ICO: Enough is Enough

Emergency. Emergency. We interrupt the crypto primer series for a special post on ICOs.

I decided to write intros to crypto, starting with “Why Bitcoin is Important” and “An Explanation of Blockchain for Non-Technical People” because I believe in the technology but more so, think when it’s normalized, it can change the world.

As I was drafting my next post on Smart Contracts and the Promise of Ethereum, I got ping’d for the thousandth time with a barrage of questions about Bitcoin and ICOs.

I am so sick and tired of repeating the cookie cutter response I have memorized, I decided to write it.

The explanation usually goes like this:

Hey. Remember the ICO Paris Hilton endorsed? Well it turns out, the company is run by a piece of shit who kicked the crap out of his girlfriend 117 times and was sentenced to a year in jail. He is also fighting four lawsuits and super radioactive in the tech community, no one wants anything to do with him. Paris Hilton found out what she was backing after she promoted him and distanced herself right away. Do you want to be known as a person who was duped like Paris Hilton?

Okay, okay, so Paris Hilton may be as smart as a box of rocks.

What about DJ Khaled’s endorsement? Remember that? Turns out, the founders of that ICO were accused of multiple charges of fraud, have outstanding bills, payments, and what have you. Just seriously not so… straight peeps and they recently resigned. You wanna end up like Khaled?

I’m sorry — well not really — but right now, you (you = my friend, acquaintance, etc.) are as knowledgable about ICOs as Paris Hilton and DJ Khaled.

So if you don’t know who and what you’re investing in, most ICOs are sketch level fucking bajillion and it goes without saying: You’re better off staying far, far, away until you understand what ICOs are.

Usually, the frankness wakes people up but I find myself getting more and more impatient when explaining ICOs. So I’m doing what every nerd does: Blog about it. (And to anyone I may have offended or angered, I’m sorry. It’s not you, it’s me. Really.)

Long legit explanation:

In short, an ICO (initial coin offering) is like a project on Kickstart built on the blockchain where a product or service is backed by the community versus investors. An ICO is not like an IPO, since ICOs are not regulated and due diligence best practices change rapidly since there isn’t an entity or regulatory party telling entrepreneurs what to do and how to do it.

Loose outline of how a company/startup typically launches an ICO

  1. publish a comprehensive white paper on what they are offering, how it will work, how they will make money, why people who back the project should invest, and the background of the founding team.
  2. find an ICO platform to launch the campaign
  3. tap into a network of high profile or influential figures, get them to back your project, and if you’re lucky, they will market when the general public can put money into backing the project
  4. market, market, market. Founders start Slack and Telegram groups to engage the community of potential backers. They publish posts on blogs and Medium. And of course, social media marketing on Facebook, Twitter, et al.

Now that we covered the basics of ICOs, some data points.

While looking through ICO stat sites like 1, 2, 3, I came across this post (in Japanese). This random guy in Japan plugged in all the numbers into an Excel so I didn’t have to, which I’m translating into English so you don’t have to. (You’re welcome.)

This guy took a sample of 48 ICOs with the following conditions:

  • ICO launched between 2014–2017 and listed on ICO stat sites
  • projects that didn’t use an ICO platform since data of products launched on platforms aren’t as easily trackable
  • projects that don’t require software or hardware development

Of the 48, he found projects to be bucketed in four categories:

  1. working product: at the time of the ICO there is a product and users
  2. beta: βversion of product is released; no users
  3. alpha: only a pro-type, not ready for beta release
  4. no product: just a white paper and a community, nothing to show (not even a prototype. Yikes.)

He lists several findings (YoY product delivery comparison, amounts raised, thoughts on why ICO products can not be delivered on time, etc.) but the one finding that raised the alarm bells was this one.

Of the 48 ICOs

Working product: 3 (6.25%)

Beta product: 7 (14.58%)

Alpha product: 11 (22.92%)

No product: 27 (56.25%)

Uhhhhhhhhhhh. 56.3% don’t have product on delivery? That’s insane. Where is the KickFailure equivalent site of ICOs? And I wonder if someone is keeping track of these people who fail to deliver. Just because ICOs aren’t regulated, it doesn’t mean individuals shouldn’t be held accountable.

Even more worrisome, is looking at the track record and seeing evidence such as this:

15 ICOs in a day and a half? What. The. Fuck.

Now I am a believer of blockchain. I champion Bitcoin, Ethereum, Litecoin, Monero, and a few others I’m closely monitoring. I am a fan of ICOs in theory and in time, cautiously optimistic that ICOs will help move crypto forward. But right now? Hedge your bets elsewhere; there are plenty of investment opportunities in cryptocurrency once you understand the basics.

A very rich man once said:

Risk comes from not knowing what you’re doing.”

That rich man is Warren Buffett. Warren Buffett is worth $80B USD so I think he knows what he’s talking about so for God’s sake, before talking about investing in an ICO or buying Bitcoin: please, please, please educate yourselves.

Thank you for reading this very long rant. The End.

