Interest in initial coin offerings (ICOs) is increasing rapidly. But is this latest method of raising capital through token sales a fad or a long-term funding method of the future

To date, approximately $1.7 billion has been raised through this novel funding model, with more than $500 million in July alone.

Venture capital firms are also increasingly recognizing this new trend and giving it traction, some claim this method of capital raising breaking down the barriers associated with traditional methods.

Max Kordek, co-founder and business lead at Lisk, a blockchain applications platform, explains with the introduction of token sales, entrepreneurs are now watching as projects promptly receive funding enabling them to begin development to bring their idea into fruition instantaneously.

"In the long and arduous process of traditional capital raising by accelerators and VC models, start-ups find themselves in a hamster wheel of building a POC then urgently trying to find the next client, or attempting to survive while the wheels of large corporates churn." said Kordek.

Kordek explains his firm has seen some record token sales receiving upwards of $200 million, but even the smaller sales of $5 to $10 million eclipse the typical seed rounds for most startups.

"Not only have we seen a huge rise in the number of token sales taking place, but there has also been a giant shift in the type of token sale participants, moving from solely cryptocurrency enthusiasts to everyday people. On a stage previously defined by anonymity, we now see respectable, reputable names backing these crowdfunding campaigns - instilling additional confidence in potential participants and adding credibility to the projects." said Kordek.

We will also see regulations around ICOs come into force. In July, we saw the U.S. Securities and Exchange Commission move in on the "Wild West" world of ICOs. Recently, the Israel Securities Authority has announced its own plans to form a panel to regulate ICOs.

Aaron Lasher, co-founder and CMO of Breadwallet, explains after the creation of Bitcoin in 2009, companies and individuals slowly realized that it was possible to tokenize any asset in a trust-less peer-to-peer fashion. This meant that anything from car titles to house deeds to stocks could, in theory, could be replaced by a blockchain token.

"There were many before it, but the first modern-era token sale was the Ethereum pre-sale in 2014, in which the Ethereum foundation raised over 25,000 BTC (then worth about $15 million)," Lasher said. "The second important innovation was the invention of the ERC20 token standard which rides on the Ethereum blockchain. This token standard allows anyone to quickly and efficiently exchange tokens that they have created for Ethereum."

He explained that since the ERC20 token standard, there has been a Cambrian explosion of ICOs, many of which have raised over $100 million.

According to Lasher, there are two dominant factors driving the phenomenon: "One is a very low barrier to entry. Many of the successful ICOs did a full raise with little more than a white paper and a website. Second is the enormous latent demand for growth investments, particularly from unaccredited investors who previously had few options for high-risk speculation."

Lasher believes that the ICO phenomenon is the beginning of a new standard methodology for raising funds quickly and efficiently and has even defined a new term to describe it called "Cellar Capital."

However, in the short-term there are two risks. Lasher explained that all tokens are sold under the assumption that they will generate demand and, in turn, value. Some are a form of synthetic equity, tied to the performance of an organization. Others are what is known as "app fuel" meaning that the tokens will have a use within a specific ecosystem that is expected to grow.

"For instance, imagine an ICO for a company that plans to monetize and incentivize spare computing cycles, allowing users to spin up a virtual super-computer with relative ease," he said. "That token would serve as the bartering tool within that economy, and would have a floating market price determined by exchanges. Although some ventures will likely succeed, not all tokens are properly designed, nor will all of the ecosystems flourish. As such, the value proposition of all ICO tokens should be examined with shrewd skepticism."

The current paradigm does not prioritize the interests of investors. Laser explains, in traditional markets, investors sign on to a certain level of risk depending on their liquidation preference. This permits appropriate recourse in the event that an investment goes south.

"For instance, if an organization needs to wind down, the typical pecking order is senior creditors, junior creditors, and then shareholders," he said. "Within this ladder, there are many nuances. For instance, mezzanine capital is a form of high risk debt allocation that is senior only to that of common shares. Because of the current ICO flurry and exuberance, many investors do not realize that they are granted almost no rights through token ownership."

As you move down the ladder, the risk-reward profile moves gradually. Bond holders have limited upside, but also limited downside. Shareholders have exposure to equity gains, but are the first to lose. Until recently, there existed no options below the liquidation preference of shareholders. But with the advent of ICOs, a new capital rung has emerged.

Going forward, Lasher expects significant turbulence and downside risk in the current ICO market.

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Editors' pick: Originally published Sept. 5.