Were ICOs Really So Bad? Sentiment is Starting to Shift

Initial Coin Offerings (ICOs) were the fuel of the 2017 era crypto boom, but a combination of regulatory scrutiny, a 90% market-wide dive, and a trail of failed projects, prompted the industry to write off the fundraising mechanism.

Now, 11 years since Mastercoin issued the very first ICO on July 13, 2013, while Ethereum popularized the method by hosting its own sale on July 22, 2014, some prominent voices in the industry say coin offerings were not so bad after all.

“Despite their many lack of disclosure, ICOs were open to all, and in a few cases, provided the types of astronomical, asymmetric returns that are often available only to accredited investors,” said Alex Thorn, head of research at Galaxy.

On X, or the crypto community’s unofficial town square, posts pining for ICOs to come back have been popping up more and more frequently.

Jorge Izquierdo, co-founder of the Thiel Project, said “borderless and permissionless capital formation aka ICOs is the holy grail.” The idea was echoed by others, such as DeFiPrime who added that ICOs were a “peak opportunity moment for retail investors.”

The pseudonymous DeFi founder Scupy Trooples is also a fan, as is Ethereum developer Eric Connor who wrote on X, “returning to ICOs with better tooling we have now around price discovery, vesting, etc would be so much better!”

The sentiment shift comes as investors are becoming fed up with the more prevalent fundraising and token issuance mechanisms: venture backed deals which give insiders tokens at a discount they can then offload to individual investors; “points” and rewards programs that are so heavily farmed participants end up with a tiny slice of tokens and projects end up with low quality users; exchange-based listings where platforms charge projects exorbitant fees while limiting buyers to users of the exchange; or airdrops that oftentimes favor a small subset of network participants over the larger community.

As investors analyze the current tokenomics landscape, the simple mechanism where projects sold most of their native token supply to anyone with an internet connection on equal terms, in exchange for crypto, is looking appealing.

According to Galaxy Research’s Thorn, ICO-backed blockchains that successfully launched are more decentralized than private sector protocols.

“Layer 1 blockchains that were funded by ICOs and did end up launching are significantly more decentralized than those that raised private venture rounds after the ICO era ended,” said Thorn.

He told The Defiant that ICO-backed chains like Ethereum, Cardano, and Tezos “have significantly more dispersed and decentralized supplies” than privately funded chains like Solana, Avalanche, and NEAR.

His assessment isn’t alone. Austin Campbell, founder of Zero Knowledge Consulting group told The Defiant that Ethereum and many of the scaling solutions that it spawned (such as the aforementioned Cardano, Tezos, and Polkadot) would be his pick for the most successful ICOs.

ICOs weren’t all good

Yet, barely five years after the great ICO boom of 2017, most projects that tapped into the novel crowdfunding mechanism, have seen the funds raised outpace their current market capitalizations.

Between 2014 and 2017, Ethereum, EOS, Filecoin, Cardano Polkadot, Tezos, Sirin Labs, Bancor, Status, TenX, and Golem raised $5.2 billion according to Wu Blockchain. Today, only a handful of their market caps are higher than what they collected.

Ethereum raised $18 million, and its market capitalization has ballooned to $419 billion. EOS is one of the great losers of the ICO boom, raising $4 billion, but its market cap sits at $890 million. The project’s leaders, however, still lay claim to 140,000 bitcoin or $9.5 billion.

Among the success stories we have Filecoin, which raised $257 million and now has a $2.6 billion market cap; Polkadot, which raised $934 million and has a $9.1 billion market cap; and Cardano with a $6.2 billion raise between 2015 and 2017, and a current $15.3 billion market cap.

But a study conducted in 2018 by Satis Research found that 80% of all ICOs were scams, with 4% considered failed, 3% dead and 15% are still traded. Of still ongoing projects, 4% are dwindling, 3% are promising, and 7% are successful.

ICOs Seen as More Egalitarian

Still, according to Thorn, ICOs aren’t exactly a novel form of crowdfunding, but they are more egalitarian.

He pointed out that he doesn’t think these are more honest than traditional funding methods, even though they opened those doors to investors’ portfolios to engorge financially.

Campbell agrees to some degree. He called the mechanism “neutral,” and explained that there were good, bad, and outright scam ICOs, but that without their competitive pressure, “we wouldn’t have Ethereum, Solana,” or any other of the many projects that now exist.

Regulation Is To Blame

The days of ICOs are long gone, however, and most point the finger at regulators.

Regulations around ICOs–specifically that businesses cannot return profits to their investors–killed the idea, claims Adam McBride, the self-proclaimed NFT Archaeologist and head of Strategy and Marketing for Emblem Vault.

According to McBride, who told The Defiant that he tried his hand during the ICO boom at creating a business model around the idea, but ultimately failed. For him, “if U.S. regulations were to get out of the way, it would be fantastic.”

Campbell agrees, explaining that fears of the SEC are what caused the demise of ICOs.

The SEC has been a relentless opposer of crypto. Under the leadership of Gary Gensler, it has gone after dozens of projects, calling many of the native tokens securities, and filed lawsuits against teams.

Crypto companies are now anticipating a more benevolent hand under the potential presidency of Donald Trump–if he gets elected.

Thorn called a spade a spade.

“As operated in the 2017-2018 era, ICOs were undoubtedly offerings of unregistered securities,” he said, adding that “the crypto world neglected to create a durable self-regulatory process of disclosures and securities regulators pursued issuers with enforcement actions, making the ICO untenable in its existing form.”

For him, the situation is ironic. Because while ICOs were no more did prevent a lot of fraud and fundraising without proper disclosures, “it also led to a more opaque and less accessible fundraising environment that resulted in less decentralized blockchains.”

Voices are now calling for ICOs to return to the scene, even if they hurt their bottom lines. José María Macedo, co-founder of Delphi Labs, said that ICOs were a better mechanism for token distribution “and for the industry,” despite hurting venture capital and private investors.

That said, all that hope has stayed on Crypto Twitter. Startups are still favoring airdrops and traditional venture capital rounds. ICOs aren’t making a meaningful comeback, at least not yet.