ICOs are Backwards
Every morning it seems I wake up and somehow feel like I'm closer to being a Bitcoin Maximalist than ever before. Or at least I feel that way in my heart. Luckily, I don't invest with my heart so we're all good there. I still try to support other ideas I think are worthwhile. But the approach is completely wrong. For example, ICOs are doing it completely backwards.
This is the problem with most blockchains
In my last post, I talked about how powerful and potentially valuable open networks and their cooperative economies of scale could be by improving efficiency and changing everyone's lives for the better. Unfortunately, most blockchains fail at being open networks in one way or another. There are still barriers to accessibility for the common folk.
One of those barriers is cost itself. The cheaper a coin is, the more accessible it is to people. Sure, lots of coins are divisible into tiny pieces, but there is usually some boundary value where the utility of token is greatly diminished, particularly with Proof of Stake coins. As these coins gain value, they gain more attention and you have groups centralizing coins closing the effective network power through their own greed.
If you want a coin to spread to as many people as possible, it needs to be worthless at first. Thus the attachment to these digital keys is minimal and the coins can be spread out effectively. Then with your worthless coin, you can develop a community and design utility around it. The people who are invested in the technology stick around and you have a strong base with secure and superior technology. The coin only gains value when value is provided.
But let's get back to ICOs. You propose an idea, create a temporary token, and assign some arbitrary value on a almost worthless token. Why is some conceptual idea worth anything with nothing of value is actually available at the moment? You are essentially trusting developers that you have never heard of to execute their idea when they can easily sell away their pre-allocated stake of the coin immediately. Why invest such a high level of trust in people in general when blockchains are supposed mitigate trusting people so much in the first place?
But let's assume that those advertising the ICO are good actors and are generally excited about the project they are advertising. Let's also assume that they will not be complacent about the project now they are suddenly worth millions of dollars. Let's assume they are generally interested in the technology and the legitimate impact it can have on people's lives.
We are artificially centralizing the coin before the network has a chance to get off the ground. The bigger investor types will have the control over the network when it is built, not the target audience and the people who could derive actual utility out of the coin.
Sure these investor types can grant developers the security and money to chase their visions, but they also stand in the way by limiting how open the network may eventually become. They are now holders and won't be willing to give up their stake until buying parties fork over their cash. They essentially block easy access to a coin and prevent it from organically spreading out because most folks don't like paying for stuff.
The internet is free. Sure you may pay to get access to your home, but you don't have to fork over cash to access the internet in a public library. The adoption of the internet was swift because all you needed was a computer to connect to the internet and the cost of the computer eventually fell below the value that the internet provided.
With tokens that start with ICOs, they are stuck in a Catch 22. In order to increase in value, they need the network to gain adoption, but in order to gain adoption, the cost of entry has to decrease. Most folks don't and can't take losses in order to wait for something to become more valuable. They need to feed their kids and pay the bills. So you unless you are providing a service at a cheaper price (which you probably aren't, blockchains are less efficient than centralized databases), the folks you want to reach are waiting for a cheaper coin.
And what do we see with most ICOs? The price decreases sometime after the initial sale. And most people lose faith in the coin completely because the price moves in that direction. If you start your coin at zero, you literally can't move down. If you start your coin at some value, you can very easily piss off some impatient investors and lose their trust.
And even if everything goes right, the limited accessibility of the coin stagnates the growth of the coin and prevents users from gaining those valuable network effects that make open networks so powerful in the first place. There's no cost to things like Facebook and Google. If you want your token to get to that point, you have to be significantly better or your token has to start close to worthless. And ICO's don't really encourage either.
Reminds me of my ultimate blockchains post. The best coins are going to start out as universal basic income and then pivot.
High cost can also generate traction, combined with some solid PR and especial rabid community.
EOS comes to mind. HPB comes to mind. These are two very expensive tokens which haven’t really released anything yet, yet are trading under the “only invest if you don’t mind losing it all” bracket due to their prohibitive cost.
Let’s not beat around the bush here: blockchains are the new shiny. They’re often even not the needed model but it’s become increasingly easy to raise high multiples of via an ICO compared to traditional VC models. Many ICOs would barely raise $250k seed funding yet they raise $10-25m and sometimes more.
Something which also happens because many cryptoangels made ridiculous ROI already.
Short term ROI doesn't necessarily equate long term sustainability. Things that are useful and widespread will survive, everything else will slowly die out. Not to say that one coin will rule them all, but only the coins that provide solid utility and good value will be able to maintain their momentum once everyone's play money runs out.
ICOs can definitely capture the attention of the space, but most founders that use this model are not strategically planning for the long burn.
This is a very interesting comment.
In recent decade lean development and focus on niche has often decided over the success - or lack thereof - of a startup.
The current ICO scene seems to only be geared at capturing whole niches, eBay/craigslist/AirBnB/total marketplaces style.
One could say that lean goes against most governance models employed in blockchain and definitely the more solid and democratic models. At which point vast funding is required for long term burn. Nobody who became a dominant player didn’t burn millions and millions on mega advertising budgets.
The question now is... are those ridiculous high amounts of seed funding ICOs benefit sufficient to capture their whole niche and make them a dominant player?
No. Not even close. This the team will also need to (Ninja) mine a vast amount of tokens to sell alter on to keep funding going.
It’s indeed more often than not a flawed model but not necessarily because of the high cost of many an ICO.
Blockchains, however shouldn't be treated as companies but with the ICO model they kind of are. Blockchains gain traction as protocols, but any good protocol should be able to survive regardless of which companies the developers associate with.
A lot of coins with micro-niches are pointless because one simply can use a larger platform and swallow that utility in the future. Until people begin seeing blockchain as protocol layers instead of applications developed by technology companies, lots of people are going to crash and burn playing with imaginary token with a marginal value.
Blockchains that have multiple companies and organizations working on them cooperatively will be the ones to survive. That runs contra to the seed funding / startup / ICO model.
We aren’t at that level yet though and it is highly doubtful that we will ever be.
First and foremost most blockchains are released by a central entity, rather than by a decentralized team. This, obviously, requires funding.
Also, something which FOSS history has often shown, design by community is often slow because things are discussed to death rather than code being shipped.
Thus unless there is a model which can provide some runway... your right assessment is merely ideological and would not truly help anything getting done. Except for those entities who go to war with an already existing war chest. But often they may see only the light by the time someone has cornered a niche already.
An plenty an ICO will help with that. Just like that we shouldn’t expect to see a different success rate than in angel investing (1/15 often).
That’s the reality. It’s just that much more money is lost in the course of events, assuming that all money invested was acquired at the during the ICO reported rate (not, which is why many ICOs go that high - we report them in USD not in BTC or ETH).
My assessments are almost always ideological because I'm not really a big fan of pragmatism. Pragmatism and shortcuts tend to lead to unnecessary pain and suffering down the road. On the protocol level development should be slow. The internet as we know it wasn't developed in a day or a week or a decade.
Despite this belief, I fully expect to see full-throttle development into blockchain applications and platforms, but almost all of them will have some shortcomings despite the time, effort, and excessive amounts of money put into them. Because the focus is in the wrong place. Not on underlying utility but asset promotion.