Endless tutorials claim to teach aspiring entrepreneurs how to create a cryptocurrency, but is it that easy?
- Cost of outsourcing
- The white paper
- Legal framework
- First, have a great idea
- Understanding the technology
- How to make a cryptocurrency: community
- Reasons for failure
- Final thoughts
- Building your blockchain
- Consensus mechanism
- The development team
- Smart contract
Scattered across the internet, countless articles are dedicated to teaching people how to easily and quickly create their own cryptocurrency. With more than 6,000 cryptos currently in existence, crypto creation has certainly boomed. Would-be billionaires, keen to use the novel blockchain technology to bring to life their idea, and seduced by the eye-watering valuations of early coins, are jumping on the wagon and piling into crypto at great speed.
Cryptocurrencies claiming to solve a host of social, environmental and economic problems, from democratising education to green energy trading, to logistical solutions, have emerged. But while some crypto start-ups, with clever white papers, solid teams, excellent marketing and clear unique selling propositions (USPs), have done well, many have failed.
Indeed, while there are countless articles discussing the relative ease of creating a token, the difficulty of all the other areas, beginning with an original idea, remains the real stickler. The still nascent industry has not been helped by the many cases of scams, where criminals have launched a coin, created a website and held an ICO (initial coin offering), only to, after raking in their investors' cash, disappear into the (pardon the expression) ether. Comparable to the dot com bubble, when VC investors threw funds at anything internet related, the Wild West of the crypto start-ups attracts similar manic kinds of investments. However, instead of just qualified investment professionals getting in on the game, now any Tom, Dick or Harry can try and hit gold.
Just as website creation, film-making, photography – pretty much everything – has, at least superficially, been democratised, it is perhaps not much of a surprise that both launching and investing in crypto has become accessible to everyone. But does this promise of democratisation and accessibility fall to pieces under deeper scrutiny? Can you get rich launching a cryptocurrency from your bedroom or is the boom over? Just because you can create a crypto, does it mean you should?
From the technical challenges to the development of a white paper to the legal dimension, we will examine the true costs involved in trying to start your own cryptocurrency, and the likely challenges you will face.
First, have a great idea
What is the first step when asking yourself “how can I create my own cryptocurrency?” A good idea.
A crypto start-up, like any other start-up, begins with an excellent concept.
While it may be tempting to see the success of other crypto start-ups and imagine that simply by putting "blockchain" in the white paper and coming up with a consensus mechanism, you are fated to get rich quick, this could not be further from the truth.
Aside from the original high-market-cap coins, such as Bitcoin and Ether, the relatively newer crypto start-ups that are successful have a very clear USP. Whether you have a more environmentally friendly iteration of a previous crypto, or are using blockchain to empower disenfranchised communities, the USP is key to the success of what you are bringing to the table. Indeed, with such a saturated market, trying to find success by being just another “me too” is unlikely to get you very far.
But how do you come up with a good idea?
Identifying a real-world need and brainstorming about what a solution would be is always a good step. Examining and scrutinising whether blockchain is the right technology and route to go down is vital. While it might be tempting to try to adapt a solution to the technology, given the alleged promise of the market, this is unlikely to work out in the long term. The internet, for example, is a wonderful resource. But creating a digital business will only go so far if the idea is original and compelling. Years ago, the immediate successors of Bitcoin, like Dogecoin, for example, became highly valued, but with the market so saturated this is no longer the case.
Understanding the technology
Truly understanding the blockchain technology and its possibilities is an important starting point. While there are countless sites purporting to describe what blockchain technology is, its technical complexities render it almost impossible to understand without thorough research and a natural ability to compute difficult ideas. With so many strands and layers to blockchain, and with so many new ideas and formations coming out of the space, the industry is becoming more abstract. While it may be tempting as a crypto founder to hire a crypto developer and skip getting to grips with the technology yourself, this ultimately leaves you vulnerable.
Without understanding the possibilities or limitations of the technology how can you know the risks involved or the possible weaknesses in the model? How can you strategise when confronted with hurdles if you are out of touch with so many of the elements which have gone into the business? Furthermore, by paying lots of money to a crypto developer, you may be easily swindled if you are not aware of how much time something should take, to what standard it should be completed and what complexities are involved in it. Furthermore, it is not as if you develop your crypto, and the technical work is done. Decentralised networks take consistent maintenance and suffer technical problems which require resolution. As a founder, understanding all the technical risks is integral in order to survive in the space.
