The innovative marketing approach of 'Airdrips'

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Introducing Airdrips

If you’re reading this newsletter right now, you’re probably involved enough in the ICON community to know about the many hints Min Kim dropped last week about the possibility of future airdrops within the ICON community.

During the week following these initial tweets, there was a lot of speculation and inquiry regarding just what the airdrop might be, who would receive it, and when it might happen.

Well, we finally got answers to some of those questions:

While the “airdrop” concept is nothing new to cryptocurrency, the “Airdrip” approach seems a lot more (if not entirely) unique.

Before we get into the full analysis, I’d like to bring up a quote that Ricky Dodds made earlier this month:

With hindsight, it’s hard to ignore the fact that this was an allusion to the airdrip news that was to come. But it’s important to look at exactly what Ricky is saying here (and to read between the lines a bit) within a broader context.

As you likely know by now, ICON has a number of DeFi protocols coming down the pipeline. On their own, there’s already a decent amount of interest in using these protocols.

But what’s the best way to get even more people to use something that’s not necessarily intuitive to understand and utilize? Well, you financially incentivize them to do so.

That’s where these airdrips come in.

First, some of the details for the Balanced airdrip, excerpted from the announcement article:

  • The first drip will drop one week after Balanced launches

  • Delegated ICX holders can claim their Balance Tokens from the Balanced website

  • The more ICX you have delegated, the more you can claim

  • If you don’t claim your Balance Tokens each week, you’ll lose them

  • Unclaimed tokens are added to the next weekly drip

  • To participate, you must be delegating from a wallet that you control the private key or keystore file (ICONex, MyIconWallet, etc.). If not, the staking platform you are using (i.e. Binance, ICONFI, etc.) must announce support

In my opinion, the most important part of this is the fact that users must claim their BALN tokens from the Balanced website every week. That means potentially thousands of users will be visiting the platform’s website on a regular basis. That’s some nifty marketing on its own.

But it gets even better than that.

If you aren’t aware of what the Balance token is, it means you haven’t yet read my Guide to ICON DeFi yet. In part 2 of that series, I take a look at Balanced, and spend some time talking about the Balance token:

So what is the value of the Balance token?

Most prominent in the eyes of many will be the fact that Balance token holders are entitled to a portion of the fees that the protocol generates, to be split pro-rata amongst qualified Balance Token stakers and paid on a weekly basis. Balanced will also use a portion of the fees to be set aside into a DAO fund managed by BALN holders.

However, simply holding the tokens doesn’t entitle you to a share of these rewards:

An important caveat to point out is that simply holding the Balance token doesn’t entitle you to fees. If you own Balance tokens, you must hold them in a wallet that also has debt in the Balanced network. In other words, only users of the Balanced protocol will be able to receive the benefits of the Balance token.

So we now have (potentially) thousands of people who will be receiving BALN tokens. It’s likely these tokens will have worth on the open market (since they have the potential to earn fees and also provide governance rights), but if you’d like to earn income from them, you’ll have to actually use the Balanced protocol to earn your dividends.

That means potentially thousands of BALN holders are now financially motivated to use the Balanced protocol.

By now, DeFi products are fairly ubiquitous in the cryptocurrency space, albeit mostly confined to Ethereum. Accordingly, with so many options out there, you can’t just build it and expect users to flock to it out of sheer curiosity. There has to be a financial incentive of some sort to lure in users initially (which is why we saw so many platforms over the summer offering crazy and unsustainable yields).

By adding this incentive and helping to ensure there is plenty of demand to use the protocol, ICON and Balanced are ensuring that the “total value locked” (TVL) — a key metric toward measuring the popularity and growth of DeFi protocols — is high from the very start. A high level of TVL is in itself its own form of marketing.

The fact that Balanced and ICON are attempting to reach and integrate users who may be complete DeFi novices and that they’ve created such a unique approach to doing so is impressive.

While many in the community were urging the ICON team to deploy 2017 marketing tactics like paying YouTube influencers, behind the scenes the team was coming up with a marketing approach far more fit for 2021 than 2017.

And it’s likely the party won’t end with Balanced. With other DeFi platforms coming (including some unannounced projects), we evidently haven’t seen the last of the airdrips:

Buckle up.

The new phase of ICON marketing?

