The economy of the primary offer of tokens (ICO)

First let's get acquainted with a little-known gambling phenomenon - pachinko.

Patinko

Before the legalization in late 2016, gambling for money was considered illegal in Japan. There were exceptions in the form of horse races, rowing, motorcycle and bicycle races and lotteries, but now the situation is gradually changing. Nevertheless, all these years, cunning entrepreneurs have found simple but effective ways of circumventing Japanese gambling laws. One of the most popular ways was used in gambling halls, offering an arcade pachinko game, reminiscent of pinball. Despite almost complete obscurity outside the country, in Japan, thanks to pachinko, a thriving gambling market with a capacity of 11,000 gaming halls with a gross income of $ 209 billion (2015), or about 4-5% of Japan's GDP, has developed.

Patinko works as follows:

• The player enters the gambling hall and buys / rents the steel balls for the pachinko for the yen.

• The player walks with balls to the pachinko automaton (see the photo above) reminiscent of a pinball machine.

• Just as in traditional pinball, coins are thrown into the machine, the player falls asleep balls, presses and releases the spring handle connected to the hammer with a soft nozzle that starts the ball on the metal track. The track leads the ball to the top of the machine, where it loses its momentum and falls on the playing field.

• If, during a fall, one of the balls touches certain targets on the playing field, the player will be able to win additional balls.

• The more balls the player has, the longer he remains in the game, increasing his chances of winning new balls.

• The balls themselves are of little value, since they belong to the playing room. However, at the end of the game, the player goes with the remaining balls (including won) to the prize stall, and receives prizes equal in value to his winnings in the pachinko balls. If the player starts with balls at 10 yen, and at the end has balls of 20 yen, then he can get a teddy bear worth 20 yen. The key point here is the ban on games for money in Japan, so the prize could be anything but money.

• Then the fun begins. Since the law prohibits pachinko playing halls from issuing cash prizes, they issue a "prize money equivalent." But next to the playing rooms are associated with them (but more often independent) stores, "buying" prizes for money!

• In fact, steel balls and prizes are only a guarantee of getting money. Therefore, the reputation of playing halls is very important, because players must be sure that the pachinko balls can be exchanged for prizes, which in turn can be exchanged for money!

At the pachinko, a thriving gaming (and underground gambling) industry has been built, skillfully but efficiently functioning in everyone's mind. The above-mentioned pachinko market volume clearly shows that either this game is in great demand or it replaces the simple and genuine concept of the casino. The key question is, which option is correct?

The pachinko effect

Although pachinko as a cultural phenomenon is as fascinating as pinball machines "Terminator", we also see that the gambling aspect of the pachinko is stretched and is not an optimal substitute for real gambling. To a certain extent, the pachinko playing halls were one of the simplest ways to satisfy gambling demand in the Japanese market by means of a clever mechanism circumventing legislative restrictions on gambling for money. At the same time gambling halls pachinko became a sub-optimal substitute for an open gambling environment. Suboptimal, because: (1) pachinko playing halls can offer only one simple game, unable to compete with a wide range of games offered by the casino; And (2) the gaming process in the case of pachinko is somewhat inconvenient, if you just want to play for money!

Terminator 2 pinball machine

Legalization of casinos in Japan was the result of the Japanese authorities' knowledge of the possibility to tax a vast gambling market, develop tourism and stimulate economic growth. There is a chance that with the introduction of new laws, the gambling market will expand due to the fact that casinos will begin to offer a greater variety of games in order to satisfy a wider range of interests and customer requests. The share of the pachinko market is likely to go down, because demand will shift to the casino gaming model. However, there is a high probability that smart business models, like those around the pachinko playing halls, will adapt to increase their attractiveness in a new gambling environment. Depending on the cost and availability of gambling licenses, existing pachinko gaming halls may allow players to directly win cash prizes, or they will start offering other forms of gaming machines, such as traditional slot machines or newer technologies, like the notorious fixed-rate terminals in the UK (FOBT).

