Putting Down The ICO Kool-Aid

In which humanity falls into the pits of delusion fueled by a pricing frenzy on something largely unfathomable that often might have no reason to exist…

Here We Go Again

Human beings have a funny way of repeating past indiscretions, as many a precautionary adage does indeed advise. When it comes to economics, during boom times our brains seem to have a worrying propensity to become enshrouded with a semblance of outcome-driven false rationale that can catch out even the most disciplined and well intended of investors. As may be a surprise to absolutely no one, in the ever mad world of ICOs, we’re well into the throws of such delusion.

Crypto represents a seminal moment in humanity, whereby technology has enabled frighteningly rapid and heretical speculation that was previously hindered, if nothing else, by the open and close of daily markets and typical policy and regulation-driven impediments to certain speculatory measures. In crypto, the recipe for chaos starts with a dose of freely tradable assets, fungible anywhere in the world, instantly (ish) transferable, and with at least a semblance of safety and immutability baked into their function, and combines with a dash of comprehension obfuscating technical linguistics, a pinch of vociferous evangelists, a legion of shills and pump armies, until viola, you have yourself the perfect makings for an ever enfluging black hole of speculation both fostered and obfuscated by self serving pseudo-intellectual technical masturbation.

My Beef Is With ICOs, Not Blockchain Tech

I should point out here that my primary critique in this piece is the ICO market, though some aspects also touch on the facets of cryptocurrency that drive such incredible price volatility for “established” currencies as well. Many in the industry see ICOs as a small piece of the puzzle, and, perhaps quite rightly so, look past them in considering the future of crypto and blockchain implementation. In fact, many blockchain projects are forging forward that have no token component at all. However, in my humble opinion anyway, ICOs have colored the perception of cryptocurrency and to some extent “blockchain technology” in the mainstream, creating the current “everything is a scam” mentality that one encounters upon leaving the hallowed halls of the crypto banquet. Also, the amount of capital that has flooded into these projects is unignorable.

As the shills who’ll no doubt deride this piece as another useless FUD tactic (emploring all who will listen that the next big break in the adoption of their chosen project is just around the corner) will doubtless attest — the technology is indeed incredible. The potential to make the world smaller, even the playing field, weed out arcane institutions, and generally shift the financial paradigm is all still there. In no way do I mean to deny the merit of what the current foundational building blocks to tomorrow’s blockchain — or whatever it may evolve into — fueled world may bring. The fact that we’re increasingly headed into a place wherein the very institutions this technology was at least originally intended to usurp (big finance and big government) appear to be some of the most ardent adopters need not signal that real change can’t or won’t happen to an effect that one might consider rationally correlative with pricing. But it hasn’t yet. Anyway, I digress…

$4B for What Exactly?

With all of those caveats out of the way, the crux of my argument is relatively simple: In no way is the amount of capital that’s been invested into ICOs substantiated or validated by the performance of the vast majority (I might argue all) of these projects. Worse, the sheer magnitude of the capital raises are in no way necessitated, pragmatic, logical, sustainable, or in many cases rooted in any plausible reality. The truth is that non speculative/investment driven adoption is still very low. With a few notable exceptions, most of the purported use cases remain theoretical. Why EOS needed roughly $4BN to build a highly experimental platform (I will save my extreme distaste for the many rudiments of EOS I find highly worrying for another time) is something many more people should be vehemently disturbed by — as is the case with Telegram, Gnosis, and so, so many more. Google initially started with six figures in seed funding, and it’s first major round? A whopping $25M. Just saying…

So, what has actually proven to be quite the successful model is a novel new way of fundraising. One which convinces us that — despite no working minimal viable product, no users, no provable metrics, and in some cases a team as trustworthy as an old wallet condom — the promise of future earnings are more than enough to speculate — and in gobsmackingly grandiose fashion at that — that something is valuable, and in turn let that speculation, or irrational exuberance as one of my colleagues likes to say, beget ever more speculation, adding to the house of cards that will result in inevitable tears. In fairness, every once in a while there comes about a company like Twitter, whose obvious virality and market addressable nature is so immense that even though there was no clear way for which to monetize it, the best of the best invested. But for the few Twitter-like companies out there, the dot com boom showed us the thousands of E-toys and their ilk who failed because at their core they were fundamentally half baked back of the napkin ideas that got muscle fucked into reality by a funding frenzy the likes of which the world had never seen — and its now being repeated on the quick cycle.

Ultimately, We’re Still Talking About Startups

It’s just business 101. Nobody can possibly predict with any degree of worthy accuracy which new company is going to boom when it’s just a concept existing in the ether (no pun intended) of minds wholly consumed by ever increasing doses of the crypto kool-aid. In reality, most startups — you know, the old school ones that have to give up equity for funding — bootstrap their way to evidence-based seed funding, and use that to screw up a few hundred more times until they find their way to more formal capital. Then, about somewhere between 1 and 10% of the time, they make it. While blockchain technology is a paradigm shift, there is nothing different about the realities of starting a real business, whether it be a cupcake shop or a hypothetical stable coin.

The very rubric for a project’s veracity, the white paper, in most instances is an inherently flawed concept. A fathomable venture begins with a central idea that can be understood and regurgitated by a 5 year old, ex: “We make it possible to track packages for less money.” Their baseline product should already exist, have been proven, have had eyeballs on a screen, and be working to some degree. Ideally, capital is raised because it’s the only impediment to forward progress, not the fuel needed to start in the first place.