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About a week ago, ICON team member Ricky Dodds conducted an AMA on YouTube with WhiteBIT, a cryptocurrency exchange.

While this AMA didn’t generate a whole lot of attention within the community (at least as far as I could tell), it’s worth a watch, and Ricky did make an interesting point at the very end of the interview, when the question of marketing came up:

“We’re at a point now in the project’s lifespan where we want to add users and we will do what it takes to add users. We’re not building ICON 2.0, this foundational technology, to have it sort of sit and flounder. That’s just not a strategy that makes sense and we’re not going to go down that route, so we’re going to do what it takes to get users and to get developers and to get people excited about it, so just stay tuned there.”

It’s unclear if Ricky meant this statement to be interpreted in the manner that I interpreted it, but I ultimately believe this perspective marks an important turning point in not just ICON’s marketing strategy, but an important turning point in the project as a whole.

Ever since ICON first launched as an ICO, the only “product” that ICON had to market was the vision and ambition of the project. There was of course the whitepaper, along with a handful of partnerships and MOUs that were lined up.

The project’s promise—and the qualifications of the team behind it—was likely what got so many people to invest in the ICO and buy on the open market shortly thereafter, helping drive the price as high as it was.

The next couple of years was essentially just an extension of this vision. Sure, there was more and more good news — partnerships were being solidified, the foundation seemed to be growing, decentralization happened, and some exciting announcements came and went — but all of these steps for the most part still fell into the “promise” category. The only thing ICON had to “sell” during this time period was good news and exciting promises.

As all this was happening in the bear market, not much was happening with the price. A lot of this, in my opinion, was related to the underlying market dynamics — the same dynamics that brought down essentially every cryptocurrency, including Bitcoin.

However, I have also seen time and time again people say, “If only people knew about the X, Y, and Z partnerships, we’d be at $10 by now!”

Maybe.

But I ultimately think there’s a limited market for people who want to make an investment based solely on hope and promises, and ICON, for the most part, probably maximized that market. At a certain point in time, a project maxes out its “speculative” valuation and ultimately needs to move onto the phase of “utility.”

As I alluded to, most people bought ICON in anticipation of people someday needing to buy the token in order to use the token—not just to speculate on its future value.

That’s because we know intrinsic demand is what ultimately helps a project succeed.

And so now, with a number of exciting DApps, a suite of DeFi products, and cutting-edge cross chain technology coming down the pipeline (that will increase the utility of ICX but likely tokens on chains that ICON bridges with), we can actually start to market ICON for what it can do, rather than what it might be.

Prior to this point in time, the internal conversation an investor may have had might have been:

“Oh, another partnership for ICON? I’ve been hearing about those for years now. Why should I all of a sudden buy in now?”

However, once DeFi and other DApps launch, that internal conversation might go more along the lines of:

“Oh, I can earn significant interest on my holdings without paying exhorbitant gas fees? And all I need to do is buy some ICX? I’m in!”

Now, compound that with being able to utilize Bridge to easily transition from fiat to ICX, and that conversation isn’t just playing out in the mind of a cryptocurrency devotee, but among the greater general public as well. The Bridge integration isn’t a big deal because it allows people to easily transition into ICX — it’s a big deal because it more easily allows people to use the ICON network.

I should point out that increased demand for the token does not necessarily correlate with increased transaction count (or vice versa). Someone could buy a bunch of ICX in order to utilize Balanced or OMM, but doing so one only require a couple transactions.

And so now marketing gets a lot easier.

Instead of saying “Buy our token because we promise we have a lot of cool stuff coming in the future (which you may or may not understand)!” the team can now say “Come buy ICX to use this product that allows you to earn more money” or “Come buy ICX to use this new fun DApp that is about to launch.”

The initial success of ICONFi should indicate to you just how effective the “come use our product” pitch can ultimately be.

Over the coming weeks and months I think we’re going to start to see more effective marketing. But that’s not because the team isn’t caring about marketing until now. It’s because it’s a lot easier to market a tangible product to a wide audience than it is to market an intangible vision.

Related Content

  • In the latest episode of the “Eye on ICON” podcast, we had a similar discussion to the above while we also made some comparisons between ICON’s growth and that of Ethereum.

  • As more and more people are seemingly entering (or re-entering) the ICON ecosystem, I wrote a brief article in an effort to get people caught up on everything ICON has going on and what’s coming down the pipeline. Be sure to give it a read!