It is important to note that although with new gambling laws, authorities can apply more stringent supervision and control to protect vulnerable players, which will lead to higher operating costs, there is also greater potential for commercial opportunities and income and a greater choice for players.

But why are we talking about pachinko in the article titled "Economics of ICO"? Because pachinko is an interesting phenomenon that resembles most clever explanations and models in crypto space, trying to distance ICO from financial instruments. Building these "detours" can limit the insight and creativity that are necessary to see the true extent of the ICO, and prevent many in the industry from seeing possible risks in the event of choosing the wrong path.

The primary offer of tokens

Bitkoyne's appearance in 2009 gave us tools and infrastructure for the exchange of tokens, or primitive electronic value signs (in the case of Bitcoin blockbuster, Bitcoins, BTC), over an open public Internet without trusted intermediaries. But in order to create new tokens, it was necessary either to deploy and scale a new block network (probably Bitcoin's fork), or to release tokens over an existing block network such as Bitcoin (using metadata encoded in raw-transactions ("raw" )). The first option encountered the complexity of the task of scaling and achieving the network effect for the new blockbuster, and the second one with the difficulty of coding enough information about new tokens in Bitcoin's raw transaction. None of these models was perfect.

But with the advent of the Ethereum in 2015, the concept of decentralized smart contracts has emerged. Ethereum's blockbuster not only provided the infrastructure for operations with primitive electronic tokens (in this case, ether, ETH), but it also opened the possibility for simple creation and autonomous management of other electronic tokens via an open public Internet without trusted intermediaries.

Smart contracts, which are, in fact, applications running on top of a decentralized network, allow you to create tokens, distribute them among users and easily share them. Such a process of creating tokens and distributing them among users in exchange for primitive electronic network tokens is called ICO.

ICO Tokens

One of the most obvious and natural uses of such ICO-based tokens is to use them as financial instruments, such as stocks, debentures, rights to share in profits, etc. In an unaltered smart contract, you can not only program emissions, Distribution and reversibility, but also to specify certain events, such as rules for the movement of funds, which can operate either at a certain time, or under certain external conditions. Public block infrastructure for a number of reasons is suitable for the issue of financial instruments and their administration, mainly related to the regulation of the circulation of client money and assets.

Nevertheless, since the issue of financial instruments is itself strictly regulated, several start-up models have been developed that allow issuing tokens, while circumventing laws on the regulation of financial instruments. In addition to the question of whether tokens are financial instruments, there are also a number of other unanswered questions related to the capital gains tax and the laws on customer identification and the fight against money laundering. Some regulatory and regulatory financial issues are currently being studied and improved. The task of this article is not to go into such questions, but to try to understand the economic reality underlying ICO, the emitted tokens and their application.

Appkoy

One of the most notable models of ICO is the creation and release of tokens, called "apkkoyny." In this case, the emitted electronic tokens symbolize access to a specific product or service that already exists or will exist in the future. The purchase of these tokens can be easily viewed as the acquisition of a "software license" that gives the holder the "right" to access the final product or service. But, unlike usual licenses, these issued tokens are easily exchanged either directly between users (without intermediaries) or through crypto-exchange exchanges. The ease with which tokens are traded on the exchange promotes liquidity and, therefore, encourages price volatility based on the market perception of the issuing project.

Theoretically, if the hardware provides access to a future product or service, then their cost should increase with the launch of the product and the growth of its use. Thus, the first users (ICO participants) benefit from the capital gain of the issued tokens. This article examines the economic dynamics and factors that affect the owners of such devices.

Gnosis

An example of one of the most famous ICO - Gnosis, collected an equivalent of $ 12 million in air in less than 15 minutes from the start, while releasing only 5% of the total number of its tokens (GNO). This means that the total market capitalization of tokens after the issue was ~ $ 300 million, and this is before the creation of any commercially viable product! Publications Gnosis allow you to understand the structure of ICO, the principle of GNO tokens and possible benefits for the buyer. In Gnosis Limited's "Terms for Tokens", the legal side is disclosed as deeply as with private placements of financial instruments, but the economic difficulties and risks associated with ICO or issued hardware are almost not affected. At the same time, even for those who are sufficiently versed in financial engineering, risks and technologies, it is not so easy to understand the intricate mechanism of the operation of these tokens, their possible economic dynamics and potential costs and risks.