Flying Without Instrumentation

While there is nothing wrong with the concept of a future road map, a typical crypto white paper outlines a complex, multi-faceted offering, with sometimes dozens of individual pieces of a project yet to be built all under the guise of imminent implementation. The hubris that comes in assuming someone can plan out the evolution of an entire business is at best ambitious but deeply terrifying. The blind insistence I’ve encountered with numerous project leaders that the 37 different aspects of their product will all be built and interoperable by Q4 of this year makes me want to buy a house in the woods of Canada and quarantine myself from whatever madness now circulates through their system. I consider myself to be a reasonably astute individual, and as someone who has dedicated countless hours to the blockchain space, the amount of projects I can’t fathom, to rehash an old political slogan, is too damn high. Or in the case of crypto, way, way too damn high. There is nothing special about cryptocurrency or blockchain technology that should make us believe company founders have gained businesses clairvoyance by drinking from the blockchain waters. Sane businesses understand that you need to implement minimum viable products quickly, test them in the market, and then go back and fix the turd you build when the market tells you they wanted something else entirely. Spending millions building something massively complex without actual proof that anyone gives a damn is akin to hinging the fate of the world on the chances of bedroom antics resulting from a particularly ill-matched blind date. It does happen, but the dot com boom, not to mention the brunt of human history, has shown us this is generally speaking quite a shit approach to building something sustainable.

If The FED Can’t Get It Right…

More worryingly still, a central piece of too many projects we come across is a proprietary economic system based upon a novel token, complete with a system of incentives to ensure the token has value. For those of us who gritted our teeth through economics class, it’s worth noting how economic principles often don’t come to fruition in reality. Economics is an enigma because people are emotional, and emotions are damn hard to predict. When is the last time you accurately guessed what your spouse really wanted for dinner? If markets were totally logical and efficient, there wouldn’t be such great stakes to be had, fluctuations would be accurately predicted, reactive, and largely self correcting, and in general, things would be a whole lot more sensibly priced. Suffice it to say, designing an entire novel economic system based on a token is a herculean task. Actual countries grovel with these concepts on a daily basis and generally screw the pooch when it comes to monetary policy and the end results.

Selling Real Estate On Pluto

The bottom line is this: Tokens exist primarily as a way to get the succulent low hanging fruit that is frenzy-driven blockchain money. It’s very rare that I’ve personally come across a project whose token seemed an integral part of the backbone. That’s not to say that a project shouldn’t be utilizing blockchain technology. It’s just that when faced with the simple question “couldn’t they just offer this product or service and accept BTC, ETH, etc.” almost always, the only non bull shit answer for why the token exists is as a fundraising method, with a subsequent use case forced upon a product or platform to justify the token’s existence in the first place. The worst part is if any of these products do indeed succeed, they could very well end up (and if they’re sane, they just might have to) opening the platform to outside currencies thereby obviating the one and only use case for the token in the first place. In that instance, investors are left with something of no real value that represents…well, nothing.

The new wave of security tokens aims to quell some of these concerns, but why a security token that grants equity or dividends is meaningfully different than a commonly understood equity is the topic of another blog post. It’s also worth noting that a proprietary token that is required to use a product is a massive barrier to entry. Have you met people? Do you think they’re really going to manage dozens of tokens, trading them into and out of each other, so that they can use the products and services that you’re offering to power their blockchain fueled lives? Again, have you ever actually met a person? If your token really is that integral, than there damn well better be a delightfully simple way to “use” it in the background that doesn’t close the doors to anyone but the upper echelons of early adopters.

Naturally, there are many solutions and third party integrations in the world to eventually bring us to a place of easier (automated/backend) token implementation, but beyond the fact that we’re not there yet, if “layer two” implementations are needed in order for the token to be even mildly viable, are we just using ever more band-aids to stop the inevitable bleed out from technology being used in a way it’s not organically well suited to so we can continue to raise money? But that still doesn’t answer the most important question: Why, oh why, does this token need to exist? What net benefit is it providing anyone other than yet another virtual horse to bet on?

What’s Real Anymore?

For all the insane money that’s been raised, there are but a precious few real examples of utility being derived from blockchain platforms, products, and payment coins that have shown themselves to have worked at this point in time. Bitcoin use in countries like Venezuela has proven a use case that I think will only grow. A border breaking coin that acts as a true digital currency might be the way to bring the 2 billion or so unbanked into the global economy. An immutable and private ledger might also enable the free flow of information and a whole host of ancillary offerings that come with that. There are some some interesting token use cases in the world of non fungible assets tied to a particular asset or instance (CryptoKitties showed the potential of this concept). For certain, we’re at the beginning of something that will indeed be an incredibly valuable market. But almost none of these ICOs will be around for long enough to experience that new world.

Nothing New Under The Sun…For The Most Part

When the shit hits the fan, and it will, the majority of these projects will fall into the annals of obscurity, the market will mature, and the few that make it out will become known as the Amazons that weathered the storm. I beseech anyone with an open mind when analyzing a project to ask what the hell is going on, (again) why the hell this token needs to exist, and most especially, why in the hell do they need to raise this much money to see if it works? It’s cheaper than ever to launch a digital product, which is what these are, by the way. Perhaps a saner version of this will see an eventual evolution into a world where token raises, even if they are just a vehicle for capital infusion, are broken up into series like traditional financing rounds. While the needs of all projects vary, just imagine what a typical venture capitalist a few years ago would have said (and many do still echo this sentiment) to any project walking into their office with zero users, no functioning platform, and an ask of, say, $50M to begin construction, all fueled by some obscure thing you need to buy for some reason that can only be had in perhaps one place and that needs to be purchased with another thing you needed to buy in fiat currency after signing up for a new exchange in a different place. Somewhere a no-bullshit grandpa who’s seen it all is muttering, “and I’ve got an island to sell you”. And you know what, most of the time anyway, he’s probably right.