Last year, the world went through an ICO craze, which, unfortunately, lured numerous unsavory characters into the market. As a result, a whole lot of fraudulent “projects” emerged with a single goal to cash in on the hype by cheating people of their money quickly and efficiently. Now, it is very important for everybody in the market to understand the factors driving up the “hysteria” that brought a notable amount of bad actors into the whole ICO thing and where is this all going.
To get into the nuts and bolts of this fundraising phenomenon, we’ve invited Dominik Zynis, co-founder of Wings platform providing community estimations of blockchain projects viability, to share some professional insights.
Why the Hype?
There are many reasons behind all the hype around ICO’s and everything blockchain. The first and the most obvious one is that blockchain is a promising and somewhat new technology. It gave life to excitingly successful projects that got funded in days, hours and even minutes. Take Bancor Foundation that raised about $136 million in just three hours, or Brave that got $35 million in less than 30 seconds.
“Anybody who raises money for startups has heard of the largest ICOs of the last 2 years. Without a doubt ICOs are an easy way to collect money from a global set of investors and buyers to kickstart a project with money and users. With virtually no restrictions people started raising money for ideas that otherwise would never have a chance to get funded from regional VCs. With the associations to a hyped up technology like Bitcoin and Ethereum, ICOs became a disruptively simpler way to raise funds that caught on fire and spread quickly,” says Dominik Zynis, co-founder of WINGS platform.
Those and other instances inspired a myriad of other projects who saw ICO as a relatively simple way to fund their endeavor, or at least as a very viable alternative to VC funding. One of the obvious advantages of ICO over venture funding is that the former enables the project team to keep the ownership to themselves.
On the other hand, ICO is arguably more effective than campaigns on Kickstarter and similar fundraising platforms: the backers usually get something more valuable than a thank-you note or a t-shirt in exchange for their contribution. In case of an ICO, the supporters get the project’s tokens that entitle them to use the platform once it’s developed, or in some cases even have a share in its future profits.
In addition, tokens issued and distributed over an ICO are typically much more liquid than the equity VC investors get when they fund a startup. Simply put, in most cases ICO investors are able to sell their tokens for money as soon as they get them in their wallets.
Mr. Zynis believes that most problems with ICOs originate in the entire industry’s immaturity:
“The apparent easiness of such endeavors stems from the fact that ICO fundraisers are restricted by little to no regulations, especially in comparison to stock markets and VC investment, and therefore require much less effort from the companies that hold them in terms of compliance or being actually responsible for their promises. In fact, almost anybody can copy somebody else’s code, put up a landing page, create or copy-paste a bunch of smart contracts to funnel the money and start offering coins.”
As a result, potential backers have to face an assorted array of projects, some of which are going to become new Facebooks, Googles, and Amazons, some are going to die trying, and some are simply trying to run away with your money.
Red Flags to Look for in an ICO
Speaking of “bad ICOs,” there are in fact two kinds of them: projects that have actual intentions to deliver but are simply not good enough, and projects that are devised as a scam from the very beginning. While these categories are ideologically very different, they end up at the same point of zero value for the community.
Telling a not-good-enough project from a good one might be difficult, and even professional venture investors sometimes have a hard time telling an unusual yet promising project from a silly pipedream. However, it’s not not that difficult to tell an honest project from a scam.
According to Mr. Zynis, there are certain red flags that should make anyone think twice before contributing their own money to a startup.
1. Anonymous or fake team. Certainly, sometimes the team behind a project may choose to remain anonymous, but in most cases the landing page should properly identify all people involved in the project. Scammers also tend to use random photos and fake names to represent the “team” and make the whole project look real. Some of them even use photos of famous Hollywood actors like Ryan Gosling. A quick check with social media, such as Twitter, Facebook, and Linkedin may show who is who. But keep in mind that social media profiles can be faked as well.
2. Unrealistic timeline and roadmap promises. Most people tend to get excited about promises, especially when they hear they’ll get rich soon. To be on the safe side investors should always ask themselves if the deadlines stated in a roadmap correspond to the amount of work required. If you are promised to have big gains very soon it might be a bad sign.
3. Poorly written, plagiarized or completely absent whitepaper. A whitepaper may be the only part of a project existing by the time it starts asking for money. It should clearly describe the ideas and the technology behind the project in question, its goals, roadmap, funds allocation, etc. A complete absence of a whitepaper is an obvious red flag. If it is a copy of somebody else’s whitepaper the flag probably gets infrared. However, even a plagiarized whitepaper can apparently earn you tens of millions of dollars.
