Blockchain Network Funding Mechanisms

This post was started in August of 2019. While it was definitely defining terms relevant to that period, the definitions still hold. Particularly that a new funding term has emerged — SPAC.

Time Capsule: I’m keeping track of the recent methods for raising capital by businesses that are either offering a service or product that is fundamentally dependent on blockchain platforms versus those using crypto-networks as their funding mechanism, if that distinction makes sense.

Here are the three key “offerings” that funded many early blockchain dependent entities (in late 2019).

Initial Public Offering - (IPO) this is the most understood means of raising public capital when a company moves from privately funded to tapping public financial markets selling shares or stock in the company.

Initial Coin Offering - (ICO) investors are given a crypto-coin or a token that represents their investment. This token may have some utility in using the product or service the company is offering, or it may just represent a stake in the company or project.

Security Token Offering - (STO) Similar to an Initial Coin Offering (ICO), investors are given a crypto-coin or a token that represents their investment. But unlike an ICO, a security token represents an investment contract in an underlying asset, such as stocks, bonds, funds, and real estate funds. The security token contains a digital certificate, which legally binds the security token to something of real value. The exchange of security tokens is like the exchange of digital currencies, everything happens on a blockchain.

STOs, unlike initial coin offers (ICO) or utility tokens, are governed by a country's security laws and regulations. For example, the issuer of an STO must submit to the supervisory authorities a "prospectus" for approval, which provides investor protection and recourse options.

To provide greater understanding, this is how Investopedia defines the STO:

Security tokens are essentially digital, liquid contracts for fractions of any asset that already has value, like real estate, a car, or corporate stock.

Using security tokens means investors can expect that their ownership stake is preserved on the blockchain ledger.

There will be more ways to raise capital in 2021 and 2022. At the moment, there is a ton of investment happening in this space from both crowd-funding sources that utilize the above to more traditional VC placements. On the later point, here is the A16Z announcement of its 2.2B new crypto fund. Burn baby burn!