Underpinning new blockchain-based networks such as IPFS are protocols, or rules, embedded in software that govern how participants interact. At least in theory, many of the interactions that happen online, such as those on social networks, ecommerce sites and search engines, could take place between willing users on decentralised networks.
“If any of these protocols becomes ubiquitous on the internet, the upside is phenomenal,” says Mr Carlson-Wee. He contrasts it with the opportunity exploited by entrepreneurs such as Mark Zuckerberg and Jeff Bezos, who created services that ran on top of the platform created by the world wide web. Decentralised social networks or ecommerce would leave ownership in the hands of those who control the underlying protocol, not an application such as Facebook or Amazon. “Users can own their data and own the network,” he adds.
Mr Carlson-Wee’s enthusiasm is a sign of the coin mania that has been sweeping Silicon Valley, drawing in the familiar mix of ideologues, entrepreneurs and opportunists. Though only 27, he has raised $250m from four of the best-known venture capitalists, including Sequoia Capital. Please use the sharing tools found via the email icon at the top of articles.
What supporters see as a profound financial innovation, however, others warn can be an easy route to creating funny money. When buyers have been so willing to purchase currencies issued on nothing more than the promise of a future market, it’s not surprising that so many are trying to mint new ones.
“There is this hype that blockchains can change the world,” says Mr Williams. “It’s like the hype of the dotcom bubble, when you had to put a ‘dotcom’ on the end of everything.”
Sceptics argue that creating a separate currency for each application is unnecessary and that any digital currency, including bitcoin, could be used. Forcing people to buy app-specific tokens traps them with a holding that has a high chance of ending up worthless.
Proponents of the coin boom say this misses the point. If a market succeeds, then its currency will be more in demand. Since their supplies are capped from the outset, anyone holding a currency would benefit from its increasing value. This chance to profit from the growth of a network also provides a built-in incentive, making people who own tokens more likely to make use of the new networks.
It would be like a social network where early adopters make much of the profit if the business takes off, says one venture capital investor, who refuses to speak publicly for fear of being seen to add to the hype. “I’m getting Facebook bucks that grow with the network,” the person says.
Selling coins has another advantage that the ICOs are less keen to highlight: it exploits a regulatory loophole. By selling a currency rather than shares they stay outside the scope of securities regulation, removing any constraints on how they market their offerings.
This is one reason given by FunFair, a blockchain casino based in London, for creating its own Fun tokens. In a rare admission of the regulatory attractions of coin sales, it admitted at the end of August that it “could’ve been easier” to let people use cash and then pay them a dividend based on the company’s profits, but added: “Our lawyers rightly warned us not to do this as it would’ve risked us being classed as an unregistered security.”
Regulators are working on closing this loophole. The US Securities and Exchange Commission said in July that it had determined that many coins were in fact a type of security, and would look at the underlying nature of each ICO to determine whether they should be regulated as securities.
For their creators, ICOs have another obvious attraction. They have made it possible to raise far larger amounts than start-ups can usually tap, at least as long as enough investors can be persuaded to suspend their disbelief.
An early-stage open source company like Protocol Labs, for instance, might normally expect to raise an initial round of $10m from traditional start-up investors. But through the sale of Filecoin, it has already raised more than 25-times that. Based on prices buyers paid in the ICO, extra coins the company has retained for sale are notionally worth more than $350m.
The history of tech bubbles suggests that throwing such large amounts of cash at unproven new businesses often ends in tears. Of the Filecoin sale, the largest ICO to date, one investor says: “They got a bit carried away because the demand was there.”
The ICO bulls take a different view. The huge amounts flowing into coin start-ups, says Mr Carlson-Wee, are an indication that the old barriers to capital formation have collapsed: with anyone free to invest, the coin start-ups can look forward to unconstrained growth.
“I actually take this to be an inflection point,” he says. “The genie is out of the bottle and the pace of innovation has changed permanently.”