Hydrominer: A post ICO analysis

Disclaimer: I am not giving any advice whether to buy/sell or hold the H2O token, I am also not affiliated with any of HydroMiners competitors. Also I don't want to FUD the project. I am just a guy who followed the development of the project and wants to share some insights of what what's going on recently, after the hype surrounding the ICO is gone.

Recently HydroMiner raised over 8000 Ether through an ICO, ICOs are all the rage in 2017 and when I first heard of this ICO, through this article on Trending Topics (an Austrian news portal focused on start-ups and new technologies), I was very curious and thinking of participating as well, mostly because in that article it’s written that they put one of their mining containers into a small hydro plant in the town were I was born and the region where I grew up isn’t really on the IT forefront, so I wanted to support this project. Also the their idea sounded quite appealing.

© HydroMiner

But before I’ll go into detail about this, let me explain what HydroMiner is all about: the main idea is to create a more eco-friendly way to mine crypto currencies. This is done by putting mining containers next to small hydro plants in Austria (Here in Austria we do have quite a lot of hydro plants. When I speak of hydro plants, I refer to power plants which are on a river, using the stream of the river to produce electrical energy, not huge damns). By doing so, they’ll keep energy costs low (in HydroMiner's white paper it’s written that maintaining the power grid causes most of the costs and thus putting a mining rig next to the source avoids this costs) and allows them to compete with the huge mining-farms in China. So far, so good, they are trying to solve a problem that’s inherent to many crypto currencies and make some money with it. The reason for the ICO is, that such a mining container costs between $350.000 an $650.000, so way too much for a young start-up. First they wanted to give dividends to people who hold the H2O tokens, they emitted. Not really surprisingly the Austrian controlling institution for finances was not really pleased by this approach, so they had to change the functionality of the H2O token from dividends to being a coupon, which you can exchange for computing time on their infrastructure (aka. mining time, where you can keep what you get, similar to the cachorreo system, used in actual mining).

Issues during the ICO

As I said earlier, in the beginning I was very interested in this project, because I like the idea and, well, to support a young, innovative Austria company. We are not really known for our start-ups (even though Runtastic and Shpock are two success stories from Austria, and HydroMiner is not even the first Austrian ICO, that was HeroCoin). So, what kept me from participating in this ICO? I’ve read their white paper. I totally understand why they had to switch to a coupon based system, but for me this sounds like gambling to participate in another gamble: you invest (which is already one kind of gamble) and as a reward you get the possibility to mine some crypto currencies (which is the next gamble). Also while reading it I got serous doubts in the ability of the team: 1.) They used a linear interpolation to predict the difficulty growth in Ethereum and 2.) They didn’t spell one of the places, where they want to put a mining container correctly (“Bruck an der Muhr” instead of “Bruck an der Mur”, which also happens to be the aforementioned town, where I was born).

The first point gave me the impression that the team lacks in technical knowledge about Ethereum and the maths behind crypto currencies in general. I know that it is difficult to grasp exponential growth for humans, but interpolating a exponential growth linear is wrong and more than just negligent in that context. They do mention Ethereum “Casper”, the switch to a Proof-of-Stake algorithm, but understate it and even doubt that it will ever come (although even during the time the white paper was written all signs pointed towards Casper and in the end it was released a couple of days before the HydroMiner ICO started). I know that Ethereum is just one of many crypto currencies and they listed different alternatives to it, but that’s not the point here, the point is that the team either has only a rather superficial knowledge about the domain or is trying to deceive potential investors. In both cases this is not a good sign for the project.

Against the second point you can of course argue that I am nit-picking and maybe a little upset, because they didn’t manage to spell my the town of my birth right. And you are right that I’m very nit-picky here, but at the same time just remember that the team is planning on putting a container full of computers, which costs several hundred thousand dollars into a place they can’t even spell right. Having a small typo in document might not seem like a big deal, but it is, because it shows how diligent the team works. This document was supposed to convince people to invest in their start-up, pretty much the core of their ICO. In short something that has to be perfect, but wasn’t. This kind of sloppiness is not really reassuring.

Actually I could also go about technical stuff, like in this video one of the team members explains that they are using Windows on their computers instead of Linux, because the “the drivers are better”. For me as a Linux enthusiast this was another no-go, but ideology aside: it’s true that Windows has in general a better driver support from the GPU manufactures (I’m looking at you Nvidia), but at the same time Linux is better when it comes to stability and administrating a Linux system is much smoother compared to Windows (if you are know what you’re doing). I also have to mention that some people claim that Linux has the slightly better mining performance, which would make a difference in the scale of what they are planning to do. And yeah, one final argument against using Windows are simply the costs: Windows 10 is almost $200 (for the Pro version, and I really hope that’s the one they are using). I don’t know how many Windows licenses they need, but I’m sure that it adds up.

