{"id":134,"date":"2017-07-04T20:48:38","date_gmt":"2017-07-04T20:48:38","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?page_id=134"},"modified":"2017-11-18T16:45:39","modified_gmt":"2017-11-18T16:45:39","slug":"icos-magic-beans-and-bubble-machines","status":"publish","type":"page","link":"https:\/\/davidgerard.co.uk\/blockchain\/icos-magic-beans-and-bubble-machines\/","title":{"rendered":"ICOs: magic beans and bubble machines"},"content":{"rendered":"

Excerpt from chapter 9<\/a> of Attack of the 50 Foot Blockchain<\/a> by David Gerard<\/i><\/p>\n

There is nothing in the world more helpless and irresponsible and depraved than a man in the depths of an ether binge.<\/p>\n

\u2013 Hunter S. Thompson, Fear and Loathing in Las Vegas<\/i><\/p>\n<\/blockquote>\n

The snappy new phrase for \u201cbuy our premined altcoin\u201d is \u201cICO\u201d (\u201cInitial Coin Offering\u201d or \u201cInitial Crowdfunding Offering\u201d). These are typically tokens running on top of the Ethereum blockchain, usually in a smart contract written to the standard ERC-20 interface.1<\/sup><\/a><\/p>\n

There\u2019s no mining involved \u2013 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\u2019s ERC-20 compliant, it\u2019s easy for an exchange to trade in it.<\/p>\n

An ICO makes sense for crowdfunding in very limited conditions \u2013 if you have a technical problem that requires decentralised, cryptographically verified tokens (if it doesn\u2019t need tokens, they shouldn\u2019t 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\u2019t meet these criteria.<\/p>\n

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.<\/p>\n

Bancor\u2019s 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 \u201cmarket maker\u201d to sell altcoins that aren\u2019t 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\u2019t actually shares, and the purchasers have no influence over the funded enterprise even in theory.<\/p>\n

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<\/sup><\/a> Golem offers a \u201cdecentralized\u201d (buzzword alert!) market in computing, like Amazon Web Services except you can only pay using their token;3<\/sup><\/a> Gnosis offers semiautomatic prediction markets using their token;4<\/sup><\/a> 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<\/sup><\/a><\/p>\n

The token smart contracts are often incompetent in both intended functionality and programming ability.6<\/sup><\/a> 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 \u2026 write an Ethereum phone app. Hopefully that\u2019s 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<\/sup><\/a><\/p>\n

Risk of abandonment \/ lack of success :<\/strong> 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.<\/p><\/blockquote>\n

EOS, founded by serial blockchain entrepreneur Danny Larimer, is as direct as possible in this regard. They\u2019re also marketing it to the general public, with advertisements on the sides of London taxis.8<\/sup><\/a> Here\u2019s how the white paper describes it:9<\/sup><\/a><\/p>\n

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.<\/p><\/blockquote>\n

No, that doesn\u2019t end \u201cand a pony.\u201d EOS is a rebranding of Larimer\u2019s 2014 project BitShares,10<\/sup><\/a> which failed to achieve this either.<\/p>\n

EOS is releasing one billion<\/em> tokens, in daily tranches over the course of a year, at a price of \u201chow much money do you have to throw at us?\u201d Really, that’s the price: the day\u2019s take in ETH divided by the number of tokens released that day.<\/p>\n

So I send in some ether, and I get …11<\/sup><\/a><\/p>\n

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.<\/p><\/blockquote>\n

The legal EOS Token Purchase Agreement is a frankly amazing document that everyone should read.12<\/sup><\/a> US citizens or residents are not to buy the tokens (though EOS assures us they totally don\u2019t constitute a security \u2013 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\u2019s any legal problems caused by you buying these officially worthless things, you agree to indemnify EOS.<\/p>\n

Crypto fans still lined up to buy them<\/em>. \u201cWhatever these people do, I\u2019m going all in. Nuff said.\u201d13<\/sup><\/a><\/p>\n

EOS was also driven up by another ICO, press.one, a \u201cContent Distribution Public Chain\u201d to run on the forthcoming EOS blockchain.14<\/sup><\/a> 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.<\/p>\n

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<\/sup><\/a> One Chinese \u201cICO\u201d broke new barriers in market efficiency: you didn\u2019t even need to put your ether into it yourself! Because the \u201cwhite paper\u201d contained malware that found your Ethereum wallet and emptied it. Now that’s a smart<\/em> contract.16<\/sup><\/a><\/p>\n

The other big problem with ICOs is that they\u2019re 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\u2019s higher transaction fees blocking all smaller transaction fees for several hours. Some exchanges had to stop trading ETH because they couldn\u2019t get transactions onto the Ethereum blockchain.17<\/sup><\/a><\/p>\n

History doesn\u2019t repeat, but it does rhyme. One of the most famous share offerings from the South Sea Bubble of 1719-1720 was \u201cA company for carrying on an undertaking of great advantage, but nobody to know what it is\u201d:18<\/sup><\/a><\/p>\n

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\u2019clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o\u2019clock, 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.<\/p><\/blockquote>\n

