The Importance of Tokens in Crowdfunding
As the crypto sphere continues to expand relentlessly, more and more ground-breaking use cases and offshoots of the technology are being developed and deployed into everyday usage.
One of the most recent and disruptive technologies was the Initial Coin Offering which has gone on to become one of the most controversial and divisive fundraising mechanisms that the world has ever known. It also gave way to a new type of assets – the ERC-20 token which often represents a share in the business, organisation, or project in question.
If a start-up wants to create a role-playing game that runs over the Ethereum blockchain, to raise funding to further development of the game and cover all expenses, it would decide to undertake an ICO. This means that a specific token is created and then sold in a token sale using other cryptocurrencies, the profits of which are then funnelled back into the project.
This method means that there is no need for venture capital, it forms a direct relationship between startups and crypto investors, without the need for an intermediary. There will be other stages of funding that include seed funding or private sales, but with ICOs, it is the public that generates most of the funds.
This is the most straightforward explanation of tokenomics; a self-funding mechanism for projects that exist within the crypto sector. Over the last couple of years’ billions of dollars have been raised this way and ICOs have even been endorsed by celebrities and leading global financial institutions.
At the moment, there is much confusion around the legality of ICOs and token sales with the SEC being the most hesitant to give their seal of approval. Whilst other jurisdictions have made headway in creating legislation, the general consensus seems to be that fraudulent behaviour and flagrant disregard for securities laws are generally evaded, and some kind of self-governance has established itself in the market.
A well-designed token should have a utility, resist inflation, be scalable, fungible, and able to be traded on an exchange.
But having a good grasp of tokenomics is essential to the success of both the ICO and the project. The how, who, what, and why of implementing a token within the ecosystem so that it can be used to facilitate the exchange of goods and services, is one of, if not the most important, part of the process.
To find out how to create the perfect tokenomics for your ICO or startup, contact E&S Group today by sending an email on [email protected]