An Explanation of Blockchain For Non-Technical People

Note: If you are looking for ways to get rich quick on ICOs and Bitcoin, this post is not for you.

Now that that’s out of the way, this is the continuation of this post and why Bitcoin and misc. alt-coins, cryptocurrencies or digital assets, and blockchain are so important.

Here, I will cover blockchain and why prominent VCs such as Fred Wilson has been writing about it for six years, and why many other firms are co-investing in crypto ventures and how cryptocurrencies are no longer for terrorists, drug lords, human traffickers, and other not so kosher transactions we only see or hear about on the dark corners of the Internet.

I left off the last post with the question: If we can make free calls between Beijing and San Francisco, why do we need to pay to transfer currency between Beijing and San Francisco? I then took it a step further, to ask: In a world where middlemen can potentially take several paychecks worth of fees for an exchange of assets, why wouldn’t I find a way to cut out the middleman and directly transact?

Right now the public is focused on currency built on blockchain technology since it seems as though people are ‘getting rich quickly’ but blockchain is much more than currency (Bitcoin, Ethereum, and other alt-coins). What blockchain does, is it enables transfers of digital assets (in any form) in a safe, secure, transparent way with no middleman.

blockchain is much more than currency (Bitcoin, Ethereum, and other alt-coins)

Technologists are excited for the possibilities that instead of a middleman — in any industry from bankers, to real estate agents, suppliers and distributors — individuals and merchants who supply a product or service can directly deal with their customers looking to purchase the product or service offered. This is what is called a P2P (peer-to-peer) network. Decentralized is another term often used but it basically means micro-transactions are not regulated by those we have come to acknowledge as trusted parties to legitimize these exchanges of assets.

A world where everything is regulated is what we are ingrained to believe as ‘trust’. 

We trust banks to handle our money. We trust fund managers to invest our money. We trust real estate agents and brokers when we look to buy or sell property. We trust companies like Amazon and Google to store our personal information and communication. The list goes on and on but in our daily lives, we know that anything we do with these established institutions, our information, money, assets, or what have you, are safe.

But what if there is a way to safely and securely cut out the middlemen, have a new trusted method to transact and save on fees?

What if there is a way to safely and securely cut out the middlemen?

That is what blockchain can do. Bitcoin is just one of the solutions (currency) to the problem of cutting out the middleman (financial institutions). The reason why blockchain is safe and secure, is a bit complex, technical, and potentially boring but important to know in order to understand the value of blockchain technology and the things built on it — like Bitcoin or Ethereum.

The following is a chart I found from a report published here. All tech jargon aside, this is basically the flow of a transaction built on the blockchain:

What this illustrates, is the structure of the blockchain technology we currently cannot see with our two eyes like at a bank or real estate office.

I’m sticking with these two examples in order to keep things simple.

In order for a transaction on the blockchain to be valid, it goes through a process, exactly how a ‘normal’ transaction happens. In traditional validation processes, there are certain things that need to be checked off in order to legitimize any exchange of assets. But instead of one entity (the middleman — whether it’s a bank or real estate firm to follow the examples from above), there are many anonymous people solving complex equations to verify the validity of the asset transfer request. Currently, if we were to transfer money or buy or sell property, a person or people manually call different parties or look through records, forms and contracts are drawn with lawyers, and / or whatever else is required in the verification process for the transactor and transactee required by regulations.

On the blockchain, there is no manual checklist item to ensure a safe and secure exchange of assets, but instead, a process based on math is used for validity. Multiple parties are involved and validation is done in two parts.

How Blockchain works

(this is where it gets a bit nerdy — skip if you wish)

Simply put: There are people who run computers called miners, that receive a request to verify a transaction. These requests are called blocks. If the miner chooses to accept the block, they run the block against a complex computer program (kind of like descrambling government spy level cryptograms).

Once the block is validated, it is passed onto the middleman called a node, to add onto a giant, public ledger (blockchain database). In traditional real life ways, the middleman is usually a person or institution. In the case of blockchain, the middleman who pass the verified transaction data and the valid block data are anonymous and technologically driven within the blockchain process, so payments and fees are unnecessary.

When there are a certain number of blocks verified (multiple miners validating the blocks and nodes adding onto the chain), the transaction is deemed valid and only then, transactional exchanges happen.

Miners are rewarded with Bitcoin for their work. There is no central authority (government, regulatory entities, etc.) overseeing the process but blockchain uses a network of trusted people, with multiple layers of technologies to ensure a fairness in keeping the transaction and all the information stable, safe, and secure. There are also methods put in place to ensure one miner doesn’t have more authority over another, or technologies that makes sure all the miners validating blocks aren’t located in the same geographic area, and so on and so forth.

Do keep in mind, this is embarrassingly simplifying an extremely complex process, and a basic explanation for those looking for a primer on Bitcoin, blockchain, and crypto.

Why did I write this? Because as cryptocurrency and transferring of digital assets become more common place, hopefully these posts will help to understand why these technologies aren’t scary but more so, valuable, disruptive, innovative, and most of all: Exciting!

Next up: Smart contract governance and the promise of Ethereum.