Creating Cryptocurrency that has Real Value.
In case you missed it, there has been the emergence of a new funding model called Initial Coin Offerings (ICO’s) that has raised billions of dollars for projects all around the world. Unfortunately, it is not plain sailing as there are a few challenges for a team to run an ICO campaign. This article offers an alternative.
How does an ICO work?
During an ICO, supporters transfer funds to a team in exchange for cryptocurrency coins, also known as ‘tokens’. The intention is that these tokens are to be used in some way for the operation of the product or service created by the team.
Part of the Problem: The TGE
Part of the problem with the current ICO model is what is called the Token Generative Event (TGE). A team has only one chance to sell the project coins before this one-off event. After the TGE, all coins are only available to be bought in the open market on crypto-exchanges from those that attained coins during the TGE.
This means that a team must try to create as much awareness and raise as much money as possible before the TGE. This usually involves an expensive and over-hyped marketing campaign.
Unfortunately, the current ICO model means that legitimate projects now need to overcome significant financial, administrative and regulatory challenges in order to see a successful outcome.
- KYC/AML: Know Your Customer and Anti Money Laundering requirements. Being a new financial asset, global regulators are playing catch-up, to understand ICOs and issue guidance for when millions of dollars are being committed globally for tokens in this many. With still much uncertainty, legal counsels to teams advise them to take a conservative approach and undertake full KYC/AML procedures as any bank or credit card company would do when onboarding customers, to be sure that they have met the highest compliance standards in case there is any future litigation. The administrative burden and cost for such compliance procedures are significant.
- ICO Campaigning: As mentioned, the team has only one chance to sell tokens before they are issued involving significant investment for funding PR, marketing and influencer campaigns.
- Token Liquidity: After the ICO, new customers will need to purchase tokens in order to use the product or service created by the team. Integration to a crypto exchange is required to convert the customer’s money (e.g. USD, EUR) into the new token units. However, listing a new coin on an exchange is a daunting task. Exchanges are interested in generating transaction fees for exchanging popular coins on their platforms. There is usually a lengthy application process and high listing fees to ensure only high-quality coins are listed. Also, after listing there is a liquidity problem, that is, having enough people on each side of the trade to exchange different currencies for the new coin.
So, is there a way for teams to runlegitimate ICO’s without all the over-hyped market campaigning and the compliance burdens?
Lightstreams is launching a new service called CoinFactory that will permit any team to easily create and issue their own coins on the Lightstreams network without having to undertake a one-off TGE. Instead, coins are continuously issued, as and when there is the need and demand for them.
So how does it work?
Instead of the tradition ICO model of issuing the total supply of coins during the TGE and then after requiring using crypto exchanges to trading the coins, a smart contract on the Lightstreams network manages both the issuance and trading of coins.
Listing on crypto exchanges is not necessary since there is instant liquidity as all coins are backed by Photons (PHT), the native currency of the Lightstreams network.
The number of coins in circulation and the price for buying and selling coins is specified by the fixed smart contract algorithm called a “Bonding Curve”. The algorithm defines the minting (creation) of a coin at a particular price in PHT. The purpose of the Bonding Curve is to regulate the price as demand increases.
Initially, when a bonding curve smart contract is published on Lightstreams, there are no coins in circulation. The cost to mint a coin increases as the total supply increases (as more coins are created). Likewise, the cost decreases as the total supply decreases (coins are withdrawn from supply).
When a payment is sent to the smart contract for minting a new coin, the funds (PHT) are held in a communal pool by the smart contract. Whenever a coin holder wishes to convert their funds, they send the coins to the smart contract that then removes them from the total supply and returns the value in PHT from the pool to the sender.
Coin Behavior is Engineered to Support Growth
The engineering of CoinFactory using the bonding curve makes it ideal for use cases involving fans, followers, and marketplaces. Emerging coins find an audience because they come at an appealing price, reinforcing the benefits of early adoption. Because growing communities attract new coin holders, value is created for all.
In the case of engineers, custom-made coins for communities can be distributed to those who support development. Like Kickstarter or Patreon for engineering projects, app development can garner buzz and funding by activating the crowd potential of believers.
Artist-branded coins: each artist has their own cryptocurrency.
Fanbase is the first application off the line showcasing Lightstreams and CoinFactory. Fanbase lets musicians produce their own individually branded coins. For example, Justin Beiber could create a “JB” coin. Supporters choose to acquire coins either to subscribe to the community, purchase content or as a collectable item that they believe will increase in value as the popularity of their favourite performer’s coin increases.
What can an artist-banded coin be used for?
An artist can reward fans for their direct patronage with early-releases, live video shoutouts, backstage passes, or meet and greets, with all original and one-of-a-kind digital assets stored in a distributed system. Ultimately, artists have access to their biggest fans, can reward true loyalty, and can own the artist-fan relationship supported by a patronage system based on individual artist coins.
Lightstreams’ CoinFactory service allows for the new generation of currencies in order for teams to utilize community support in real, material ways to support their projects. CoinFactory is just one more way in which creators in the new economy can realise their projects, spearheading the revolutionary creation of cryptocurrency.