Image Credit: Robert Greenfield IV
HBO’s Silicon Valley introduced cryptocurrencies to a mainstream audience by recently airing an episode titled ‘Initial Coin Offering’ (ICO). The storyline was emblematic of the current crypto market, where a fictional Valley startup called Pied Piper decides to ICO as an alternative means of fundraising. In simple terms, ICOs are launched to introduce a new cryptocurrency into the market.
The unprecedented rise of cryptocurrencies such as Bitcoin has seen numerous ICOs pop up. ICOs have become a fad, with many seeing them as a ticket to quick riches. People were excited by the surging price of cryptos while the market was going on a bull run. However, crypto market correction has made it clear that token value both rises and falls. The inherent value of a token is dependent on its merit and real-world value; it’s capability of sustaining in an ever-changing environment.
ICOs offer enormous promise as a means of raising money outside of venture capital. Venture firms are slowly opening up to the idea of cryptocurrencies, with Andreessen Horowitz recently launching a $300 Million crypto fund. However, much of the focus has been on the price of cryptos instead of use-case development. Scam ICOs that offer no real value to investors need to be weeded out in order to truly justify the $200 Billion market cap of cryptocurrencies. This article takes inspiration from an excellent piece of work by Arthur Brock, and will look into 3 critical aspects of launching an ethical ICO.
The year 2018 has seen more than 1000 crypto projects fail either due to fraudulent schemes or failed software. Scam ICOs lure gullible investors with false promises of groundbreaking technology and skyrocketing prices. This can be done by simply having a fancy website and launching a marketing campaign that hypes the value of the token on social media channels such as Telegram.
Investors must perform their due diligence and thoroughly scrutinize the website of any company that promotes an ICO. Websites of scam ICOs are either devoid of team members or list ‘fake identities’ as integral members of their team. Launching an ethical ICO requires someone to be held accountable for finances invested in the company. Helix, for instance, has a visible team of people having expertise in their respective fields. Real people are expected to actively contribute towards the success of a project.
ICO projects have to clearly specify the responsibilities of each member on their website, ensuring that investors and enthusiasts know who to hold accountable. Teams must consist of people who are respected in the fields of artificial intelligence, cryptography and peer-to-peer networks. In order to support the team in a myriad of ways, a project’s advisory board should comprise of individuals who are vastly experienced in tech, law and business development.
Unlike fraudulent ICO websites, it is essential to provide a clear roadmap that highlights milestones and expected delivery of services. In a rapidly evolving crypto market, it is fair to assume that timelines could potentially shift. Investors should steer away from ICO projects having no definite timeline as this indicates a lack of long-term planning.
Many ICOs are spinning up to simply make a quick buck, with the market hampered by numerous ‘pump and dump’ scams. In most crypto projects, a majority of the tokens are allocated to founders and team members who are subjected to no lock-up period whatsoever. This puts everyone’s investment at risk as teams could dump their tokens whenever they want, thereby crashing the currency. To increase project accountability, founders and team-members can agree on a token lock-up period. Doing so can demonstrate their consistent trust in the project, i.e. they are in for the long haul.
Raising money is as easy as it has ever been. In June 2017, Bancor — a ‘decentralized’ crypto exchange platform raised a colossal $153 Million from token sales. ICO projects argue that they need to raise such figures for maintaining network infrastructure and ensuring long-term viability. But what is the downside of securing enormous amounts of funding?
Fund Mismanagement: Many cryptos reserve a majority of their tokens for their ICO to generate as much capital as possible. ICOs have been accused of selling out in seconds, with large holders of cryptocurrencies often being beneficiaries. After raising such figures, crypto projects would have to devote a lot more of their time towards managing these funds. Furthermore, the crypto market is still at a very nascent stage. Few people in the industry have experience of protecting and managing huge assets at an early stage of a project.
