ICO Escrow: What It Is and Why Your ICO Needs It

After a banner year for the capital raised, and massive excitement surrounding the ICO market in 2017, things have been progressively softening in 2018. Despite the total funds raised so far in 2018 already exceed those raised last year by over 30%, the amounts have been dribbling down continuously.

Partially, this downward trend is driven by poor reputation of the crowdfunders. With every successful ICO, you hear stories about missed deadlines, lack of updates or worse — sometimes project leaders just disappear with the capital raised in the offering. This can lead to investor losses and jail time if the founders are caught.

In fact, a recent study by ICO advisory firm Statis showed that almost 80% of ICOs were identified as scams prior to trading. Of the remaining ones, only 15% continued on to keep trading, where only 7% found successful funding.

That’s why, with increasing fraud and deceptive practices among the hundreds of available ICOs, it’s more important than ever to make escrow services a part of your ICO offering to ensure investment. A properly executed escrow system can help avoid the problems while at the same time making your ICO look more attractive than others which lack such safeguards.

What is Escrow?

Escrow describes a financial arrangement that involves a third party who holds the funds and regulates disbursement of the funds based on pre-agreed upon conditions. Storing the capital raised in an escrow account builds a level of trust between the founders and the community.

The access to cash that the founding team has can be broken down into certain milestones, allowing the funds to be metered out according to the progress achieved. A properly administered escrow practice can aid your ICO by increasing the team’s productivity while also building trust with your investor base.

Ways to Implement ICO Escrow

There are several ways you can implement an escrow strategy for your ICO.

Traditional Escrow

First off, a traditional escrow arrangement, using a trusted provider as an intermediary. Many companies offer such services, leveraging their industry expertise to help vet the project, product, team and progress of a given ICO for investors.

You’ll want to make this part of your plan early on so you can promote the security as you promote your ICO. But if you’re at the beginning of a project, there’s another way to build escrow functionality in. Through smart contracts, you can build the safeguards right into the code of the blockchain your product is built on.

DAICO

By turning your ICO into a DAICO, you can leverage smart contracts to automate the release of funds based on certain predetermined criteria. Investors need to agree and can even be compelled to vote on certain milestones which will release funds.

Putting this power and control into the hands of your investors will only further build trust in your company, leading to more investor engagement and demand to get involved in your project.

Importance of Building a Realistic Timeline

Most ICOs publish a timeline that they propose for development of a given product. By building escrow services in, that timeline becomes the roadmap for disbursement of investor funds as well. It can be tempting to put out an optimistic timeline to try to attract investors, but you don’t want to set a goal you can’t reach.

Engaging in and planning for an escrow from the beginning will force you to consider the timeline and build a more realistic plan. Resources needed to get to each stage of the timeline can be planned with a good idea of what the budget of each phase will be.

In short, planning an escrow arrangement into your project can actually help you build a plan that you can deliver on. When something is a benefit to both the founders/developers and the investors, it definitely should be a part of your plan.

In 2019, ICO Escrow Is Not an Option

No matter how good you think your plan is, the risk for investors in an ICO that lacks escrow is going to be a large factor in whether or not they join your community. The risk for you is that you’ll not properly plan, leaving yourself exposed to miss targets and fall behind on your timeline.

For 2018 and as we move into 2019, having some form of escrow service as a part of your ICO offering will be critical for its success. As the ICO landscape becomes saturated, and the number of ICOs keeps going up, the percentage of successful ones is going down.

In addition, the number of ICOs has also been dropping month after month in 2018. This means that for you to be one of the small number that succeeds, you need to use every tool available to you to make your ICO stand out from the crowd. You simply can’t afford to go to the ICO marketplace without a clearly communicated escrow solution.