What to look for in the Contribution Proposal System

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The CPS approaches

In the ICON Development Roadmap Update for January, we were given a firm release timeline for the much-awaiting Contribution Proposal System (CPS):

The Contribution Proposal System is in the final stages of code review and will be tested again starting the first week of February. All frontend and backend logic is complete and ready for production. Assuming no more issues are found, we expect to launch the CPS no later than the 3rd week of February. We look forward to bringing this amazing product to the community.

If you aren’t familiar with the CPS, I encourage you to read the prior newsletter I have written on this topic, “The upcoming Contribution Proposal System.” In addition, in the most recent episode of “Eye On ICON,” we took time to discuss this topic in depth (so be sure to listen and subscribe if you haven’t done so yet!).

In the article I just mentioned, I highlighted two key benefits of the CPS, as described in the opening pages of the “Contribution Proposal Paper 2.0”:

The importance of the Contribution Proposal System is two fold. For one, it allows for expedited growth of the ICON Network by giving entities the opportunity to receive funding from the network itself. Developers of decentralized applications and contributors to the growth of the ecosystem can submit their work or plan to the Contribution Proposal System, Public Representatives will vote on whether or not this is a legitimate project, and if approved, this project will be eligible to receive funding from the ICON Network. This system will turn the ICON Network itself into one of the first fully operational Decentralized Autonomous Organizations (DAO).

Secondly, and perhaps less obvious, the Contribution Proposal System plays a significant role in the distribution of wealth and power in the ICON Ecosystem. Many blockchain networks give rewards solely to those that produce & verify blocks, thus centralizing wealth & governance power and giving sole discretion of funding ecosystem growth initiatives to such entities. With the introduction of the Contribution Proposal System, anybody interested in contributing to the ecosystem will have the opportunity to accrue governance power and wealth within the network.

From a big picture standpoint, another goal of the CPS is to transfer the surplus rewards that P-Reps have/had been receiving since the beginning of decentralization away from P-Reps and towards the CPS. Due to a decision made by the community and P-Reps, ICON is moving toward a system where P-Reps operate as node operators and governance participants, while contributions to ICON are to be funded by the new CPS.

Much to my dismay, however, is the fact that thus far only three contribution proposals have been submitted thus far on the ICON forums, the forum where proposals are to be floated prior to submission to the CPS.

With 250,000 ICX being provided to initially fund the CPS, there’s a lot of opportunity for growth of ICON — but only if quality projects are submitted and approved.

As projects start to get submitted and vetted by P-Reps, here are a few things I’ll be hoping for:

Very specific metrics on how the money is being spent

I have seen a handful of ideas for proposals tossed around that include some version of paying for marketing. It also seems like these ideas haven’t been fully fleshed out yet in terms of just how much money this type of marketing may cost. Take, for instance, YouTube influencers. Many of these crypto YouTube influencers charge a pretty penny for mentioning a given token or project. Many ICONists may believe it only costs a few hundred dollars to “hire” one of these influencers. In likelihood, it’s probably somewhere in the thousands. To back this up, here’s a quote from a Multi.io Research report on crypto marketing, released in mid-2020:

The number of crypto and blockchain content creators on YouTube is rapidly increasing, but there have been a few pack leaders with over 100k subscribers who have firmly established themselves as the go-to influencers for promotional purposes. Their rates are currently working out at a CPM (cost per mille, aka cost per a thousand views) of about $500 to $1500. If you look at an influencer’s average views for a video that has been up for a month, if they are hitting around 10,000 views, expect to pay between $5,000 and $15,000.

Does it make as much sense to spend thousands of dollars on a brief video that gets 10,000 views? Maybe. But maybe not. But until we know just how much money it costs to implement these marketing tactics, I’d be hesitant to get enthusiastic about a marketing campaign built in this manner. So it’s my hope that those proposing projects will do the work ahead of time to reach out to target influencers to figure out how much they actually charge before putting forth a proposal.

A diverse array of projects

Contribution Proposals fall into three potential categories:

  • Infrastructure

    • for supporting the underlying code base of the blockchain - Infrastructure supporting tools, bug patches, node maintenance tools, etc.