Issues after the ICO

Now after stating why I didn’t participate in the ICO, it’s time to write about the reasons that made me quite happy that I did not. It all started two weeks ago with another article on Trending Topics. The article is about “questionable events” (quoting the headline of the article) regarding HydroMiner and their ICO. Probably the biggest point Trending Topics is pointing out is the fact that HydroMiner named a lot of locations, where they put (or planned on putting) their mining rigs, but they were not very consistent doing so:

• They told Trending Topics in October, shortly before their ICO started, that their mining rigs are located in Bruck an der Mur and Langenlois.
• A couple of days later they told futurezone.at that their mining rigs are located in Schönberg and Waidhofen an der Ybbs.
• On Medium they wrote (already in September), that their mining rigs are located in Murau and Schönberg.
• The PR agency of HydroMiner on the other hand, speaks of Langenlois and Waidhofen an der Ybbs as the locations of their mining rigs.

In the reply from Nadine Damblon, CEO of HydroMiner, she admits that the communication regarding the locations was confusing and says that it was due to changes from their original plan (the power plant in Murau was to small, so they changed to a bigger one in Waidhofen an der Ybbs). Another take-away message from her reply is that HydroMiner had those locations rather as options than as something fixed. So far it seems, that HydroMiner has mining rigs in two locations: Schönberg (where this video was made) and Waidhofen an der Ybbs (where HydroMiner organised a tour on 29. November 2017).

Other questionable things are happening on their social media channels: in the aforementioned article on Medium, Philip Dimitrov, CMO of HydroMiner is interviewing Christian Vogl, CTO of HydroMiner, without mentioning that they both work for the same company. Also their reach on Facebook is much bigger than you would expect for a page that has around 3000 followers: e.g. a picture of them signing the contract to incorporate received 227 shares. Trending Topics pointed out, that this is more than Sebastian Kurz (winner of the last election in Austria and most likely the future chancellor) together with Alexander van der Bellen (president of Austria), signing a document. Sebastian Kurz has around 714000 followers on Facebook. Another interesting thing is that if they post some link to a German article, their comment section is full of English comments, praising the team, from accounts with names like Bitcoin Hunt. The reason for this is, because they hired an agency that takes care of the community management (AmaZix) and which organised a bounty campaign. The idea behind a bounty campaign is to reward the community of a project for spreading the word about that project on social media. But nowadays it is not only done by the community, but also by professional bounty hunters, which are doing it for profit. Fake friends and likes on Facebook are nothing new, but still if most of the followers of a Facebook page seem to be paid to follow, it does not really cast a good light on the project.

Then last week Der Standard (one of the biggest newspapers in Austria) also picked up some of the irregularities: The aforementioned Austrian controlling institution for finances is apparently running some investigations against the HydroMiner team. They assume that the team behind HydroMiner is violating the laws regulating the capital market. So far no complaint has been filed against HydroMiner. The Austrian controlling institution for finances is not giving any statement yet, because investigations are still on-going. HydroMiner states that by changing from the originally planned dividends to a coupon based system, they are on the safe side and they should not face any problems with the law.

This article also points out some other questionable facts about HydroMiner: the company was officially incorporated on 6. November 2017, so quite a while after the ICO started. Der Standard cited two different lawyers (one who was the legal advisor for HydroMiner’s ICO, and another one who wants to stay anonymous): both agree that it is in principle possible to incorporate after starting doing business, but while the legal advisor for HydroMiner saw officially incorporating only as a formal step, the other lawyer claimed this was an unusual thing to do.

Another point Der Standard made, was pointing out the situation of HydroMiner “headquarters”. The place where HydroMiner is registered is Cocoquadrat, a coworking-café. I guess for start-ups it is not unusual to be located in a coworking space, a coworking-café might be something less common, but I guess this is due to the fact that there are less coworking-cafés around. Since it is pretty close to where I live, I decided to pay it a visit:

As you can see here, there are no signs indicating that HydroMiner is located here.

Finally one more thing that I saw this week, that also casts a poor light on the project:

In the projects telegram group one member asked why the company is not listed at the WKO (Wirtschaftskammer Österreich, the Austrian Federal Economic Chamber, where all Austrian companies are required to be registered), the CEO replied herself, but in a rather arrogant way, that avoided the question. And indeed, as of today (2017-12-01) you can't find HydroMiner on the WKO database (btw., for OMV you find 237 entries). I don't know the exact legal subtleties involved here, and I assume that the process of incorporating is just taking a little while, but dealing with (subtle) criticism by shutting it down with an empty statement is not really speaking in favor of HydroMiner

Conclusion

The idea behind HydroMiner is a good one, it is not as revolutionary as it might seem at first sight (it’s basically green cloud mining). But still I an quite happy that I did not participate in the ICO, even tough the ICO claimed that it was done in compliance with the Austrian laws and regulations, there were quite some mishaps, which (in my opinion) undermine the trust, the team wants to gain. I am especially concerned about the technical expertise of the team, as well as the miscommunication(s). I understand that it is not easy building a start-up and that a lot of difficulties come with it. But still HydroMiner didn’t seem to handle those situations in a professional manner. HydroMiner is promising a lot, but so far not really delivering anything to back-up their promises, but rather hiding their assumptions behind defensive legal jargon. Like many start-ups (and especially ICOs) only time will tell if the project will be successful or not.