ICOs had been one of the hottest trends of 2017, collecting over $5.6 billion. Initial Coin Offerings (ICOs) is a token sale where companies sell their own cryptocurrencies on the blockchain and raise funds in return. In most of the cases millions of dollars were raised by blockchain startups that offered nothing more than a flashy website, a conceptual whitepaper, a promotional video and a team of engineers.
ICOs had been surrounded by a lot of controversies and scandals and the major reason of which is the poorly-regulated crypto industry. Out of the many ICOs held last year, some died midway, some couldn’t reach expected cap and had to end while some were intended scams.
Now it’s 2018 and it seems like ICOs are still a hot topic however there is a slight twist this year. The latest trend surfacing this year is reverse ICOs, a process by which non-blockchain companies change their business model from centralized and fiat-based to decentralized, crypto-based models.
What is a reverse ICO?
Blockchain-based companies hold ICOs before having a fully functional product. They then use the funds raised to develop their platforms.
On the other hand, reverse ICOs are held by centralized companies who want to decentralize themselves to keep up with the trend. Now a reverse ICO can be held by either a fully established company like Google, Facebook or Amazon or a startup that has an existing centralized business model.
Firstly, the companies that run the reverse ICO, issue digital tokens on the blockchain to replace its shares. Then, they decentralize their business models by giving the token holders the power to get their profits from their replaced shares.
Benefits of a reverse ICO
One of the biggest advantages of a reverse ICO is that the company holding it already has a fully formed business model. Now this definitely gives those companies a step ahead in comparison with the startups that haven’t yet developed a fully functional product and a business strategy. The established one has been serving for years and has a greater chance of keeping up to its promise.
Moreover, established businesses, due to their strong user base have a greater chance of decentralizing themselves as their customers would likely want to invest in the token and be a part of the ICO. For instance, the social media giant Telegram will be holding its ICO later this year, and with its 200 million user base, the token sale would obviously be a success.
By turning into a decentralized business, companies can also save up on their money by enabling users and customers support the platform by sharing their free resources such as disk space and bandwidth in return for their digital tokens.
Companies benefitting from a reverse ICO
Kik, a popular messaging app with a 300 million plus strong user base, raised nearly $100 million in an ICO held last year. The company was having a hard time to grow in presence of competitors like WhatsApp and Facebook messenger so had to change its strategy.
By decentralizing, Kik can incentivize its users for their interaction and allow developers to create all sorts of business models around the Kin token.
“Our ultimate vision is for Kik to be one of hundreds or thousands of digital services for Kin,” said Ted Livingston, Kik’s CEO, last year. “What if we got all these developers to integrate Kin, then, as a consumer, I can earn and spend Kin inside all these places?”
For example, developers get the Kin tokens based on the interactivity they bring to the platform and by the attention they get from users. Such business model encourages developers to use Kik apps and bots aimed solely at user experience.
Cool Cousin, a social city guide app with 500,000 users, is another company that is planning to change its centralized business model to a decentralized one. The company closed the private sale of its cryptocurrency, the Cuz token in mid-March and started public sale in April. By moving to decentralization, Cool Cousin aims to create a self-sustaining, self-governed community. This means that “neither the company nor the community members can manipulate or mess with the content due to hidden or commercial interests,” said Itay Nagler, the company’s co-founder and CEO.
The company would also be rewarding the Cool Cousin users who will contribute to the growth of the platform. “Community participants ‘mine’ Cuz tokens by contributing to the success and quality of the platform,” Nagler says.
Not a solution to everything
While the tokenized, decentralized system has provided great value to companies, it is not a magic wand that provides solution to every problem.
Many companies have taken advantage of the hype surrounding the technology to make quick cash or boost their stock value without actually using the technology. One of the examples is Tulip BioMed which had its stock increase by 42,500 percent after the company changed its name to Bitcoin Services. Another company called Long Island Tea boosted its share value by 500 percent after renaming itself to Long Blockchain. Though, the company later abandoned its plans of entering into the blockchain space.
Blockchain and crypto tokens only make sense when they make a business system transparent and help distribute revenue among the community.
Future of reverse ICOs
The reverse ICOs are still to be explored further to discover their full potential. As the trend is getting widely adopted, it will give rise to new jobs and industries. It is yet to find how and what effect it will have on IPOs and other sectors of the finance industry