  • Development

    • Developer support and product ideas - wallets, block explorers, dapps, developer documentation, etc.

  • Community Activities

    • Ambassador activities, public relations, meetups, educational content and activities, and web community development and management

It’s my hope that we see a healthy combination of all the above. I imagine there may be a temptation to flood the CPS with marketing proposals — not only because there’s a lot of enthusiasm for marketing, but also because it’s a skill far more people have (compared to development or infrastructure). I ultimately believe the long-term success of the project will be more aligned with strong projects and a stable infrastructure, but there’s certainly a need for spreading awareness too.

Treating the CPS funds as “our money”

In a certain way, the CPS is money that sort of “belongs” to the community. I say this in the context of the fact that, moving forward, the CPS will be funded by tokens minted by the network — aka, inflation (fortunately, there is a 1,000,000 cap on the amount of ICX that can be in the CPS). While this isn’t new inflation (since it’s essentially the funds that had been going to P-Reps), it’s still inflation.

So, if inflation is providing the funding for the CPS, don't you, as an ICONist, want those funds to be spent in a manner that most effectively helps the long-term success (and thus price) of ICON?

When community members review projects, I hope they’ll think of that funding through that lens. Pretend a proposal required 10,000 ICX of funding. Ask yourself “If that was my ICX, would I want to spend it on this?” “Is it worth it to spend 10,000 ICX for 60 seconds of a YouTube influencer talking about ICON?” I think this line of thinking will help ensure only quality proposals are receiving funding.

Overall, the CPS holds a lot of promise for the ICON ecosystem — but only if the opportunity isn’t squandered or wasted on ineffective or unhelpful projects. I’m hopeful we’ll start to see more proposals come forward over the coming weeks, and I’d encourage the community to make your voice heard about what you’d like to see P-Reps vote to approve!

The saga of "vote-buying"

Welcome to this week’s edition of the RHIZOME Wire!

Note: Before we get into this week’s newsletter, I wanted to draw attention to the fact that I am now collaborating with ICON community member FezBox on a new podcast: Eye on ICON. We'll spend time going through recent news on the latest ICON developments and analyzing new projects. The second episode is now LIVE! Listen wherever you subscribe to podcasts!

Vote-buying and the evolution of governance

Back in late 2019, right around the time ICON began it’s decentralization process, the initial campaign by P-Reps to win over voters was in full force.

Most initial teams put forth their proposals for what they were going to do to contribute to the ICON network — after all, when decentralization began, the objective of the economic system at the time was to encourage voting for P-Reps that would do the most to support and grow ICON (aka “contribute”), rather than simply run a node or participate in governance.

However, a handful tried a bit more of an outside-the-box approach and promised that they’d give rewards back to those who supported them. This certainly wasn’t that unique of an idea in crypto. Most “staking” systems operate this way: a holder delegates their stack to a node operator, thus increasing that node operators stack. The node operator receives 100% of block rewards, but gives back a portion of them in the form of rewards.

As I mentioned above, ICON wasn’t designed with this system in mind, but it shouldn’t come as a surprise that some teams wanted to borrow from this model.

One of the more notable — although not the only — team to put this idea forth was Ubik Capital, when they proposed giving back 50% of their staking rewards back to the community. Here’s a graphic showing their pitch back in 2019:

As other teams had put forth similar proposals involving some sort of reward sharing, Min Kim tweeted the following:

At the time, this pronouncement dramatically shifted the dialogue around what P-Reps were supposed to do. It also created a situation in which any sniff of “vote buying” was met with significant pushback from community members. The responses to this Tweet from Min give an example of that.

It’s understandable that under the initial model of ICON, vote-buying would be prohibited (or at least frowned upon). If teams were supposed to win votes based on the merits of their proposals (and thus their potential for substantive contribution to the ecosystem), then offering a financial incentive to receive votes would have corrupted that process.

However, since that time, the ecosystem—with formal governance ratification from P-Reps and the community—has gradually shifted how we should view P-Reps, and what the responsibility of P-Reps should be.

A short time after decentralization, Scott Smiley of ICX Station made a post on the ICON Community Forum laying out some of the issues that the initial system as designed had created:

1.) Competition instead of collaboration. Some P-Reps have collaborated, but there is a competitive nature to this rewards design that limits synergies and incentivizes combativeness, smearing, a major focus on PR/politics, etc.

