Lessons we learnt from failed ICOs

in ico •  last year 

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The world of ICOs, in the absence of authoritative institutionalization and comprehensive regulatory mechanisms, is complicated and chaotic. It is not difficult to ruin a promising ICO project with a small mistake, and lose the faith of investors forever. If yours is a serious Blockchain-powered project which has the potential to make a considerable positive impact on any industry, you would want to make sure that your ICO goes right, and that you do not repeat the mistakes of those before you.

Here are the things we learnt from the following failed ICOs in the past -

-- DAO - The DAO hack is one of the most notorious examples of failures in the history of ICOs. Decentralised Autonomous Organisation or the DAO was meant to be a decentralized investment fund where all investors could vote on which companies to fund. The weight of the vote was equivalent to the contribution of the investor. The DAO had already raised 12M Ether, which was equivalent to over $150 MM at that time. Then, a hacker discovered a vulnerability in the Smart Contract code, and he exploited it to extract $50 MM worth of Ether from the DAO.

The DAO attack reveals that security often tends to be neglected in ICOs. Smart Contracts are in the process of fundamentally changing the way the world conducts transactions, and it is imperative that any project, before deploying its Smart Contracts on the Blockchain, should get it audited from experienced developers in the Blockchain community to ensure that they are free of any bugs.

-- Tezos - Tezos, an on chain governance protocol project, made headlines in the crypto-verse twice - first, when it raised a whopping $232 MM in its ICO, and the second time, when conflicts between founders Arthur and Kathleen Breitman and Johann Gevers became a serious issue and jeopardized the project. Further, the project has been condemned for selling unregistered securities, misrepresentation of how the funds would be spent, misrepresentations of when the network would be active, false advertising under state laws, unfair competition and deceptive trade practices. The complications continue, and there is little clarity on how the project will shape up post-ICO.

While the Tezos ICO surely underscores the importance of ensuring legal compliance, and structuring, marketing and executing the token sale properly, the Tezos debacle teaches investors that is important to do one’s due diligence to ensure that the ICO team is absolutely serious about their project. A way of finding this out is if the team has a prototype in place. A minimum viable product (MVP) gives some assurance of the team’s technical capabilities, and their intention of making a full-fledged working product, as described in the White Paper.

-- Enigma - Enigma, an investment platform, became the target of hackers because the team members failed to ensure password security of their accounts. Guy Zyskind, the CEO of Enigma, had apparently used a password, which had previously been used on a compromised platform, for his GitHub account. Hackers got hold of that password, gained control over the company’s website domain, slack channel and mailing lists, and end up taking away $500,000 from their investors.

A minor negligence on the part of the CEO caused the collapse of the Enigma ICO, and it is a lesson for upcoming ICOs that poor security is any ICOs nemesis. It is a good practice to keep changing the passwords of ICO accounts, and ensuring their strength by making them complex. Small measures like these can make a significant difference to the success of your ICO, as the Enigma incident underlines.

-- PayCoin - PayCoin rose to fame in the crypto-verse with the claim that they were going to create a new breed of cryptocurrency - at least, that’s what their White Paper suggested. However, when they launched their ICO, coin that came out was another generic altcoin. However, when the team failed to keep its promises, including the $20 pay floor, and the hype around the project soon fizzled out. In fact, GAW Miners and Paycoin Head Josh Garza pleaded guilty to operating a Ponzi scheme.

What is evident from this case is that if your product is bad, no amount of marketing and PR can turn it around and make it worthy of raising millions of dollars. Therefore, it very important to give attention to conceptualizing your product meticulously, and developing it in a manner that it adds value to the industry it is catering to. For ICO participants, it foregrounds the importance of doing one’s research and reviewing the ICO for its technical and economic feasibility, because many ICOs, which make far-fetched projections about “revolutionizing” any industry, are actually Ponzi schemes.

-- CoinDash - CoinDash is another ICO which suffered because it failed to take adequate measures in securing its ICO. The hacker replaced the Ethereum address the project was using to receive funds, with a fraudulent address, resulting in the loss of $7 MM to the ICO. Recently, the hacker reportedly returned 20,000 ETH to the company’s wallet.

Hackers are always a step ahead of our security measures. Therefore, it is essential to ensure that you keep yourself updated on best practices for ensuring the security of your ICO, and leave no stone unturned in fortifying it against attacks. For ensuring website security, a good practice would ensure rigorous external penetration testing of the website done and buying all similar sounding domain names, so that hackers are not able to exploit your community with a fake website.

-- Munchee - Munchee was an ICO which sprung out of existing business idea about rewarding restaurant reviewers with MUN tokens when they published an honest restaurant review with photos. The reviewers could redeem these tokens at a number of restaurants within the Munchee ecosystem. The ICO tumbled when its marketing efforts took the wrong turn, and make the utility token look like a security token, which would fetch investors profits. The SEC intervened and terminated the ICO on the grounds that MUN was an unregistered security.

Munchee’s failure is an example of an ICO gone wrong because of improper messaging in its marketing campaign. The Howey Test’s rubric considers any token which shows the tendency to profit its investors, as a security. Munchee was a company operating in the US, and it bungled up because of non-compliance with SEC’s terms. Thus, there are two key takeaways from the Munchee case - first, ensure complete compliance with the regulations of the country you are operating in, and second, ensure that the messaging of your marketing campaigns should be focused on how the token will add value with its utility to the industry it is being implemented in. Refrain from talking about the profits it will bring to those buying the tokens as an investment.

-- JesusCoin - No offense to Jesus, but this one had to be on the list. This is a coin “decentralizing Jesus on the Blockchain”. The coin offers “outsourced forgiveness” and “record transaction speed between you and God's son”. With the CEO of the company being Jesus Christ himself, no doubt it is a hoax. What’s even more surprising is out of nearly 1500 coins listed on CoinMarketCap, it ranks at 816 presently, and has managed a market cap of nearly $1.5 MM. There are a number of other ridiculous coins in the market such as the PrayerCoin - a coin for decentralizing religion, Sand Coin - a coin for ordering high-quality sand, Exotown - a reptile breeding program, etc.

The point here is that not everything needs a blockchain. There are many projects out there in the market which have tried to include Blockchain in their poorly-made project blueprints, just because it has become a buzzword associated with raising money, and they want to use ICOs as a scheme for making easy money. Investors, beware. Do not support such projects at any cost because they bring a bad name to the cryptocurrency industry. For ICO developers behind such projects - regulatory authorities across the world are getting more stringent with their evaluation of ICOs. Your efforts to swindle people will be thwarted.

-- Spacebit - Spacebit was an ambitious project which had the attention of crypto community back in 2014. Labeling itself as the “first decentralized space company” its aim was to launch “nano-satellites” into space and provide the world with a globally accessible blockchain, and thus allow bitcoin cold storage and help unbanked regions access financial services. The project, after creating a lot of buzz in the crypto-verse, died in 2015 when the community stopped hearing from the team altogether. Apparently, the team had started working on another project, BlockVerify, and had directed its attention entirely towards the new project.

The reason why the team did not develop a prototype could perhaps be because of the project’s technological infeasibility at that time or the team’s lack of experience at fulfilling the idea. So, the project was scrapped after all the marketing efforts. From this instance, we can gather that it is absolutely important to evaluate a project’s technical feasibility before building an ICO around it. Get in touch with experienced developers in the crypto-community and consult with them if you can. If not, do your own research thoroughly and conceptualize a product which you and your team understand in and out. Last but not the least, as we have advised before, at least start developing a prototype before launching your idea in the market.

We regularly update this space with articles on ICO best practices for different aspects and components of ICOs. Stay tuned!

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