ICOs are all the rage. Yet Token is a better word to describe where we are moving to, which is to “tokenise” all assets so that they can be traded online. So we may hear more about ITOs rather than ICOs. Or not. A lot is invested in the ICO name, so ITO may not take off as a name.
Regardless of name, the way an asset is tokenised matters. That is where a briefing on Colored Coins matters.
First, ignore all the noise on the line about ICOs (scammy or disruptive or both at the same time?) and focus on the problem that ICOs are fixing.
If it is broke, do fix it
A regulated Stock Market is how the market of connecting entrepreneurs and investors works today. The old saw is if it ain’t broke, don’t fix it. The corollary is if it is broke, do fix it. Here are the 4 big flaws with these legacy Stock Markets:
- small cap hell: it is too hard for smaller issuers to get investor attention, so they suffer a valuation discount based simply on market cap. (See here for our other coverage of this issue).
- legacy listing and governance processes: post Enron, the SEC layered on lots of expensive process to protect investors from scams, all of which were based on manual processes (which later got automated but they were still not native digital ie they are expensive and inefficient).
- national boundaries: it is too hard to discover stocks on exchanges in local markets, so they either suffer a valuation discount or seek a listing on one of the global exchanges (where only mega-sized companies can do an IPO). (See here for our other coverage of this issue).
- declining revenue line from listing fees: Stock Exchanges increasingly make their money from selling data, co-located servers for HFT and payment for order flow. This leads to misalignment of interest with the two customers who matter – issuers and long term investors.
Why Microsoft did an IPO
They did not need to raise money – they were already profitable. They wanted liquidity and price discovery so that they could motivate employees with stock. That is the function of a public market. Any public market 2.0 initiative (such as ICO) has to bear that in mind. Investors want to buy shares of profitable business. Uber’s $66 billion valuation in private markets is being questioned because investors cannot figure out how they still lose money after having got to such scale. Then consider a bootstrapped business such as Microsoft at their IPO 25 years ago or a Mittlestand company in Germany. As an investor, which do you prefer to own? That is what the Innovation Capital business should be serving and is not.
In short, the big value in an ICO is instant liquidity. That is only one word but it is a game-changer. It is why ICOs are serving a real purpose and why they are here to stay. It is why ICOs are not simply Crowdfunding.
Colored Coins 101 for business people
Part of our mission at Daily Fintech is to demystify jargon that obfuscates. We translate Fin for Tech and Tech for Fin. In this case we are translating Tech for Fin. There is so much innovation around Blockchain that it is hard for business executives to keep up to date. Our job is to find the stuff that matters and bring it to your attention.
We think Colored Coins is an important development in the Blockchain world. We will parse the tag line on their front page to explain why:
The Open Source Protocol for Creating Digital Assets On The Bitcoin Blockchain
- Open Source Protocol. This is like TCP/IP or HTML. No company controls it or makes money directly from Colored Coins. You make money by adding value on top.
- Creating Digital Assets. You don’t buy an Alt Coin. Let me repeat that. You don’t buy an Alt Coin. You “color” an existing Bitcoin ( % of a Bitcoin or number of Satoshi, which is the smallest divisible unit of a Bitcoin) to represent an asset (stock in a company, a house or car or painting or whatever). Then you can buy and sell those assets frictionlessly across borders.
- Bitcoin Blockchain. This is about the public Bitcoin Blockchain. You can also use Colored Coins on Ethereum (another popular public Blockchain). If you believe that all Blockchains will be private, this is not for you. Using the analogy with the development of the Internet, this is about the Internet not a collection of Intranets. Open Coin transactions are validated by a consensus network that is proven to be secure over many years and lots of transactions.