2.) Votes are too concentrated - this is a research intensive decision and many people do not put in the time/effort necessary to comfortably diversify their votes among many P-Reps.

3.) Some P-Reps have reported being extorted by voters trying to push the teams to do what they want.

4.) P-Reps at the top are getting too many rewards.

5.) Self-delegation by ICX whales is highly economical and there is no unbiased/objective/decentralized way to stop this with the current design.

6.) There is a strong economic incentive to buy votes. Although we have stifled this problem for now via political tactics, I would much prefer a solution at the protocol level.

7.) Overlap between responsibilities of a P-Rep and what will be the responsibilities/scope of an EEP.

8.) This is not decentralized enough, thus we lack some key benefits of public blockchain (immutability, security, etc.) since we are essentially 22 non-anonymous entities that could easily be shut down by authorities, collude to alter transactions, freeze accounts, etc. This is especially true considering the concentration of votes.

There are obviously a handful of issues listed here. Most of decentralized blockchain governance is one big experiment, and to expect there not to be issues at any point would be unreasonable. This was, as far as I can tell, the first notable recognition that problems existed and that a solution was needed.

However, the most relevant problem (as far as vote-buying is concerned) was #6: “There is a strong economic incentive to buy votes. Although we have stifled this problem for now via political tactics, I would much prefer a solution at the protocol level.”

Here was the long-term proposal suggested by Scott:

Separate the role of [CPS] and P-Reps and make ICON more decentralized. Core responsibility of a P-Rep becomes governance and block validation, while core responsibility of [the CPS] is to contribute to the growth of the network via specific initiatives. Block rewards would be allocated as such at the protocol level, lowering the rewards for individual P-Reps and increasing the reward pool for Contribution Proposals. I would expect many of the current P-Reps to start forming teams that execute [CPS proposals] and build DApps on a regular basis. The larger economic incentive would switch from running a P-Rep/campaigning for votes to submitting Contribution Proposals and executing on such proposals. A key benefit here is that each individual [CPS proposal] has specific goals and KPIs, thus putting the larger portion of block reward funding directly towards specific projects/initiatives rather than to the control of P-Rep teams.

In other words: P-Reps were going to become node operators with governance responsibilities, and funding for contributions to the ecosystem would have to come via the Contribution Proposal System (referred to previously as “EEP” for “ecosystem expansion project”, which was another change made since the initial economic design of ICON).

Scott elaborated on the benefit of this system a bit further in the thread:

Those that would be earning the lion’s share of rewards would be teams that execute [CPS proposals] or build DApps. They would come to the network seeking votes that would approve a specific initiative. I believe this is a more efficient solution than what we currently have, where P-Rep teams are first earning rewards then deciding, in a centralized way, how they should be spent. In contrast, the rewards would go directly towards specific initiatives, rather than having P-Reps act as a middle man between rewards and initiatives.

So, rather than P-Reps receiving a bunch of rewards on the front end and saying “we promise we will figure out what we will do with this money and then work on it!” those who want additional funding will instead now have to put forth a specific, accountable proposal into the Contribution Proposal System — with a specific budget — and then receive approval for it.

The additional part of this adjustment is that P-Reps are now earning far less rewards for being P-Reps than they did at the start of decentralization. That’s because over the past several months, there have been several adjustments downward of the reward rate that P-Reps earn. Thus, there’s little economic incentive to “buy” votes, as there aren’t a whole lot of extra funds to “buy” votes with.

However, a large chunk of the community hasn’t necessarily been closely following these governance changes and this new line of thinking.

So when Sesameseed arrived late last year — along with their model of rewarding voters with SEED tokens — there was some pushback from the community. The best example of this was another thread posted on the ICON Community forum entitled SesameSeed and Vote Buying Discussion. This wasn’t of course the only place this discussion broke out — it was in Telegram and on Twitter as well.

Here is part of Scott’s response:

Looking back at our history, all the in-fighting, debating over what’s vote buying and what isn’t, social media arguing, boxing out certain teams, etc. has been a net negative for our network. It has caused people to feel uncomfortable, in some cases leave our community, not work together and often causes our community to lose focus on what’s really important (working together to grow the ICON Network and utility).