Unnecessary Attention: Bancor garnered significant media attention for being one of the top 5 ICOs in 2017. But what happened next? The token platform was hacked and lost around $13.5 Million in crypto. While crypto projects claim that they are trustless and very secure, this is often not the case. One needs to realize that decentralization is a journey and NOT a destination. Establishing fully-secure networks take time and require much testing. Scammers are quick to notice cryptos making noise and focus their efforts on infiltrating that particular network. With the network not fully optimized, this could be a recipe for disaster!
Legal Troubles: One of the most well-funded ICOs in recent history raised more than $200 Million last year. However, the project is currently embroidered in a legal battle with investors who claim that the company reneged on its promises of issuing tokens in exchange for their investment. An unclear roadmap and a lack of communication with investors do not serve any company well, particularly in the crypto space. It is important to set clear goals and then gauge the amount of capital required to kickstart a project. For instance, if your project potentially opens doors to a manned Mars mission, you have every right to raise incredulous amounts of funds.
Einstein believed that fear and greed are the two main drivers of human behavior. People in crypto cannot be blamed for harboring plans to get rich in quick time. The rise of ICOs have propped up crypto projects that hope for the pump so that they can dump. Genuine projects looking to impact society positively must realize that it makes no sense to get greedy and unreasonably cap their ICO. Rather than aiming to raise incredulous amounts, projects need to come up with a revenue model that ensures infrastructure maintenance without funds generated from ICOs.
Spending millions on fancy marketing campaigns does not usually help. Projects would rather benefit from mainly focusing on their core product offering. A project is more likely to gain access to creative capital if it builds a strong product — one that catches the eye of investors having significant technical expertise.
If your product is good, adoption will follow
Even if your project turns out to have a disastrous ICO, you can still achieve success if your product holds value for industry. This is evidenced by the backstory of a current top 10 crypto project that reached great heights despite having a poor ICO. ICOs can transcend above merely raising capital and progress towards a higher purpose. Tell your own story — think of the ICO as a means to showcase your idea to the masses.
The prospect of raising non-dilutive capital in a relatively unregulated market has seen way too many dumb ideas float around the crypto space. Anything and everything is being tokenized for the sake of making easy money at the expense of unsuspecting investors. An example of such an egregious exit scam is BitConnect, whose spokesperson Carlos Matos is enshrined as an Internet meme after this incredible moment of madness. It is vital for any company in the crypto space to be honest about what they are trying to achieve. Do they have a vision that is practically achievable? Is the project actually taking steps towards realizing its aim? What is the current status of product development?
Another problem facing the industry is the ‘pay-to-play’ mentality of certain crypto-rating websites. While most rating agencies claim that they research every ICO project listed on their website, this is often not the case. Instead, quite a few ICO rating agencies accept payments from projects to raise their ICO rating on the website. This is not an ethical practice and negates the need for having a rating website in the first place. Such agencies need to do their part to protect ICO investors by thoroughly reviewing every project and providing a fair rating. In short, we hope such agencies turn things around and understand their responsibility in the crypto community — to find exciting projects that could potentially change the world while calling out ICOs that are outright scams.
It is crucial for projects to gather Know Your Customer (KYC) information to prevent money laundering and comply with legal requirements. Choosing the right partner to carry out the KYC process is vital, as any hiccup in this process could potentially lead to lost sales and delays, while sometimes putting consumer data privacy at risk. ICO projects must develop a strict KYC management solution that acts as per the home country’s regulations. Doing so, provides a secure whitelist experience and enables ICO participants to participate in the coin offering smoothly.
The ICO space is growing with projects who are looking to capitalize on the unique and compelling narrative of Blockchain. However, the emergence of scams and fraudulent ICO patterns have set the industry aback. Projects need to stand out from the crowd and develop a strong moral compass in order to steer away from such practices. By acting in an ethical manner, projects can play their part in creating a democratized industry that ushers in the era of decentralization.
Follow Helix Foundation on Medium, Twitter, Reddit, Discord, and Telegram.
An article by Rajeev Hegde - Research Analyst, Helix Cognitive Computing GmbH, originally posted on Medium