Tavonia Evans, founder of the successful crypto start-up Guapcoin, told Dzengi.com: “One of the things which is key to bring in when you don’t have capital is experience in the area. I had a lot of years in tech and I had a lot of experience with start-ups in tech and bootstrapping. When you have the passion in the area, you are willing to go that extra mile without the funding”.
After you have the great idea, and you have got to grips with the space, before writing the white paper and trying to get investment, it is important to understand which way you want to build your blockchain.
Building your blockchain
There are three ways to build a blockchain.
The first is to build your own. This is by far the most expensive and time-consuming approach. It does, however, mean you have more control of the result. Building your own blockchain means you develop your own “coin”. Building a coin from scratch can cost hundreds of thousands of dollars, meaning that unless it is necessary for the business model, a lot of crypto founders go for the second option.
The second is to use a platform such as Ethereum or NEO to create an application. You can thus create a token, rather than a coin. This is less expensive and much more straightforward.
Coins and tokens are both cryptocurrencies, but while coins belong to their own blockchain, tokens are built on an existing system. This means while there are hundreds of tokens built on the Ethereum network, there is only one coin: ether.
Ethereum has become one of the most highly trusted platforms. Capitalising off the established nature of this network can be beneficial for a new start-up.
The third method is forking an existing blockchain. This is basically splitting off an existing blockchain. Bitcoincash, EthereumClassic and Dash are all examples of blockchain forks.
A fork may be a good solution if you want to get the power of a blockchain that is already established but want to simplify or alter it to add some of your own features.
While creating a token on an existing platform is the cheapest and quickest method, remember that you will still need money, a great team of developers and most importantly an excellent idea.
Another important decision to make is what type of consensus mechanism you will adopt. The consensus mechanism is the system used to guarantee that transactions made using your coin or token are bona fide.
From proof of stake to proof of work to delegated proof of stake, there are many types of consensus mechanisms to choose from.
While proof of work, used by Bitcoin, Litecoin and Ethereum, is the original method of creating a trusted decentralised network, it has been found to be extremely environmentally unfriendly.
Proof of stake, a model which Ethereum is due to move to soon, is much more sustainable, however it is much more centralised and less secure.
The development team
Should you be lucky enough to have enough capital behind you, the next step is finding a good team to work with you.
Blockchain developers are highly sought after meaning their day rates are high. Trying to get a team onboard who are with you for the vision as opposed to just to finish a job and get paid is ideal, as it means they will be more invested in the long term. Furthermore, while it may be tempting to go for developers who charge less, it is vital to weigh the importance of having experienced people on board.
Realistically, examining how long it will take to develop your idea is essential. Having a timescale helps you to understand whether you should hire developers by the hour, day or on a contract. This will alter pay rates and provide you with a more realistic budget as to how much it will cost to get your job done.
You must always remember that, as a founder, you are ultimately responsible for understanding every dimension of the technical side, even if you do decide to get a team on board. Otherwise, a system may be set up that is rife with issues. The developer you hire, once they are no longer on the project, will have no investment in dealing with the problems.
Guapcoin's Evans says outsourcing work to others without understanding it fully is fraught with danger: “There is huge risk in not being tapped in. Blockchain is something which literally has a pulse. Anything could go wrong and then it would fall back on you. If you just pay people and you don’t have responsible leadership, people will leave. There’s a huge risk that the person you hired today is not going to be here tomorrow”.
Eric Annan, one of the founders of the failed crypto trading platform start-up KuBitX, cited a lack of technical understanding around the technology as an important reason why the start-up failed. Annan, born in Ghana but based in Nigeria, gathered $600,000 from investors, and then outsourced the development of the minimum viable product to an American firm for a cost of $150,000.
Annan told Quartz Africa: “That is one of the early-stage terrible mistakes we committed … the rationale was to get a global partner who had a track record to validate our platform.”
While the logic was to create a global brand, and get tech expertise from the front runners, the result was unnecessary expense and a lack of control. By the time the prototype had been developed, most of the funds had been burned through, leaving insufficient capital to successfully go to market.
Understanding in depth all areas of your business will help you hire the right kind of people and better ascertain whether they can add value as well as gauge their true level of expertise.
If you choose to go with developing a token on an existing platform, it is important to work out the specific conditions of the smart contract. These conditions are then written into code on the blockchain. The decentralised network of computers, or nodes, completes certain actions when specified conditions have been met.
