In part one of the ListedReserve Smart Contract series, we examined how Smart Contracts at their most basic level could provide powerful frameworks for financial transactions. This article will explore the functionality of smart contracts as a fund raising device for innovation, namely the ability of smart contracts to create and manage new types of blockchain assets.

Over the past few years, the rapid development of blockchain from its relative infancy to a major source of innovation and investment has been remarkable. A key challenge for blockchain projects from the beginning has been their ability to raise finance through traditional avenues. The fact that many blockchain projects are developed with decentralisation as a core principle (no central company controlling the service/network) means these projects do not conform with the traditional risk management systems of lenders and consequently struggle to raise funds.

To find success with typical startup methods of financing, blockchain projects began to run Initial Coin Offerings (ICOs) in order raise the funds they needed. Beginning in 2013 with a project named Mastercoin, ICOs provided individuals with the opportunity to purchase a cryptoasset at a set price which typically would later become usable in some context on that particular projects platform. For example, buying into Ethereum’s ICO using 1 Bitcoin back in 2014 would have got you 2000 Ether (good for a 10000% ROI at today’s prices), with the Ether currency being usable in paying for the creation of smart contracts and the processing of transactions. Mastercoin on the other hand while managing to successfully form the underlying tech for tether has underperformed the crypto market. Raising 4,740 bitcoin in 2013 and since rebranded as OMNI, in BTC terms it is down 85% albeit still a rise of 650% in nominal terms.

While it’s certainly true that many platforms ran successful ICOs without a smart contract, the massive prominence of Ethereum smart contract based ICOs has driven investment in the space to record highs. In 2016 with smart contracts only at the nascent stage, ICOs raised only US $103 million spread over a number of small projects. 2017 saw that number increase fifty-fold, as the prevalence of token based ICOs saw the amount raised hit US $5.3 Billion. In the first quarter of 2018, we have already seen funding eclipse 2017’s total, with ICOs raising US $6.3 Billion in that period alone. See the graphic below:

Graphic taken from Coindesk (https://www.coindesk.com/6-3-billion-2018-ico-funding-already-outpaced-2017/)

To articulate how these smart contracts had such a significant influence on ICOs, we must first define the token smart contract. Token smart contracts essentially are a block of code in a smart contract that define the creation of a new digital asset, built into the network the smart contract is hosted on. The most common type of token smart contract used right now in the ICO space is the ERC20 token standard on the Ethereum network. This standard basically describes the requisite components for a token to function as a new type of digital asset on the Ethereum network, as seen below:

contract tokenCode {
     mapping(address => uint256) balances;
function transfer(address to, uint tokens) public returns (bool     success){
         balances[msg.sender] = balances[msg.sender].sub(tokens);
         balances[to] = balances[to].add(tokens);
         Transfer(msg.sender, to, tokens);
         return true;   
     }
}

The above smart contract snippet may look extremely simple, but in reality this is the core of many blockchain projects. The first line stores a mapping of addresses to numbers — in non technical terms, think of a ledger that records each individual and their respective balance of funds. The second section of code performs a transfer of tokens from one address to another, effectively allowing individuals to own and trade currency in just a simple Ethereum smart contract.

For example, Binance coin, an ERC20 based smart contract token which was used to raise capital for the Binance project (now the biggest cryptocurrency exchange in the world by volume) is now used to discount the base fees users of the exchange will pay. Monaco, another example, raised US $27 million for its implementation of a digital asset based debit card used for traditional fiat payments. Their token is used as a key part of their rewards program, with rewards increasing considerably depending on the amount of Monaco tokens an individual owns.

In essence, these token smart contracts allow projects with non-traditional organisational structures and revenue streams to raise funding they normally would not have access to. Furthermore, they enable projects to generate loyalty within their own ecosystem using the native token (in English token holders get a discount when using the underlying product).

Whatever your view on the likely success or otherwise of many of these tokens and the economics behind them, it is certainly true that application of smart contracts in fund raising has had a massive effect in terms of the speed with which external capital can be raised.

As far as the future is concerned we expect that this method of fund raising will continue to be popular, albeit, investors will be increasingly discerning about which tokens they are willing to back.

Check back next week for our next instalment in the ListedReserve smart contract series.