Linking investor success & cryptocurrency growth
Cryptocurrencies have taken the financial world by storm. There are now comparison sites to help investors choose which ones to invest in, and global exchanges to manage transactions. One of the main ways that a cryptocurrency can gain support and funding is through an ICO (Initial Coin Offering). This is a strategy based on crowdfunding that sells part of the currency to early adopters. Currencies based on Bitcoin release coins, whereas those built on Ethereum offer tokens. The development of a token is vital to the success of an ICO. Tokenomics is the process of designing a token that will entice investors and help the currency to grow.
To achieve good tokenomics, a token should provide an advantage to users, entice early adopters and encourage expansion. Tokens usually represent the right to use a product or service within the platform, and are referred to as ‘utility tokens’. A successful token will be sold at a discounted price, cut out middlemen, and match supply with demand. Another key feature is ensuring that the value of the network increases alongside the number of users, also known as Network Economics. The sale of tokens is one of the most distinguishing features between the Initial Product Offerings (IPOs) of conventional startups and ICOs. Free from regulations, these new organisations are creating miniature, self-governing economies by setting their own operative rules.
Until very recently, ICOs and token sales avoided the strict regulations associated with IPOs. However, an Ethereum based VC fund for cryptocurrencies called The DAO suffered a high profile security breach in 2016. In the first few hours of the attack, hackers stole $70m from members of the Ethereum community. In response, the US Securities and Exchange Commission has been investigating ICOs and token sales. The autonomy of tokenomics could be compromised by increased official involvement, which is something that crypto enthusiasts should be aware of.