4. Little to no representation of a project at public events, as well as purely marketing zero-value speeches. Founders of real projects usually know that roadshows and conferences are important parts of spreading the word about their project. If their project offers real value they usually have something to say. Therefore, if the team of a project in question has never been at any event, or if their speeches are full of marketing buzzwords and lack meaningful insights about the project, its inner workings and its mission, it might be better to think twice about funding it.
5. Unavailability or lack of the project’s source code. Most blockchain-related startups tend to be open-source and release their code on repositories like GitHub. Still, the lack of source code doesn’t necessarily mean it’s a scam as some projects just don’t want to share their original know-how. However, the latter usually engage the services of independent auditors in order to review their code for flaws and vulnerabilities. If a project in question doesn’t show neither their code, nor credible audit results, chances are there’s nothing to show, except for a not really sophisticated scam.
6. Too big a share of issued tokens goes to the team. In any ICO the team gets a portion of the issued tokens to motivate them to work. However, in order to prevent team members from disposing of their tokens right after the sale is complete the assets are typically vested for several months or more. If the team is going to get a significant portion of tokens, or the vesting schedule looks suspicious, the project may not be the best investment option for you.
All in all, if something doesn’t feel right about the project, it is better to double check everything until the doubts are gone, or to stay away from the project altogether.
Where Did It Take Us?
Today, as all the hype is giving way to somewhat more sober views and more realistic expectations, there are researches showing that a significant percentage of all projects conducting an ICO are failing. There are also more and more attempts to restrict this funding method in order to limit the opportunities for dishonest “entrepreneurs.” This, however, affected not only the bad seeds but also the honest projects whose reputation became a collateral damage.
According to Tokendata statistics, about 46% of all ICOs that were held over 2017 have failed. Out of 902 fundraisers, 142 failed on the funding stage, and another 276 didn’t get much further after that. In addition, the authors classified 113 projects as “semi-failed” due to stagnant social media communication or small communities. If we take those “semi-failed” projects into account, the failure rate skyrockets to 59 per cent.
However, this information should be taken with a grain of salt. Thus, the failure rate of VC-backed startups comprises around 75% according to Harvard Business School senior lecturer Shikhar Ghosh. It looks that most startups never make it, regardless of the way they get funded. Of course, it doesn’t mean that putting money into ICOs is safer: VC investment is strictly regulated, while scammers don’t have that big a chance to fool seasoned investors.
Mr. Zynis remarks:
“What’s happening now is the disillusionment phase. The market for crypto and blockchain projects is sobering. As the hype wears off, we will see less of those who are in just for the ‘easy money’ and more projects with real value, at least until the next adoption wave causes new hype and speculation.
The whole mess with scammers, zero-value projects and disappointed backers has drawn some well-deserved attention from financial watchdogs, so we should expect the entire market to become more regulated in the future.”
Indeed, the US SEC and other regulators already came down on careless scammers on numerous occasions. In fact, back in 2017, the SEC even started a special group to deal with such cases. There have been numerous signs that the “wild frontier” ICOs will soon fade away, and either give way to something regulated, or perish altogether.
What Will It Look Like Tomorrow?
There have to be rules for the game, so the introduction of certain regulations is only the matter of time. It may imply certain restrictions or even a complete ban of ICOs. The football is now on the regulators’ territory.
“Most probably, the market will see rules similar to those regulating stock trading and IPO’s, where investors should either work through brokers or become professional — accredited or sophisticated — investors. And those who hold an ICO will have to register their offerings with the respective authorities and comply with certain rules, including AML and KYC policies. If this scenario unfolds, traditional institutions, such as banks, funds and governments, will be more willing to deal with crypto, bringing the actual mass adoption closer,” Mr. Zynis says.
Governments can even go as far as to experiment with their own cryptocurrencies and blockchain-based solutions. Blockchain technology itself will shake off the status of a marketing buzzword and turn into another applicable everyday tech like cars or smartphones.
Dominik Zynis concludes:
“In the upcoming years ICOs will be ubiquitous, just as ‘normal’ as Kickstarter or VC-backed projects, or having a Twitter account or a blog. There will be more regulation as well, whether appropriate or not. As there will be more blockchains and more tokens speculation will increase, and adoption waves will result in periods of volatility not unlike the most recent one.
Just like the Web changed while industries and sectors of the economy so will decentralized ledgers change how we do business and experience our lives.”
All in all, the changes we’re facing are more likely to be positive, despite the grim-looking premises of excessive regulations. The frontier needs to be tamed and become a mundane field for real projects to grow and realize the full potential of blockchain tech.