Initial Coin Offerings as a Fundraising Strategy

For those who haven't been keeping a close eye on the evolution of blockchain systems such as Bitcoin and Ethereum, and the ever-expanding collection of altcoins built atop or otherwise reliant upon the few core blockchains, the recent spate of large Initial Coin Offerings (ICOs) might seem as though they arrived from out of the blue. Startup companies have been raising tens of millions of dollars on the basis of the most flimsy and unrealistic of business proposals, simply by launching and then selling a new set of limited issue tokens based on the Ethereum system. The promise of these tokens being used in some future API or system of exchange is barely even visualized in many cases, let alone planned or under construction. Yet the tokens are eagerly purchased in exchange for bitcoins or ether cryptocurrency, and then go on to trade for multiples of that price. Those of us in fields like longevity science that struggle for funding might well look at this and ask how we can participate in this apparently magical money fountain.

So what is going on here? The answer to that comes in two parts. Firstly, the technical underpinnings. Blockchains considered in the abstract are a use of cryptography to solve an important problem in distributed collaboration. Within their bounds, they can be used to enable verification of identity, trust between anonymous parties, business ledgers that do not rely upon any one central party, escrow that doesn't require a trusted escrow holder, and so on. This clearly has value, and the fact that the various cryptographically assured tokens associated with blockchains trade at a price is due to the underlying value of what can be achieved with blockchain technologies. Bitcoin is a first generation, comparatively crude blockchain, while Ethereum opens up the technology to allow the operation of arbitrary logic in the way in which cryptographic tokens and the blockchain operate. In both cases there are open markets where the tokens associated with the blockchain can be traded, an operation that is carried out without the need for any market maker, using the power of the blockchain to enable trusted exchanges between arbitrary third parties, ensured by cryptographic exchanges. This is a very high level sketch indeed, and I'd encourage you to read some of the longer summaries for laypeople that can be found online.

That blockchains in the abstract have value - and potentially considerable value in the longer term - doesn't explain why ICOs exist in their present form, enriching startup owners on the basis of dubious business propositions and minimal effort, however. The current consensus view is that there is a lot of money bottled up in some combination of (a) the cryptographic tokens held by people who came into ownership early-on, and (b) the wealth of countries like China with strong currency controls. Mostly the latter option. The flood of money into ICOs is driven by these sources of wealth seeking a place to convert or move their assets, and since this tends to raise the market value of these tokens in the short term, this drags in every speculator in town. Many fairly sophisticated entities with deep pockets are now involved in cryptocurrency trading.

Thus when an ICO takes place, sells out quickly, and the tokens purchased are immediately sold for a profit on the open market, along the way money from currency-controlled regions moves to other jurisdictions via the blockchain as an intermediary, people with large unrealized gains in bitcoins and ether can diversify their holdings, and various other entities can achieve their own goals. So in the short term, it is likely that a great deal of the current market value of blockchains lies in their being a very accessible way to work around currency controls, and ICOs are just a particularly convenient manifestation of this point. Absent regulatory intervention - something that is anticipated by observers in the US, since ICOs look a lot like a way to circumvent SEC rules on startup fundraising - this will probably continue for some years, I'd imagine, if what I've said here is an accurate assessment of why the current situation exists.

So then, back to the question at hand: how could the funding-starved longevity science community drink from this money fountain, while at the same time offering a legitimate use of an ICO? The most obvious path forward seems to involve some form of Kickstarter-like model of funding development by preordering the product. This of course has a high rate of failure, but that seems to be accepted by both Kickstarter backers and by the SEC, tacitly or otherwise, as a way to bring in the necessary funding to a startup company to allow an attempt at development of the product. The further you are in advance of an actual product the more morally dubious it becomes to sell preorders; when you are researching whether or not your approach to building a produce is possible at all, one can argue that it is somewhat outrageous to be taking preorders. (Arguably many Kickstarter projects that are purely development work are also making outrageous claims of certainty in their ability to deliver, but the similarities between that situation and the uncertaintities of real scientific research are superficial at best).