It can be viewed as a self-executing contract between buyer and seller according to the different coins. The conditions will be different.
An example could be: “Once a user sends 2 ETH to the smart contract then the smart contract sends 150 tokens to the user”.
Developers will help to code these smart contracts but it is important to understand early on what you want the conditions of the smart contract to be.
Cost of outsourcing
It is important to understand the cost of getting a consultancy firm onboard and whether it is the right fit for your business.
Projects are typically divided into the discovery phase, the UI/UX phase and the development phase.
The discovery phase, “the first and most important part” according to a leading crypto consultancy firm who asked to remain anonymous, involves helping customers come up with a strategy and develop their idea.
This phase may take a couple of months and could cost up to $50,000. At the end of this phase, a firm will typically produce a 50 to 100-word final document. This can be used as a white paper if required.
After the first phase comes the UI/UX phase, meaning "user interface" and "user experience". At this point, the strategy is shared with the developers and a technical roadmap is created. This phase can cost up to $10,000.
The final phase, the development process can take anywhere from six months to a year or more depending on the complexity of the project. Complex projects could cost over $1m.
Developcoin, another crypto development firm, offers legal and financial advice, as well as supporting entrepreneurs throughout the ICO process. According to their website, developing a cryptocurrency "might cost around 5k USD to 30k USD" depending "on the complexity of the project and requirement of the client".
The white paper
Before launching an initial coin offering (ICO), it is very important that a clear, thorough and professional white paper is written.
This business plan outlines the idea, technical choices and roadmap for the start-up.
Given how many ICOs are happening at any one time, it is vital to stand out with a clear white paper.
The integral elements of a good white paper include: a solid, compelling idea; a clear understanding of the competitive advantage of the project within the market; realistic forecasts; the criteria of the smart contract; a clear description of the functionality of the coin, including the value of the token; a reiteration of the importance of the crypto market; and a strategic roadmap for the future.
Consistent brand aesthetics, clever graphic design and a good layout will keep readers engaged and demonstrate consistent brand messages. Looking at successful white papers is a good place to start. Ethereum, Quonine and DigixDAO are solid prototypes for what a great crypto white paper looks like.
Alongside having a great white paper, it is vital to set up a great website. This is ultimately where you will post your white paper. Spending time ensuring the website is clear, professional looking and consistent will play a crucial role in developing a solid brand.
You can also post your white paper to forums and crypto websites, including GitHub.
It is essential early in the process of developing a crypto to understand the full legal implications of what you are doing.
With so many scams and Ponzi schemes, regulators are cracking down hard on ICOs. Getting legal advice at the beginning of the process, while costly, will ensure you are up to date with all the legal requirements. This is especially the case given the rules are changing and will continue to alter as the crypto market matures. Audits also help to protect businesses from their funds being hacked into.
An Ernst & Young ICO market report in 2018 said: “More than 10% of ICO funds are lost or stolen in hacker attacks. Hackers benefit from the hype, irreversibility of blockchain-based transactions and basic coding errors that, had the ICO been carefully reviewed by experienced developers and cybersecurity analysts, could have been avoided.
"Funds are misappropriated via substituting project wallet addresses (phishing, site hacking), accessing private keys and stealing funds from wallets, or hacking stock exchanges and wallets; all on top of indirect losses caused by high reputational risks for project founders.”
Hiring an external professional audit is also an important part of imbuing trust among potential investors and protecting your start-up. Audits from a trusted company will help reassure investors that you are following industry standards.
However, it is important to remember, just like with crypto developers, crypto legal experts, auditors, crypto marketeers all need to be carefully reviewed for expertise.
Marketing is an integral part of the process of learning how to create a cryptocurrency. With so many ICOs vying for attention, getting word out there is potentially the hardest part.
No matter how good an idea is, if its target community is not aware of it, or if it is seen by only a limited audience, it is unlikely to be successful. You can build a better mousetrap; but if the people who are plagued with rodents do not hear about it, you will not sell any.
Harnessing social media such as Facebook, Twitter and LinkedIn is critical to getting your brand and its worth out there. Instagram and Snapchat are also good options.
Attempting to harness publicity to add credibility to your ICO is also crucial. If well-known publications write about your idea, you will appear more trustworthy and more potential investors will become informed.
If you have experience in social media branding and are well connected with websites, or well-known publications, you could do the marketing yourself. However, many crypto entrepreneurs will need to outsource the marketing process, not just because it is immensely time consuming but because it requires a host of skills and contacts which you may not have.
