and a website.
While this was an exciting and entrepreneurial time, it introduced trouble and controversy counteracting the good – and by 2018 Deloitte was reporting that 92% of funded projects from past years were either abandoned or otherwise inactive, partially due to unrealistic objectives and plans, and some due to outright fraud. This compares poorly to venture-backed companies, that fail at a 67% rate.
This is why a trend worth watching closely in 2019 is that of “reverse ICOs” – the process by which existing non-blockchain companies move from a working centralized business model to a decentralized token-based model.
Reverse ICOs tokenize existing assets
The reverse ICO first gained popularity in S.Korea in 2018, and I expect interest will spread to other countries as investors look to find quality projects from proven firms that have already achieved user growth, profits, and or other assets such as technical IP and/or deep domain knowledge.
The primary advantage of a reverse ICO is that the company behind the ICO already has a working business model with users, technology, and key partnerships. This is a distinct alternative to the “built from a white paper” model presented by most ICOs, where the go-to-market strategy, including product development and user acquisition, is unproven and therefore both more risky and demanding in time, money and resources.
Another edge a reverse ICO can leverage is in adoption of cryptocurrency. Purchasing and spending cryptocurrencies still presents formidable technical and trust barriers to would-be crypto users. It is far easier to facilitate existing user integration than it is to spark new user adoption.
An established company that has deep knowledge of their customers can use the right motivational triggers and desirable outcomes to incentivize users to cross the not-insignificant hurdles that persist to understand and effectively use cryptocurrencies for products and services they are accustomed to purchasing with fiat.
The benefit to mainstream adoption of a reverse ICO
Reverse ICOs introduced in certain industries also have a much better chance of stimulating mainstream adoption. Companies that provide high frequency mainstream services can certainly lead the way to digital currency adoption. As CEO of eMusic, I’ve observed how eMusic users and fans in general consume hours of music and videos a day across multiple apps and services. As such, their motivation to take the time to learn and master the properties of a new form of payment related to or enhancing their everyday need for music, videos and artists will be strong.
In addition, cryptocurrency can create all new economic value to drive adoption. A cryptocurrency can open the opportunity for models such as “stream to own” or the ability for artists to gift their music to their most active fans without the need for costly middlemen to execute the transaction.
The most exciting result for firms that pursue a reverse ICO approach will be in the native lock-step between corporate and customer goals. The tokenized business model is a great tool for aligning company, customer and partners in the profit ecosystem because customer value is at the center of profit and revenue creation. The more that customers value and use the token, the more platform fees and related monetization and network effects can be realized.
The virtuous cycle can even grow to create a competitive moat, where the company hyper-focuses on inventing new ways to surprise and delight customers through innovations in user experience, token properties and more. This, in turn, creates more loyalty from the targeted customers, which creates token usage and the value created can be re-invested in the cycle once more.
Following the roller-coaster of speculation and business applications of the last two years, the emphasis for 2019 has to be on actual applications more than just big ideas. Reverse ICOs will pave the way to proving the ability to provide immediate benefit with decentralized ledger technology and the tokenization of digital assets.
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