Original: “I Don’t Like Big ICOs” by CZ, Binance
Translation: Compiled by TechFlow
On July 24th, Binance founder CZ posted on Twitter an article he had written 6 years ago titled “I Don’t Like Big ICOs”. In the article, he mentioned a large-scale ICO that claimed to raise $100 million but currently has a market value of less than $1 million.
CZ expressed that they were a group of good people, but they may have become distracted because of too much money. Start with small things first, and then move on to bigger things, rather than the other way around.
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In the article, CZ explains in detail that it is not necessarily a good thing for a cryptocurrency project to raise a large amount of money with a high valuation in the long run, although this is often seen as an achievement for founders. Binance also does not like such projects, and this line of thinking has continued to the present day.
For entrepreneurs who aspire to make achievements in the cryptocurrency world, this article may be worth reading.
The following is the full text:
I am CZ, the CEO of https://www.binance.com. This is my first article published on Steemit, and it is a highly subjective article.
Last night, I was at a party in Tokyo with several cryptocurrency enthusiasts. The host wanted to conduct an ICO, and although the team was small in number, they were strong. They had already developed and released a product and had a decent user base. Everything sounded good until I asked how much funding they planned to raise in the ICO, and the answer was: $100 million.
My expression was “I don’t like it.” This was followed by a discussion, and I believe it would be beneficial to share the content of this discussion with everyone who wants to conduct an ICO or list on Binance.com.
At least in theory, there are many benefits to a large-scale ICO. It can become headline news, increase the project’s visibility and credibility, make people in awe of your greatness, and boost confidence. $100 million should be able to meet all the funding needs of the project for a long time! With ample funding, the project team can do whatever they want and actively build it into a huge empire. All of this seems like a happy ending…
But I don’t like it. Here are the reasons:
Firstly, does your project really need $100 million?
The first answer I received from a team member yesterday was “Yes, we will build an entire ecosystem, acquire companies…” and I interrupted him. I like to see startup teams focus only on one task. This is just my personal preference. However, my personal preference has indeed influenced Binance.
Do you need all the funding right now?
One misconception is that an ICO is a one-time event. You have to have all the funding you need right now! This is incorrect. There are many ways to build a token economy and obtain all the necessary funding for the project over time, without having all investors bear significant risks in the early stages. This will be explained in detail later.
I’m worried that a small team with $100 million may no longer feel hungry. Indeed, the most motivated teams should have intrinsic motivation, a desire to change the world, and so on. Indeed, some people can maintain this hunger even if they have money, but not everyone can. I still hope to see teams that are hungry. I like to see code being submitted to GitHub at three in the morning from time to time.
Setting that aside, the key issue is token economics.
ICO Maximization = Bad
I don’t like to see projects maximizing value during the ICO. In the long run, this is usually detrimental to these projects. This goes against intuition for many ICO entrepreneurs, including many present yesterday.
Once the most valuable ICO coins enter the exchange, the price will only fall. This brings various problems, which most people did not consider during the ICO stage. But as an exchange operator, I often see this situation, fortunately mostly on other exchanges.
Suppose your project is worth $200 million today, and you sold 50% in the ICO for $100 million. One day later, your coin is traded on Binance. Setting aside speculation and market overreactions, unless you have increased the value of the project within a day, the price on the exchange will not rise further. If the price doesn’t rise, it will fall. A certain number of people (short-term traders) will sell it in exchange for coins that rise faster. This selling will cause the price to fall, and when the price falls, more people (less certain people) will also sell, causing a spiral downward.
Now, people have lost money on your coin. Some people will complain, talk bad about you, and spread their conspiracy theories on more social channels that you cannot monitor. Now, your reputation is damaged, and you have to spend all your energy managing negative PR instead of writing code.
Due to the impact of negative news, your user acquisition rate has dropped. Recruitment has also become extremely difficult. People in the office start arguing about what went wrong and start blaming each other. And so on…
You also have to immediately take on the responsibility of raising the project’s valuation from $200 million to $400 million, which is not an easy task for most new projects.
Now let’s compare this to another scenario. Suppose your project is currently worth $200 million (or any value you believe), but you set the ICO valuation at $30 million and sell 50% for $15 million. (These are the actual numbers from Binance during the ICO. I think, from our commitment, no matter how you look at it, these are very good numbers).
But you might say, “Damn, this is so stupid. I lost $85 million in ICO funding and valuation.” If you think like this, please continue reading.
Of course, now, due to the undervaluation, everyone wants to get a piece of your ICO. It has been oversubscribed. Everyone is asking for more allocation from you, but you say, “Sorry, buddy, you’ll have to buy it on the exchange later.”
Your ICO is completed in 38 seconds (the actual record of the last ICO on Binance). A day later, your coin starts trading and people flock to it. No one wants to sell, and the price soars. More traders are attracted to you rather than other coins.
Now, you have become the talk of the town. Everyone is discussing your project, making YouTube videos, analyzing how good your coin is. With all these free positive reports, the speed at which users register for your service is beyond your imagination. In about a month’s time, you have entered the top ten rankings in the world. With the growth of users, your project is now valued at $300 million, and your 49% stake is worth $150 million.
Now, most of your investors have made a lot of money, with a 10-fold increase in two months. You have a user base, a product, and positive community support, and you are ready to grow at a faster pace. Over time, you can gradually sell your stake at a valuation of $300 million or higher.
Of course, if you still feel stingy, you can adjust/reduce the ICO proportion by 50%. But I strongly recommend a 50% or higher ICO proportion. The whole point of an ICO is to make money with your investors and build momentum!
From the exchange’s perspective, there is one last simple mathematical problem to consider. If your coin has a circulating supply of $30 million, with 80% being long-term holders, you just need to attract buyers who can bring in an additional $12 million in funding to double your valuation. If the circulating supply of your project is $300 million, then you need to attract $120 million. If you look at the trading volume of the current top ten exchanges, you will find that squeezing out $12 million from other coins is easy, while $120 million will require some effort.
Therefore, if you can prove that your coin can bring in $120 million in new capital and new users to our exchange, we would be happy to list it. Otherwise, we will have to carefully consider whether to list your coin with a market value of $300 million, especially if your coin is new and has no trading history.
Last night, when I explained these issues in detail, there was a sense of “Oh, I see, I didn’t expect it to be like this” flowing in the room. I think I successfully changed the mindset of most people present from “big and comprehensive ICO” to “long-term growth”. I hope I can do the same for you, which will make it easier for us to list your token.