Vitalik Buterin doesn’t want non-blockchain and fiat projects to conduct ICOs, and here are economic reasons behind that

For the last several years, there has been going a very basic discussion in the blockchain community, and the topic is: should non-blockchain projects use ICO/TGE as a funding mechanism? The answer that old-school blockchainers like Ethereum founder Vitalik Buterin give to that is simple: No. Vitalik has expressed his opinion in multiple speeches, presentations and interviews (here is one several example), and he is certainly not alone in the no-ICO-for-fiat-projects camp.

Let’s try discussing this in more detail and finding the reasons behind this point of view.
First of all, blockchain and distributed ledger technologies are not some miracle land that is seated somewhere on a distant cloud, this is a normal industry that has all attributes and characteristics of one: it employs people who get paid for their work, it rents some office space (however tiny it is), it consumes resources such as electricity, storage and computing capacity, it uses remittance, banking and other financial services.

The size of blockchain sector is rather difficult to calculate since most of the projects do not provide any statistics at all. On top of that there are no statistical standards for the sector. Leave alone the fact that there are no big research institutions that collect such statistics, put it together and process into aggregated data. The only number we can work with is market capitalization of tokens and coins openly circulating on crypto exchanges.

This market capitalization term shall be explained better. Historically, it arrived from the stock market where capitalization derives from the term capital, and in effect it reflects market value of a company, or companies, thus reflecting current size (or value) of capital that those firms can use for their needs. Stocks/equities can be used in mergers and acquisitions, as option payments to employees, as pledges in loans and marginal trades and so on.

It is somewhat different with coins and tokens. By nature, utility tokens (which currently represent a significant part of the crypto market) are not entitled to any property, assets or shares in business. They represent a payment mechanism for some specific service that every particular project offers or provides. This statement is, obviously, a serious simplification since there are plenty of other attributes for every particular token or coin: rights and obligations as regards to the network of the project, roles in its architecture and everything that relates to the network consensus mechanism. However, for a regular buyer the token is a guarantee, or an option, to consume some specified service. So, for sake of correctness, crypto market capitalization shall be called combined purchasing power.

Illustration: World ICO Heat Map by Wulf A. Kaal, Professor, University of Saint Thomas School of Law

ICOs have been the swan and the ugly duckling of the crypto universe since they became massive about three years ago. The bad part is easy to explain, as it has been the talk of our crypto town on a daily basis: scam, fraud, over-fundraising, little control of spending by the community, and so on, and so forth. The good part was the inflow of resources.

Any typical ICO goes as follows: the project accepts Bitcoin, Ethereum, Litecoin, Bitcoin Cash, or any other top-20 crypto currency (and gives the buyer its tokens in exchange). In order to buy into an ICO, any outsider has to buy this top crypto currency in the first place. Some of these ICOs developed tricky combined schemes allowing investors to buy in with fiat contributions but this is nothing compared to crypto: according to the statistics disclosed by several projects, ETH stands for around 70% of the total funds raised, and BTC covers another 20%+. During 2015-1H17, the majority of ICO buyers were blockchain professionals who invested their basic crypto currencies into something that looked more promising and had good expectations to grow faster than the basic asset (i.e. BTC/ETH). Over time, as the world got to acknowledge blockchain and its prospects, the ICO spree attracted more and more outsiders, forcing them to buy crypto currencies with their fiat money, thus inflating prices for BCT/ETH and causing the purchasing power of the crypto universe to increase.

Currently, it stands somewhere slightly below $500bn, according to Coinmarketcap, and was as high as $830bn at its Jan’2018 peak. This doesn’t mean that if every crypto currency holder sells his or her holdings entirely, it could be transformed into $500bn of USD cash (given there will be no buyers, the price won’t sustain). Theoretically, this means that in every given second, there is $500bn worth of blockchain services that can be consumed by paying with crypto.
But is it true? Hardly doubt that. One can name between a dozen and a hundred of projects that are offering some fully cooked product (or MVP, at least) available for immediate buying, and none of them come close to $1bn in annualized revenues, let alone $5bn. In essence, current market value of tokens and coins still represents a mere expectation of the public; an expectation that there would be sufficient level of activity in the blockchain sector that would justify those valuations.

While each and every commentary suggests that there will be a massive burst of the bubble with 90% of ICOs being wiped out of the market, there are good chances that overall imbalance can be eliminated painlessly. In order for it to happen, one thing must become true: the industry must start providing external services while continue attracting external capital.

And that’s where we come back to our initial question: should the industry support fiat-oriented businesses as ICO campaigns and projects? As we mentioned earlier, blockchain Founding Fathers claimed over and over: no. They always gave good technical and infrastructural reasons to support this position but rarely commented on the economic one. However, there is nothing to be ashamed of when stating the obvious: when fiat-centered businesses raised crypto currency, they milk the money out of blockchain. And vice versa – when blockchain enterprise collects fiat money, it fuels the industry by inflowing the capital.

The same is true when you analyze the projects’ business models. Today, blockchain projects consume a lot of resources from the outside (meaning fiat) world: internet providers, legal support, banking, transportation, you name it. The opposite is far from true yet; use of blockchain hasn’t become massive and banks and insurance companies, remittance services and media are only making their first steps in incorporating blockchain in their day-to-day operations.

The key item on our agenda remains the same as it was a year ago. Blockchain has to build up its position as a supplier of services and consumer of capital; and try limiting external consumption of resources and outflow of capital. This means more clients from the fiat world (paying either in fiat, or in crypto), more subcontractors receiving payments in crypto (salaries and tech stuff, presumably) and more fiat money invested in new ventures offering outside services and selling to the outside world, not the opposite.

I made it clear earlier that I’m a believer in crypto. Please note that my trust relies on facts and figures, trends and expectations, not only general inspiration. As usual, feel free to share your thoughts and views, I’m always open for discussion.

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