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If you’ve been in the crypto space for a significant amount of time, you’ve seen your fair share of market booms and total flops. We’re willing to bet you also had first-hand experience with various methods of funding new projects.
However, if you remember right, not all of those methods were effective. Sure, some worked for a while and led to great successes - until the cracks eventually started showing. As we take you down memory lane and analyze the history of different fundraising models, you’ll quickly learn what they lacked. By extension, you’ll also realize the value of the emerging community contribution model we foster here at citizend.
Rise and fall of ICOs
For a long time, ICOs ruled the world of crypto and were the go-to method of getting capital for new projects. This fundraising strategy is simple to grasp - it involves blockchain startups raising funds by selling the tokens that will eventually be used on the blockchain. As the network expands and the tokens become a hot commodity, there’s a an expectation that their value will rise as well and reward all the investors who pitched in.
The dominance started with Ethereum. Back in 2014, developers used the ICO approach to sell their token and raised a whopping sum of $18 million in the process. This stirred up the pot and set the precedent for many projects that would emerge in the future. Startups wasted no time seizing the opportunity to quickly raise money without getting involved with the bureaucracy. Plus, the ability to reach any user with an active crypto wallet was another huge benefit. There are several reasons why ICOs absolutely dominated the market Hulk Hogan-style during their heyday. The lack of a regulatory framework contributed heavily as it allowed for quick sales and liquidity. Plus, the prospect of large profits like those seen with Ethereum inspired many investors to jump on the crypto bandwagon. There was also a huge buzz around blockchain technology at the time, explaining the enthusiasm around ICO fundraisers.
Any time something reaches a peak, the only way is down - and ICOs were no exception. Their demise was practically made certain due to scam projects. The absence of oversight and regulation exacerbated the issue, practically encouraging many shady individuals to prey on misinformed investors. In addition, so many projects with ill-defined roadmaps or viable products surfaced, further raising concerns about the long-term value of investing in ICOs. Once regulatory efforts started to come about, they did wonders for market integrity, but it was a losing battle at that point: compliance got excessively complex and regular access was needlessly convoluted for regular investors.
Emergence of venture capital as the dominant funding model
Out of the debris, a “new” fundraising model became more prominent than ever before in the web3 landscape - venture capital (VC). Contributions suddenly started moving from the community to private investors.
Let's look at some numbers. According to @CryptoRank_io, from 2020 onwards, there have been:
- 105 registered token launch platforms (IDOs, ICOs)
- Supporting ~2k projects to launch
- Collectively raising over $7.2bn
According to @MessariCrypto , the amount invested by VCs in web3 Pre-seed & Seed rounds since 2020 is +$9.5bn - These rounds were also at significantly lower valuations than IDOs/ICOs.
Traditional financing sure made sense after the Wild West that was ICOs. It’s synonymous with startup companies with potential for lasting growth and typically comes from financial institutions, investment banks, and other investors.
It works the same way in Web3. Venture capital firms fund new projects in return for tokens or equity. This provides them the opportunity to make large profits from high-growth crypto projects and is often aimed at supporting the long-term development of the project. Not every project can attract venture capital, though. These companies are only interested in well-developed projects with a continuing vision that can lead to a positive ROI and will likely grow into large successful businesses - already an improvement over the outdated old approach. Keep in mind that ICOs still happen. The difference is that retail investors often only join when the token is launched, missing out on the private rounds with lower valuations and prices. As a result, they risk being exit liquidity for private investors.
Drawbacks of VC dominance in Web3 funding
Despite the improvements it brings to the table, the VC model has a few noteworthy issues - mainly relating to tokenomics that go against the community’s best interest. The allocations often favor the team and investing companies, which is a stark contrast to how things should operate. With Ethereum, for example, only 10% of the supply is allocated to the investors and teams. On Solana, the percentage is over 62%. This approach is normalized and users don’t find anything problematic having over 50% of the supply controlled by the key players.
To ensure success, VC funds and companies may try to change the original vision of the project, leading to clashes in regard to the allocation of resources or strategic decisions. In such an environment, creativity and innovation die down in the race toward viability, and the project may end up being only a shadow of what was once a truly unique value proposition.
How a community-backed approach can help
Along the way, as we went from a loose ICO approach to a strict VC direction, the community impact was lost. In an industry where the community is everything, having a Big Brother figure for financial security goes against the principles of Web3. A dedicated community not only provides helpful pointers on the project’s direction but also assists in the promotional front and ultimately builds a new level of transparency.
That isn’t to say strict rules and guidelines enforced by venture capitalists are devoid of positivity. Their method provides security, after all. However, the solution here is to have the entire community serve as a VC, in a sense. As luck would have it, the community-backed approach is more than feasible and you can explore it in its relative infancy.
Citizend’s innovative approach
As a community-curated token launch platform, citizend is the perfect cure. It strikes the perfect equilibrium in benefiting the community and ensures the long-term success of the token for new projects. Moreover, citizend also successfully merges two approaches of due diligence (something that was lacking in the traditional ICO approach but was standard for VC launches), while providing the community with a say on which projects launch on the platform. Let’s explore how citizend works in action.
Mechanics of citizend's community-curated token launches
When submitting an application to the citizend platform, projects are required to detail all the key information and its fundraising goals. In addition, it’s necessary to supply an expert legal opinion or undergo due diligence to confirm the legal side of the project’s token checks out - not to mention validate that tokenomics are fair.
It’s on the community to decide the project’s long-term potential and not the team behind the platform. If the project demonstrates the ability to grow and oozes quality, the community will recognize it and award it with a contribution slot.
Community members will be able to explore discovery batches and vote for their favorite projects. This ensures fairness and transparency in the allocation process and allows only quality projects to move forward.
Here’s the catch - everyone casts a single vote so that everything is fair. Users can stake tokens on the platform to gain larger allocations, and they’ll receive their yield after the public sale on the platform is over or the project launches.
Future of web3 investment lies in empowering communities
The community contribution approach is the natural progression in the history of Web3 fundraising. Combining the positive aspects of the traditional fundraising models with a healthy dose of community involvement and transparency benefits projects and investors alike.
Projects get to keep their vision pure and launch their token with ease, while the community gets to discover tokens worth investing in and have their voice heard. With platforms like citizend, everyone wins - and that’s the only way things should be in Web3. Get your passport and be a part of the change: citizend.xyz/participate
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