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I am newbie to cryptocurrencies and just read an article about ICO (Initial Coin Offerings). However, I didn’t quite get the functioning and role of tokens. Lets say there is a company that plans to build a marketplace that operates on blockchain, where you can buy and sell many different things. To use the marketplace the user however needs to buy company’s tokens.

To raise money to build the marketplace, the company one day decides to participate in an ICO, where it will issue its tokens for a low price. The ICO is very successful and the company manages to build the platform and attract a reasonably sized customer base.

Let’s say that in a few years the value of the company goes up, which means that the value of the token will also increase. Then come new users who are attracted to the platform and want to participate in it. This is the part which I don’t understand. Because they need to buy the tokens to participate in the market, wouldn’t the high price of tokens (compared to their original price at ICO) significantly deter new users from coming to the platform? The new users would have to pay high costs (buying the tokens) just to enter the platform. How do blockchain companies (like Status.im) solve this problem?

Thanks a lot for clarifying the problem.

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    $\begingroup$ you write: "the company one day decides to participate in an ICO, where it will issue its tokens for a low price" but that's not what's happening at all. The company decides to issue its tokens at a very very high price, in the hope that it can take lots of money off some fools who don't realise that the tokens they're buying are practically worthless. This applies to all ICOs. $\endgroup$ – EnergyNumbers Jan 26 '18 at 7:07
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The companies who engage in these sort of mechanisms expect the token to have a variable price which remains accessible and fair for the product in question, and also keep some tokens for themselves which can be used to influence the. In case the price rises beyond intended, some companies reserve large amounts of initial tokens to sell in the market (sell high volumes of tokens to keep the price low), or they even reserve the right to produce new tokens.

However, these companies also benefit from a high valuation of the token, which creates a speculative risk, benefiting the company but not necessarily consumers. See the long example/explanation below.

Example: Amusement park tokens

The situation can be illustrated as an amusement park who requires tokens to access and use the rides. Instead of selling the tokens themselves, the park sells lots of tokens before being built (similar to an ICO). Consider they sell it for €1 instead of the typical €2 or €3 on other amusement parks. You can then go to the park and try to sell the tokens to anyone. The logic is any visitor would still pay 2 or 3€ for the tokens, since he/she is a casual visitor. If it is a regular visitor, maybe he or she would try to save some money by buying the early tokens, but once those were used, the rides are still fairly priced at €2 or €3.

However, if the tokens are in too much demand, their price would climb to, for instance €10. When this happens, people would stop buying until the price lowers again until an acceptable value. If this doesn't happen due to whatever reason (e.g. speculation) the amusement park could sell some reserve tokens at the intended price (2€). Some amusement parks would even say they can produce new tokens at any time, to avoid this risk. However, remember that the amusement park benefits from selling reserve or new tokens for high prices at any time, and this would be a profit without delivering any value or product.

Research and further reading on ICOs

Please note that this is a very new area and very few studies have been performed yet on this field. I've recently read one paper on "Red Flags for ICOs", and another one is the economics of ICOs, if you want to learn more.

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