ICOs: magic beans and bubble machines

Excerpt from Attack of the 50 Foot Blockchain by David Gerard. Join the mailing list for updates!

There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of an ether binge.

– Hunter S. Thompson, Fear and Loathing in Las Vegas

The snappy new phrase for “buy our premined altcoin” is “ICO” (“Initial Coin Offering” or “Initial Crowdfunding Offering”). These are typically tokens running on top of the Ethereum blockchain, usually in a smart contract written to the standard ERC-20 interface.1

There’s no mining involved – you create a smart contract that manages a pile of tokens, sell a small percentage and hold the rest to sell later. You also keep centralised control over the token. If it’s ERC-20 compliant, it’s easy for an exchange to trade in it.

An ICO makes sense for crowdfunding in very limited conditions – if you have a technical problem that requires decentralised, cryptographically verified tokens (if it doesn’t need tokens, they shouldn’t be bolted on); if the tokens are directly usable on the platform itself; if at least a proof-of-concept of the technology verifiably exists. It also helps if the idea is even plausible as a business. Unsurprisingly, most ICOs don’t meet these criteria.

Token offerings have been around a while, but kicked off enormously in the second bubble. The usual pretext is crowdfunding, but in practice the tokens are just traded on the exchanges as commodities. The creators then cash in. The value proposition for buyers is, as for the creators, easy money in a bubble.

Bancor’s ICO raised $144 million with none of the due diligence of an ordinary Initial Public Offering, the barest prospectus and no indication their plan (a “market maker” to sell altcoins that aren’t selling otherwise) would even work. This is clearly superior, for a certain type of seller, to the IPO bubble of the dot-com era, in that these aren’t actually shares, and the purchasers have no influence over the funded enterprise even in theory.

The ideas themselves are as bad as the worst dot-com IPOs. Digix, the first token crowdsale on the Ethereum blockchain itself, is a cryptocurrency backed by gold;2 Golem offers a “decentralized” (buzzword alert!) market in computing, like Amazon Web Services except you can only pay using their token;3 Gnosis offers semiautomatic prediction markets using their token;4 SingularDTV is a bizarre plan to fund a TV show about the Singularity in which a Caribbean island adopts Ethereum as its currency and Austrian economics works (this one gets its own section later in the book); Iconomi is an index fund of other ICOs.5

The token smart contracts are often incompetent in both intended functionality and programming ability.6 This turns out not to matter as long as they do the basic job: attract buyers and sell tokens. Status raised 300,000 ETH (then over $100 million) to … write an Ethereum phone app. Hopefully that’s enough to develop a phone app! It sold out in just a few hours. The actual promises as to what people will get for that $100 million are typical:7

Risk of abandonment / lack of success : The User understands and accepts that the creation of the SNT and the development of the Status Project may be abandoned for a number of reasons, including lack of interest from the public, lack of funding, lack of commercial success or prospects (e.g. caused by competing projects). The User therefore understands that there is no assurance that, even if the Status Project is partially or fully developed and launched, the User will receive any benefits through the SNT held by him.

EOS, founded by serial blockchain entrepreneur Danny Larimer, is as direct as possible in this regard. They’re also marketing it to the general public, with advertisements on the sides of London taxis.8 Here’s how the white paper describes it:9

The EOS.IO software introduces a new blockchain architecture designed to enable vertical and horizontal scaling of decentralized applications. This is achieved by creating an operating system-like construct upon which applications can be built. The software provides accounts, authentication, databases, asynchronous communication and the scheduling of applications across hundreds of CPU cores or clusters. The resulting technology is a blockchain architecture that scales to millions of transactions per second, eliminates user fees, and allows for quick and easy deployment of decentralized applications.

No, that doesn’t end “and a pony.” EOS is a rebranding of Larimer’s 2014 project BitShares,10 which failed to achieve this either.

EOS is releasing one billion tokens, in daily tranches over the course of a year, at a price of “how much money do you have to throw at us?” Really, that’s the price: the day’s take in ETH divided by the number of tokens released that day.

So I send in some ether, and I get …11

The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform.

The legal EOS Token Purchase Agreement is a frankly amazing document that everyone should read.12 US citizens or residents are not to buy the tokens (though EOS assures us they totally don’t constitute a security – hear that, SEC?); the tokens are defined as not being useful in any manner whatsoever; forty-eight hours after the end of the distribution period, the tokens will no longer be transferable; the buyer promises not to purchase them for speculation or investment. If there’s any legal problems caused by you buying these officially worthless things, you agree to indemnify EOS.

Crypto fans still lined up to buy them. “Whatever these people do, I’m going all in. Nuff said.”13

EOS was also driven up by another ICO, press.one, a “Content Distribution Public Chain” to run on the forthcoming EOS blockchain.14 The press.one ICO sells 20% of its tokens for bitcoins, 30% for ether and 50% for EOS tokens. Founder Xiaolai Li is an EOS/BitShares investor.

Chinese speculators went all-in on ICOs, buying into dubious proposals from fear of missing out, to the point where local exchange BTC38 refused to put new tokens up and warned that illicit fundraising can carry the death penalty in China.15 One Chinese “ICO” broke new barriers in market efficiency: you didn’t even need to put your ether into it yourself! Because the “white paper” contained malware that found your Ethereum wallet and emptied it. Now that’s a smart contract.16

The other big problem with ICOs is that they’re already recreating the Bitcoin transaction clog, but on Ethereum. Both the Bancor and Status ICOs filled the blocks on the day of their release, with Status’s higher transaction fees blocking all smaller transaction fees for several hours. Some exchanges had to stop trading ETH because they couldn’t get transactions onto the Ethereum blockchain.17

History doesn’t repeat, but it does rhyme. One of the most famous share offerings from the South Sea Bubble of 1719-1720 was “A company for carrying on an undertaking of great advantage, but nobody to know what it is”:18

The man of genius who essayed this bold and successful inroad upon public credulity, merely stated in his prospectus that the required capital was half a million, in five thousand shares of 100 pounds each, deposit 2 pounds per share. Each subscriber, paying his deposit, would be entitled to 100 pounds per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98 pounds of the subscription. Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.

The finest ICO remains PonzICO,18 a piece of “blockchain performance art” wherein later contributors are paid directly from previous contributors, with the founder taking a meagre 50% off the top. His pitch – “In today’s age, it seems better to promote the plausibility of future profit rather than waste energy on actually delivering”20 – grossed $4000 as of June 2017.21


3 “Crowdfunding Whitepaper”. The Golem Project, November 2016.

5 A survey of the top 8 ICOs at the time: Lyle Cantor. “A Tour of the Ethereum Token Bubble”. 18 June 2017.

6 e.g., Emin Gün Sirer, Phil Daian. “Bancor Is Flawed”. Hacking, Distributed (blog), 19 June 2017.

8 Edan Yago. “Ads on Taxis – Is EOS.io the PETS.com of ICO?” Twitter, 11 July 2017.

12 “EOS Token Purchase Agreement”. EOS.IO. (archive)

13 CoinHoarder. “EOS – Asynchronous Smart Contract Platform – (Dan Larimer of Bitshares/Steem)”. Bitcointalk.org Bitcoin Forum > Alternate cryptocurrencies > Altcoin Discussion, 6 May 2017.

14 “Decentralized content publishing”. press.one.

18 Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, chapter 2. “The South-Sea Bubble”.

20 Josh Cincinnati. “PonzICO: Let’s Just Cut To The Chase”. 12 May 2017.