







Instead of selling shares to an elite group of investors, blockchain companies can issue tokens to the public through initial coin offerings. ICOs are supposed to be more decentralized than venture capital.







But that’s quickly changing. According to a report released last week by ICO Rating, token crowdsales in the second quarter of this year saw a “sharp increase in the share of institutional capital and a continued decline in the number of retail investors.” In particular, there’s been a significant shift in how companies are structuring their token sales, with projects choosing to raise “the majority of their ICO funding in private sales rather than public sales.”





This strategy seems to be paying off. In the second quarter of this year, the median amount of funding raised by projects that allocated 20% to 40% of their tokens privately was double that of projects that only gave 20% or less of their tokens to private investors. And overall, the ICO market has been more lucrative this year, despite a sharp downturn in funding due to the bear market. Funding from token crowdsales in the second quarter of this year was more than double of that last year, or a whopping US$8.3 billion.





But the increase in institutional capital also means that “the funds raised during an ICO depend on how well the project cooperates with investment funds,” Sasha Kamshilov, CEO of ICO Rating, wrote in the report.





Some crowdsales have even cancelled their public sales entirely in lieu of private investment, such as Telegram, which raised US$1.7 billion from fewer than 200 private investors, according to sources at the Wall Street Journal. In other cases, blockchain projects will organize a round of ICO pre-sales, where tokens are often sold at a discount compared to the public price.





It’s not necessarily a bad thing for ICOs to allocate some tokens to private investors, such as the company’s founders, or future use cases, like operational costs. After all, for most blockchain companies the main purpose of ICOs is to raise capital for product development. Private sales have other advantages too, especially in more tightly regulated markets like China, where ICOs are flat-out banned.





But if fewer and fewer tokens are sold to the public, ICOs may start to resemble the venture capital industry, sans the regulations and funding stages. Companies that raise an ICO are often very early-stage -- sometimes without a working product or fleshed out business -- unlike companies at the IPO stage. That means that the project’s so-called early investors, who jump in at the pre-sale stage, aren’t really taking on more risk to justify the token discounts. In traditional venture capital, investors are putting in funds years before the company goes public. That’s not the case in blockchain. Retail investors take on just as much risk, but at a higher price per token.





This is hardly the first time a tendency towards centralization has reared its head in the crypto space. The cryptocurrency market is increasingly centering around exchanges, to the point where “high efficiency strategy and relationships with exchanges has become a crucial factor for success on the secondary market,” according to ICO Rating. Some exchanges, for instance, can charge millions of dollars for listing tokens, as those with high trade volume can play a large role in drawing more investors or boosting the token’s popularity.





“I definitely hope centralized exchanges go burn in hell as much as possible,” criticized Vitalik Buterin, creator of Ethereum, at a blockchain conference in July. Even if centralized crypto exchanges have higher volume, Buterin hopes that decentralized exchanges become the new baseline, that way the industry can “take away this stupid king-making power that centralized exchanges have, where they have this ability to just decide which tokens become big by [...] listing them.”





The centralization of ICOs could lead the cryptocurrency industry even further away from its democratic ideals.