The finest ICO remains PonzICO,18<\/sup><\/a> a piece of \u201cblockchain performance art\u201d wherein later contributors are paid directly from previous contributors, with the founder taking a meagre 50% off the top. His pitch \u2013 \u201cIn today\u2019s age, it seems better to promote the plausibility of future profit rather than waste energy on actually delivering\u201d20<\/sup><\/a> \u2013 grossed $4000 as of June 2017.21<\/sup><\/a><\/p>\n

\n

 <\/p>\n

\n

1<\/a> Amy Castor. \u201cEthereum \u2018Tokens\u2019 Are All the Rage. But What Are They Anyway?\u201d<\/a> CoinDesk<\/i>, 17 June 2017.<\/small><\/p>\n<\/div>\n

\n

2<\/a> DigixDAO<\/a>.<\/small><\/p>\n<\/div>\n

\n

3<\/a> \u201cCrowdfunding Whitepaper\u201d<\/a>. The Golem Project, November 2016.<\/small><\/p>\n<\/div>\n

\n

4<\/a> Alyssa Hertig. \u201cICO Insanity? $300 Million Gnosis Valuation Sparks Market Reaction\u201d<\/a>. CoinDesk<\/em>, 25 April 2017.<\/small><\/p>\n<\/div>\n

\n

5<\/a> A survey of the top 8 ICOs at the time: Lyle Cantor. \u201cA Tour of the Ethereum Token Bubble\u201d<\/a>. 18 June 2017.<\/small><\/p>\n<\/div>\n

\n

6<\/a> e.g.<\/em>, Emin G\u00fcn Sirer, Phil Daian. \u201cBancor Is Flawed\u201d<\/a>. Hacking, Distributed (blog), 19 June 2017.<\/small><\/p>\n<\/div>\n

\n

7<\/a> \u201cSNT Creation and Status Project Creation Conditions: Explanatory Note & Governance Terms\u201d<\/a>. status.im.<\/small><\/p>\n<\/div>\n

\n

8<\/a> Edan Yago. \u201cAds on Taxis \u2013 Is EOS.io the PETS.com of ICO?\u201d<\/a> Twitter, 11 July 2017.<\/small><\/p>\n<\/div>\n

\n

9<\/a> \u201cEOS.IO Technical White Paper\u201d<\/a>. EOS.IO.<\/small><\/p>\n<\/div>\n

\n

10<\/a> Red Li. \u201cEOS Triples in 2 Days, Making Yunbi Top Tier Exchange With Over 230k BTC Volume\u201d<\/a>. 8BTC, 3 July 2017.<\/small><\/p>\n<\/div>\n

\n

11<\/a> \u201cFrequently Asked Questions\u201d<\/a>. EOS.IO.<\/small><\/p>\n<\/div>\n

\n

12<\/a> \u201cEOS Token Purchase Agreement\u201d. EOS.IO. (archive<\/a>)<\/small><\/p>\n

\n

13<\/a> CoinHoarder. \u201cEOS \u2013 Asynchronous Smart Contract Platform – (Dan Larimer of Bitshares\/Steem)\u201d<\/a>. Bitcointalk.org Bitcoin Forum > Alternate cryptocurrencies > Altcoin Discussion, 6 May 2017.<\/small><\/p>\n<\/div>\n

\n

14<\/a> \u201cDecentralized content publishing\u201d. press.one.<\/small><\/p>\n<\/div>\n

\n

15<\/a> Red Li. \u201cExchanges Alerts ICO Scams and Illegal Fundraising in China Punishable by Death\u201d<\/a>. 8BTC<\/em>, 26 June 2017.<\/small><\/p>\n<\/div>\n

\n

16<\/a> Cindy23. \u201cICO Investors Lose All Their Money When Reads a Whitepaper Encoded with Viruses\u201d<\/a>. 8BTC<\/em>, 30 June 2017.<\/small><\/p>\n<\/div>\n

\n

17<\/a> Stan Higgins. \u201cICO Blues: Status Raises $64 Million (So Far) But Leaves Buyers Waiting\u201d<\/a>. CoinDesk<\/em>, 20 June 2017.<\/small><\/p>\n<\/div>\n

\n

18<\/a> Charles Mackay, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds<\/em>, chapter 2. \u201cThe South-Sea Bubble\u201d.<\/small><\/p>\n<\/div>\n

\n

19<\/a> https:\/\/ponzico.win\/<\/a><\/small><\/p>\n<\/div>\n

\n

20<\/a> Josh Cincinnati. \u201cPonzICO: Let\u2019s Just Cut To The Chase\u201d<\/a>. 12 May 2017.<\/small><\/p>\n<\/div>\n

\n

21<\/a> \u201cEthereum Account 0x1ce7986760ade2bf0f322f5ef39ce0de3bd0c82b Info\u201d<\/a>. Etherscan.io.<\/small><\/p>\n<\/div>\n<\/div>\n

 <\/p>\n

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A company for carrying on an undertaking of great advantage, but nobody to know what it is.<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"footnotes":""},"class_list":["post-134","page","type-page","status-publish","hentry"],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/pages\/134","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=134"}],"version-history":[{"count":17,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/pages\/134\/revisions"}],"predecessor-version":[{"id":2367,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/pages\/134\/revisions\/2367"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=134"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}