Engaging in sponsored content as well as blogging could help get the word out there about your cryptocurrency.
Remember, marketing costs in the lead-up to an ICO can easily go up and beyond tens of thousands of dollars. It is important to prepare for these costs and not expect to be able to do something for nothing.
How to make a cryptocurrency: community
The lifeblood of crypto is in the strength of its virtual community. From the moment of an idea being launched, to the development of the technology, to decisions around smart contracts, getting help from the community will be key. Staying plugged in will ensure you are kept up to date on the pulse of the market. It is a resource which can be used to gain a deeper knowledge of blockchain, as well as organically meet potential collaborators.
If you do not have capital but have a great idea and a passion to get your crypto start-up off the ground regardless of the time, energy and learning that are required, developing a strong community will be crucial.
As Guapcoin’s Evans says: “There’s a lot of learning that takes place and you have to be willing to learn. At the same time, there’s plenty of information out there for you to tap into to help push you along.”
A strong community is also what will ultimately help distribute, market and add validity to your project. Understanding the market which will benefit from your offering is also essential. For example, if you are creating a coin to strengthen the LGBT community, it is vital to find ways of tapping into online platforms, as well as get in touch with LGBT publications.
Thus, being tapped into both the crypto and target community will ensure you have the best chance of a successful ICO.
Reasons for failure
It is important to bear in mind that while crypto may appear to be something anyone can get in on, starting any business takes a huge amount of dedication, time, expertise, originality and, invariably, money. As the market becomes even more saturated, and as legislation and need for auditing increases, the costs for anyone wanting to start their own crypto will rise even higher.
The internet is a graveyard of start-up failures. According to Wolf of Qtrade.io: “No matter how these small projects are financed, via an ICO, pre-mine, fair launch, dev reward, self-funded, and so on, they are essentially young start-ups in a completely unproven technological field. Such start-ups are known to have an extremely high failure rate of about 90%.
“Early-stage start-ups fail because the promised technology turns out to be impracticable, because they cannot find a product-market fit, because their teams fall apart, because they go bankrupt due to mismanagement, and so on.”
Underscoring this high failure rate, a 2017 report by Deloitte found 90% of 26,000 blockchain projects had become idle. While the industry has been flush with venture capital and retail investment cash, a lack of support, lack of direction, lack of expertise and strategy errors cause most start-ups to fall flat.
Setting up a business is tricky and crypto is no exception. While yes, it is true anyone can set up a token on the Ethereum network after watching a couple of tutorials, the fact is, this is unlikely to get you far.
Just like setting up a website selling products is relatively easy nowadays, the difficult part is knowing what to sell, how to sell it, who to sell it to, how to market your products, how to design your brand and who the target market is. Simply put, there is a lot that goes on outside of just setting up a coin.
Having an idea that you really care about is fundamental to your chances of success. Deeply understanding every facet of the business and technology is also important, even if you are lucky enough to have capital.
As Annan told Quartz Africa “If I was doing it today, I would go on the lean start-ups methodology. Do customer surveys, interviews, and bring in team members who are problem solvers, aligned to the ‘why,’ and able to deliver the ‘what’.”
While it is tempting to answer the question “how do you create a cryptocurrency” with a stock simplified answer, the reality is there are many complexities and nuances to creating a crypto which will survive and add value.
The cost of creating your own cryptocurrency varies massively according to the complexity and timescale of the project. If you are developing a crypto from scratch, the cost could go up into the millions of dollars and any coin could take several years to produce. If you are choosing to create a token on an existing platform, even then the cost could be in the thousands of dollars.
While the cost of actually creating a token may not be hugely expensive, the associated costs of launching a successful crypto which people trust and want to invest in, can be extremely high. The cost also depends on how much you are able to do yourself. If you can engage in a community and learn the technology yourself you can take more ownership and outsource less.
While it is not hard to create a token on an existing platform, it is difficult to create and launch a successful cryptocurrency. You need an original idea, plenty of dedication and knowledge as well as a good understanding of strategy. Like with any business start-up you need persistence, a solid support network and plenty of resources.
While developing a cryptocurrency can be profitable, it entirely depends on how it is executed and how much time and energy you are willing to give it. A good business proposition and a solid strategy can, in the long-term, lead to success, but with a 90% failure rate, the chance of creating something profitable is certainly not inevitable.