As opposed to social media pressure and off-chain mechanisms, there has been focus on systematically making vote buying less beneficial through protocol changes, such as the bond requirement and generally lowered rewards, while also reserving a large amount of block rewards specifically for contributions through the CPS. Yes, there may always be some benefit to trying to earn more votes in this way, but it will not be nearly as extreme as it once was. The CPS ensures the network will always have resources used specifically for growth initiatives regardless of vote-buying or other similar concepts.

Ultimately, after it became clear that “vote buying” wasn’t something that was going to be enforced or frowned upon, this opened up the door for other P-Reps to offer some sort of value. Here are a couple of other examples:

These tokens are of course on top of the ICON rewards you already receive by staking and voting with your ICX.

Ultimately, there are a couple of conclusions I take away from this evolution.

First: In my opinion, under the old model, vote buying was an act that ultimately would have reduced the net contribution (and added value) to the ICON ecosystem. Rewards that were redistributed from P-Reps to community members weren’t being used to grow the ICON network in any meaningful way. Meanwhile, teams themselves had little incentive to produce contributions to ICON, since the most effective way to earn votes was to simply buy them. That’s just how the economic incentives aligned.

Under the new model, the only way it economically makes sense to give back rewards is to create new, additional value beyond the P-Rep rewards, which can then be given back to your voters.

For example, with Sesameseed, this means offering block rewards from other blockchain communities in the form of the SEED token. With ICONbet, this means sharing in some of the profits generated by the platform.

Second: Some in the community seemed dissatisfied with the fact that ICON has made so many changes to the original vision. Part of this may be that ICONists held an initial attachment to that vision and believed it was a sound model, part of it might be the fact that changing course might make the project look less stable to outside observers. Whatever the reason, these perspectives are reasonable and understandable.

However, as I alluded to before, a lot of this space is experimental. Those in crypto can do their best to try to design a system that best aligns with human behavior and incentives, but it’s hard to get it correct right out of the gate.

Getting governance wrong can be catastrophic for a blockchain. Just take a look at EOS. In that case, what seemed like a sound and well-thought-out design was eventually undermined by those willing who noticed and attacked the smallest cracks in their system.

As we move forward, it’s likely the community and P-Reps will continue tinkering with the ICON ecosystem — and that’s a good thing. Nimbleness is critical in this space, and it doesn’t just apply to governance. While ICON’s original vision of hyper connectivity is still in tact and on its way, the project has also expanded into other areas and has dedicated resources in ways it didn’t originally plan or anticipate.

So, embrace the change, and engage with governance to ensure your voice is heard!

ICON may be cooking up something big with STOs

Welcome to this week’s edition of the RHIZOME Wire!

Note: Before we get into this week’s newsletter, I wanted to draw attention to the fact that I am now collaborating with ICON community member FezBox on a new podcast: Eye on ICON. We'll spend time going through recent news on the latest ICON developments and analyzing new projects. The first episode is LIVE! Listen wherever you subscribe to podcasts!

ICON dabbles into STOs

This week, Min Kim tweeted out an article that he co-wrote with Ricky Dodds entitled “Why Security Tokens will have a greater impact in 2021.” This came a bit out of the blue, as security tokens haven’t really been a focal point of ICON’s attention (at least publicly). The fact that two of the most notable leaders of the ICON project published a very public article on a blockchain media website implies to me that something may be brewing behind the scenes.

So of course, I decided it would be a good time to revisit the idea of security tokens and to speculate a bit on what ICON may be working on.

First, as a primer on what exactly STOs are:

According to an article on Investopedia, security tokens are “essentially digital, liquid contracts for fractions of any asset that already has value, like a house, a car, a painting, or equity in a company.”

So, let’s say you want to gain some exposure to real estate. This means you have to have enough money to buy a property. And now you have to run and operate it and deal with tenants and repairs and all the other headaches that come with it.

Or, you could purchase an STO, giving you a share of ownership of that piece of land. And all you have to do is hit “buy” on exchange to do so. Since you’re only owning a fraction of the asset, you’d only pay a fraction of the cost.

See, look: here’s a token giving you exposure to a piece of real estate outside of Detroit. For less than $200 you can own 1/3,800th of this apartment!

Now, let’s talk about STOs and compare them to ICOs.

If you’ve been in crypto for any amount of time, you’ve likely heard the term “initial coin offering,” which was all the rage during the 2017 bubble (and the tool that ICON used to launch ICX).