Nonetheless, for research that is further along the pathway, this seems defensible. I'll paint a few scenarios of varying degrees of plausibility and risk of failure here. Let us look at senolytic rejuvenation therapies, for example. Imagine that Oisin Biotechnologies hires a programmer to create a simple Ethereum redemption token type. Oisin pledges to exchange a token for their senolytic treatment at a time at which the cost of that service is $10,000 or less, in any jurisdiction where the treatment is approved for clinical use. Perhaps there are some additional perks, such as token holders gaining priority when space is limited. Some fraction of those tokens are then put out in an ICO. The expected plan would be to sell several tens of millions of dollars of these tokens in exchange for $10,000 each in ether, in the full understanding that the entities initially buying these tokens have no great interest in what they are later to be used for. Then convert the ether into dollars, and treat that as a form of fungible loan or obligation - one that can be obtained somewhat more easily and at much better terms than are available through any existing financial institution. Later funding rounds and deals with third parties to provide the services offered to token holders may be used to dilute the effective cost of this loan and of honoring the tokens.

Alternatively, consider a group of people with a suitable biotechnology firm on contract who make much the same ICO offer, but selling tokens at $2,000, and pledging a place in an open human trial of whichever package of senolytics they settle upon. Depending on the amount raised, they pledge to run mouse studies for the promising senolytic drug candidates with only cell studies, and initial human volunteer tests for senolytic drug candidates with only animal data. They offer no guarantee as to which senolytics will be used in the end, and the expected package for people who redeem the token is a kit sent in the mail, with instructions on how to coordinate with a local physician to obtain before and after measurements. You can adjust the dollar amount and the type of support and logistics offered by the venture, ranging from the minimal product described above to travel to a location for a medical tourism-like package, to ensure better data collection.

The point here is that none of these things could do very well when it comes to raising funds in the present environment of crowdfunding absent this unusual dynamic flowing through the blockchain system. They are legitimate products, analogous to many Kickstarter efforts, but our community of longevity science supporters simply isn't large enough and longevity science is not yet entrenched enough in popular culture to bring in tens of millions in this way. But near anything put in the path of the money flows and incentives currently operating in the major blockchains right now will, if properly executed, stand a good chance of raising significant funding in this way. Will that continue, or will it be diluted to nothing by the gold miners even now heading in that direction? Who knows. But you don't find out without giving it a try. It is of course the responsibility of those who do this to conduct themselves in an ethical way that reflects well upon our community, but I think this to be a practical possibility, and one we should look into.

Comments

Good suggestion Reason. What have irritated me for long is that other projects have an easier job getting donations than life extension.

Posted by: Norse at July 8th, 2017 1:16 AM

Nice idea. But cut it down into smaller units like 1/100th or 1/1000th of a token. The most important feature a venture capitalist wants from his investment is liquidity. An exchange-traded commodity (ETC) does that with a market maker, but Ethereum explicitly doesn't have one. So the only way to get liquidity is by having a lot of speculation going on.
$2000/unit requires at least $200000 of capital with proper money management. Most small-scale traders would simply avoid such a market and go somewhere else.

Posted by: Matthias F at July 8th, 2017 6:57 AM

It looks like a bubble. My Uber driver the other day was telling me how he was investing in Bitcoin.

Moving large quantities of money around monetary controls is probably easier via smurf systems.

Posted by: Jim at July 8th, 2017 7:52 AM

It's a shame hash based cryptocurrencies overshadow significantly better ideas like folding@home.

Posted by: Anonymoose at July 8th, 2017 10:51 AM

I'm pretty sure Folding@Home had some sort of currency as well although pretty much no one knows about it.

Posted by: Anonymoose at July 8th, 2017 12:06 PM

Seems to me you would have develop a fully functional crypto currency then market it. But the limited liqiditity would reduce its market appeal.

Posted by: JohnD at July 10th, 2017 10:33 AM

Hi Reason, Great post. A friend of mine suggested I read it. I've been an investor in bitcoin and (more recently) ethereum and one thing that excited me the most about this technology is it's ability to raise money for life extension ventures. I didn't know when the technology would be ready but I think, with the new ICO model based off ethereum, it's probably time to try something. The next logical step is to pair up a brave scientist/entrepreneur from the longevity space like Aubrey de Grey, Laura Deming, Bill Andrews, or (my favorite right now) David Sinclair and get them to work with a team of people who know how to launch/manage an ICO. I have enough contacts in the cryptocurrency space, I could probably find a team to launch/manage the ICO, but I don't know enough people or have enough clout in the longevity space to get somebody to try this funding model out. I am guessing you might have those connections/clout? Do you care to have a conversation to discuss a best path forward? please email me at the address I provided in the comment form .... ps I am posting this as a comment so that people can see something is being done about this opportunity.

Posted by: RenSylvain at July 20th, 2017 1:43 AM

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