The purpose of this article is not criticism of Gnosis, but the provision of a methodology for analyzing the economic reality behind such devices to understand their value and risks. As can be seen from the example of ICO Gnosis, this is not an easy process, so we will try to unravel the complexity with a simple and visual thought experiment with the ICO laundry service.

"Laundry" tokens

Let's imagine that we are experts in the field of laundry services who publicly announced the plan to open a new laundry network, whose development will be financed through the ICO. We issue tokens that will give holders access to laundry services in all the laundries of the new network, at a cost of 1 Laundry Token (LTX) = $ 1. However, we will only issue 1 million LTX in total, creating an artificial shortage. In addition, we will do this with the mediation of an independent third party to ensure that we can not cheat the system, that is, an independent third party will ensure that we can not release more LTX or recall previously issued LTX, and that the LTX Will be used for the intended purpose. Let's also imagine that the price of LTX may rise or fall depending on demand and supply, and that users can easily exchange them at a fair market rate. According to the effective market hypothesis, the exchange rate of tokens in a sufficiently liquid market will display all the market information associated with the relevant project. The theory says that when we issue LTX tokens and use the recovered funds to build a laundry business, the cost of LTX will increase (in anticipation of a successful launch), and therefore, LTX holders will profit. On the other hand, if the project meets with difficulties and bad news gets into the media, the cost of LTX will start to decrease, and LTX holders will suffer losses.

In order for LTX to be fully equipped, the issued tokens must be converted to laundry services, ie, holders must be able to pay their LTX for services in any laundry from the network. LTX can be divided into subunits, but for simplicity, we assume that 1 LTX when redeemed in the laundry is converted into an equivalent number of laundry coupons at the market rate in dollars. Thus, if 1 LTX now trades at $ 50, then the holder at the repayment of 1 LTX can receive laundry coupons for $ 50. For example, he can wash five jackets if washing one jacket costs $ 10. When the price of tokens on the open market grows, the holder at redemption can get more laundry coupons "for free", ie, wash more jackets for the same number of tokens. Does it sound confusing? This is a fairly simplified explanation in comparison with how Gnosis tokens work, where GNO = LTX, and WIZ = laundry coupons!

Fundamental indicators of tokens

Nevertheless, in order to guarantee sustainable development, the economic model of ICO and devices should be viable. For example, if the problems due to the price drop of tokens to zero are obvious, then a sharp rise in price can also hurt business, but less obvious. In order to build a basic methodology for such an analysis, it is important to begin by reviewing some of the fundamental indicators of tokens.

Money-credit policy

The monetary policy of tokens is a model for releasing reserves and a limit on the aggregate supply, that is, how many tokens are issued and how often and how many total tokens will be issued. A limited and properly controlled release of reserves increases the chances of a slow increase in demand, which increases the price of tokens. Monetary policy is usually defined in advance in the emission strategy, where a fixed number of created and issued tokens is laid. Nevertheless, even if there is a limit on the total offer, the issuer can distribute only a certain part of the available tokens in order to attract a fixed amount of capital to carry out the business plan. The remaining tokens are stored on an escrow service to finance operating costs or future related projects. For example, in the previous example of ICO LTX, the offer limit was 1 million tokens, but we can distribute only 500,000 tokens, and put the rest on an escrow account that can be used to cover the costs of doing business or for future expansion of the laundry network. The escrow account can have access / use control so that investors are assured that the stored tokens will not be sold all at once, triggering a price drop; Or they can be blocked for a fixed period to make possible controlled sales for a "sufficiently long" period of time. All these aspects relate to the monetary policy of tokens, since they are directly related to managing the supply of tokens in circulation, and this is a relatively well understood concept in the field of  crypto currency.