At a fundamental level, an ICO is technically a contribution to a project. In exchange for this contribution, you are given a number of tokens, which are almost always utility tokens. As a contributor, it’s your hope that the value of these tokens will go up over time if demand for using the protocol goes up.

Meanwhile, security tokens are an actual investment and ownership in a financial asset. They entitle a holder to profits, potential dividends, and direct exposure to the underlying asset.

Ultimately, utility tokens promise a product or a service; security tokens promise a profit (but it’s important to note that in both cases a promise is not a guarantee).

In 2017, most ICOs were backed by just a whitepaper and a prayer (and sometimes the crafty marketing of a scammer). ICOs were the best path for new projects to take, as they were an easy way to avoid the stringent regulations that a security offering requires. ICOs were just a fast way to raise money.

As a result of these rules and this structure, an ICO participant is not an investor. There are no rights conferred and there is no actual ownership of an underlying asset.

Meanwhile, with an STO, all tokens that are sold are sold as securities. Everyone who owns one is considered an investor, with all the rights that term bestows. However, the issuance of an STO requires a lot more heavy lifting when it comes to regulatory and legal compliance.

This “heavy lifting” is where ICON hit a wall in their prior exploration of the STO space. Here’s an excerpt from Min and Ricky’s article:

In 2018, we looked into creating a tokenized security fund on the ICON blockchain network. We’d participated in other tokenized funds before such as Blockchain Capital’s BCAP offering and found the process straightforward from an investor standpoint. But when we started to go through the process ourselves, it was evident that the cost-benefit economics did not make sense. We and many others discovered that starting and operating a tokenized fund would be more costly than starting a traditional fund. For example, the hours racked up quickly on legal due diligence because this was new territory with high regulatory risk. There were also technical development and operational costs that wouldn’t apply to a traditional fund.

So not only were there high operational costs, but the demand for these products wasn’t significant. They were a lose-lose proposition.

Fortunately, over the past year or so, there have been some changes to regulations making it more practical to issue security tokens:

In 2020 the SEC announced plans to streamline the application process for investment companies, paving the way for blockchain companies to gain faster approval. And in November, the SEC increased its limits on how much capital companies can raise before registering from $1.07 million to $5 million, making it much easier for startups to conduct STOs with fewer restrictions. 

U.S. regulators are showing clear progress toward a better understanding of digital assets and their various use cases, setting the stage for blockchain firms to offer security tokens with greater clarity, transparency, and trust to investors in the coming months and years.

So what might ICON have in store?

In May of 2020, we got some news that the ICON Foundation had reached a partnership with LCX, a crypto assets exchange based in Liechtenstein:

The security token sector just got a little more competitive thanks to the work of the ICON Foundation. This week, the group announced a strategic partnership with the Liechtenstein crypto assets exchange – LCX. Now, the two companies seek to share valuable insight on security token infrastructure, compliance solutions, and regulation technology. The news demonstrates further growth in the STO sector, as well as, rising tokenization interests in the EU.

According to company executives, the firms inked a memorandum of understanding (MOU) this week. Now, the groups will focus on research within the market. The team seeks to gather enough data to help it develop a variety of new standards for tokenized assets. If succesful, their work could prove to play a pivotal role in the EU’s STO market development moving forward.

According to the company, “LCX is a secure and compliant platform for buying, selling, transferring, and storing digital currency.” More pertinent is the fact they focus on “tokenization of assets, utility and security token offerings and advanced trading tools.”

Here’s how the CEO of LCX described their vision in an AMA:

LCX is on a mission to redefine finance as we know it and to democratize financial services and bridge the gap between the traditional banking world and the new crypto-industry.

Similar to Coinbase and Kraken, we have invested heavily in compliance and regulatory structures to ensure our users have a safe, secure and reliable environment to buy, trade and manage their digital assets. Our LCX crypto compliance suite has been built from the ground up and sets new standards in the industry.

Furthermore, in the announcement of the partnership released by ICON, they listed the specific benefits of the partnership:

  • exchange of knowledge and sharing of insights on security token infrastructure, compliance solutions, and regulation technology.

  • working closely together to develop new standards for tokenized assets and how it could interconnect with other blockchains participating in the ICON network.

  • sharing of operational infrastructure in Liechtenstein and South Korea.

You can see why LCX may have selected ICON as their partner (and based on their website, ICON is the only partner (along with Chainlink)—among an impressive list of partners—that is a blockchain organization). It appears they’re primarily looking at utilizing ICON’s interoperability features for security tokens.

I think it’s also important to note that less than a month ago, LCX announced they had “secured the approvals of eight registrations of the Token and Trusted Technology Service Provider Act (TVTG). This makes us one of the first cryptocurrency platforms to achieve these regulatory milestones in Liechtenstein allowing us to offer the broadest scope of blockchain services.”

Among the services they are permitted to provide are “token generator, token issuer on its own, and token issuer on behalf of the clients.”

More notably, these approvals don’t mean they’re only able to serve clients based in Lichtenstein. Here’s another quote from the recent AMA conducted by the LCX team: “Even if the project is based in Singapore, Netherlands or USA – we can issue the token for them combining our legal tool kit, regulatory setup and our token sale manager technology platform.”

Meanwhile, ICON has released it’s own standard for issuing security tokens on the ICON public chain:

The security token standard describes how to represent full ownership or split ownership of a particular asset. Through this standard, ownership of certain assets can be issued, represented, tracked, viewed, divided, privately owned and transferred. It may also be entrusted to a third party provider and may be controlled under strict authorization.

The standard supports assertion of legal documents, partition management with partially fungible tokens in tranche, and interfaces for managing operator privileges.

Additionally, for regulatory compliance regarding fraud or loss of private keys, token control by operators is enabled in the standard.

This ultimately means ICON has created the infrastructure to create and launch STOs on the ICON network, just like they have with NFT tokens and the ability to create other IRC-2 tokens.

Now, what makes ICON compelling from an STO standpoint? Well, we know LCX already cited the interoperability features that are soon to launch ICON.

But remember, ICON also has a close working relationship with dozens of banks and other financial companies throughout South Korea, along with a history of receiving regulatory approval for financial services.

If you were interested in the security token space, wouldn’t it make sense to utilize a blockchain with significant ties (and use cases) with the financial industry and financial regulators?

So, here is what we know:

  • ICON was deeply interested in the STO space as early as 2018

  • ICON created the technical capability to launch security tokens on the ICON public chain in a way that allows legal backing and regulatory compliance.

  • ICON has deep connections with financial industries and regulators, and has a groundbreaking interoperability platform (BTP) launching later this year

  • ICON has forged a partnership with a company (LCX) aiming to be a financial gateway of sorts to be able to launch, trade, and store security tokens. Oh, and they also have the regulatory approval to do so.

  • Out of nowhere, Min and Ricky write an article touting the promise of security tokens.

What does this add up to? Well, this is speculation on my part, but I could envision a scenario where ICON and ICONLOOPs many financial partners express an interest in the security token market to digitize traditional assets. Just look through the many MyID Alliance partners with the word “securities” in their name or description.

And don’t forget, with a decentralized identification already approved by financial regulators that exists on the ICON blockchain, it’s now a lot easier to conduct the KYC process—a key component of issuing STOs to investors.

I would think these factors would make ICON the default blockchain for any and all security token offerings in South Korea.

Meanwhile, it’s important to have the infrastructure necessary to roll out these STOs and ensure they have a presence on secondary markets. The partnership with LCX provides a potential pipeline to a regulatory approved exchange for trading STOs.

Furthermore, with ICON’s promise of interoperability, it may be possible to utilize these assets on other blockchains. Perhaps, for example, it may be possible to use a tokenized asset such as real estate as collateral for taking out a loan on a DeFi platform on another blockchain (or you could always use one of ICON’s soon-to-launch platforms!). And of course, at a basic level, ICON’s interoperability promises “cross-blockchain payment capabilities” as Monty C. M. Metzger, CEO, and Founder of LCX pointed out in the partnership announcement.

All of these seem to be possibilities in my view. Ultimately, I could be wrong, and none of this may materialize, or it may materialize but never live up to these grand expectations.

That being said, toward the bottom of their article, Min and Ricky did state that “the ability to safely and securely invest in tokenized real estate properties is one thing we’re working toward rolling out in 2021.”

So with everything else ICON has in the works for 2021, we can now add another potential milestone to the list.

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