William Clarkson Stanfield, The Battle of Trafalgar (1836)

The present-day proliferation of initial coin offerings (ICOs) on the Ethereum Foundation-led ETH blockchain foreshadows an impending arrival of decentralized app-coin crowdsales on the Ethereum Classic (ETC) chain.

Cryptocurrency crowdfunding through an ICO typically spans a shorter length of time than a Kickstarter or Indiegogo initiative. Digix DAO of Singapore, for instance, raised 5.5 million USD in 12 hours to fund their asset tokenization platform on the ETH chain. The market for Ethereum app-coins is staggering, with Golem’s GNT cap valued at 80 million USD, while Augur’s REP is situated around 150 million.

Several ETH app-coin offerings have collected funds but have yet to trade on leading exchanges, such as Plutus PLU and Melonport MLN. This post-ICO stage is a particularly anxious one for startups and stakeholders alike, as capital has changed hands but the status of the product is in a state of limbo. In a recent scare, Matchpool’s co-founder abruptly resigned when funds associated with the startup’s coin offering briefly went missing.

The purpose of this publication is to caution investors against inviting themselves to be victimized, either by outright scams or ill-conceived misallocation of capital. Our stated goal is to stress due diligence and dissuade stakeholders from frittering away resources on sketchier ICOs. Remain skeptical, as a bird in the hand is worth two in the bush.

There will be app-coins on ETC

Taylor Van Orden at MyEtherWallet volunteered her time toward facilitating token delivery on ETH crowdsale campaigns, helping investors access their DGD tokens following the DigixDAO ICO. Stakeholders were allowed to upload their json file or plain text private key to the site to access the app-coins, which could then be transferred to other Ethereum wallet addresses. As the DGD crowdsale took place entirely on the blockchain, no IOUs were needed as placeholders for purchased tokens. In 2017, similarly high standards should be expected of Ethereum ICOs.

In the Ethereum space, some developers are voicing concerns regarding recent crowdsales. There exists at present no established framework for investors to assess Ethereum startups’ ICOs, along the lines of a PhD student’s being required to defend their thesis. Instead, many are launching without first setting up a Slack channel or Subreddit, participating in Ask Me Anything threads or webcasts for the benefit of prospective token holders.

Prioritizing flashy web design and paid spots on Bitcoin news outlets is commonplace. Meanwhile, vesting among founders remains a source of potential abuse, as immediate access to ICO funds can lead to controversial executive decisions and falling-out crises between co-founders. Certain crowdsales are being structured to “escape” securities or SEC regulation, in facile maneuvers that attorneys in the space warn are misguided.

At present, ETCDEV’s Igor Artamonov and Dmitry Ulanov are integrating a set of tools into their forthcoming Emerald Wallet software that could be employed by startups for launching initial coin offerings. Because Artamonov is a core developer for ETC — so designated, not because he is “hardcore,” but because he helps maintain ETC “core” clients — he declines to work directly with ICO organizers.

As one might expect, ETCDEV will not vouch for coin offerings in the same capacity as the Ethereum Foundation members who signed on as curators for the launch of The DAO crowdsale. ICO organizers may opt to use Emerald Wallet tools to deliver tokens to backers, though crowdfunding will not be the stated purpose of the software. Taking advantage of these tools for the creation of ETC decentralized apps, startups can issue offerings without ETCDEV having to involve themselves in ICOs.

Augur’s decentralized prediction market has yet to launch, already featured in Wired

Tulip Mania on the immutable chain

The Ethereum Classic Slack channel hosts discussions on future ICOs

In Nick Tomaino’s cautionary Medium post “Irrational Appcoin Exuberance,” the venture capital analyst warned that investors are currently exhibiting unrealistic expectations for cryptocurrency ICOs. He viewed the prevailing enthusiasm as being attributable to the outsized gains enjoyed by Bitcoin and Ethereum investors, leading would-be Warren Buffets to dreamily confuse developer “vision” for a reliable yardstick for profitability.

Evidently we have not learned our lesson from the DAO fiasco. There, a lack of security-mindedness on the part of Slock.it’s devs made it possible for a hacker to siphon away 50 million USD in Ether through an exploit discovered in the smart contract’s code. Slock.it spokesperson Griff Green’s apparent lack of concern following the hack was perhaps an indication of our having collectively lost touch with reality in ICO land. The Ethereum Classic community self-organized around the principle that in this field, “move fast and break things” is an attitude that invites catastrophe.

TradeBlock recently opened its ECX Index tracking the Ethereum Classic market price on leading exchanges. Digital Currency Group designated this milestone a prerequisite for the launch of their Ethereum Investment Trust, a Grayscale Investments product deriving value from ETC currency. DCG founder Barry Silbert is committed to reinvesting capital earned through the trust back into the purchase of ETC, predictably mitigating downside risk.

If stakeholders profit in a short span of time as a consequence of the launch of the Ethereum Investment Trust, some developers may choose to run their ICOs on the immutable chain, inviting the backing of the ETC nouveau riche. However, let us hasten to add that Matthew Beck in “Into the Ether,” his ETC investment thesis for Grayscale, does not cite the imminent arrival of ICOs as a justification for investing in Ethereum Classic.

To date, there have been only two crowdsales associated with the Ethereum Classic blockchain, both spearheaded by mining entrepreneur Chandler Guo. ETCWIN successfully raised 1,769 BTC to establish an exchange based in China. Guo followed up with the XBTC coin offering, which failed to reach its ambitious 12 million ETC funding goal. The crowdsale reimbursed its backers after a full month of campaigning.

Falling short of 20% of its target, the XBTC initial coin offering on the ETC chain set too high a bar and attracted hostile feedback on social media for its controversial goal of boosting miner signalling for Bitcoin Unlimited. Predictably, using Ethereum Classic crowdfunding to obstruct the objectives of Bitcoin Core turned out to be ill-advised.

Curb your ICO enthusiasm

Ethereum ICOs have been expertly executed by some, irresponsibly managed by others, and even outright hoaxes

To date, there have been two ICO hoaxes aimed at robbing ETC stakeholders of their capital. A fake startup called Unicorn claimed to be working on a prediction market for ETC, using photographs borrowed from a Johns Hopkins medical student to decorate their staff webpage. A more elaborate ruse called BorgDAO presented a whitepaper detailed enough to convince a Las Vegas conference organizer to invite the author to present at the industry event. Promising IOUs delivered by email, the BorgDAO team vanished after their crowdsale collected Bitcoins from credulous investors.

Be cautious when asked to accept vouchers delivered via email as ICO rewards. We caution stakeholders against participating in crowdsales that do not provide exhaustive evidence that their organizers are real people. Request timestamped social media histories, webcast footage, or unforgeable documentation of names and faces. If the coin vendors you are funding will not appear on camera, they might just be a BorgDAO.

“Cardano makes people all over the world smile,“ reads crowdsale advertising materials

Ethereum Classic third party developer Input Output Hong Kong participated in a crowdsale with Attain Corporation of Japan last year, serving as delivery partner for the Cardano smart contracts platform. The ICO for Cardano’s ADA coins sought to inspire confidence in prospective investors by citing in advertising materials the extraordinary returns of Ethereum — while prominently featuring images of former Ethereum CEO Charles Hoskinson, IOHK’s co-founder. A minimum purchase of $1,000 USD in Bitcoin was required of investors, while bank transfers were only accepted from Japanese citizens. Attain’s closed-door business seminars helped isolate the gathering of funds from scrutiny outside of Japan.

Ethereum market cap went 60x, cites suggestive ICO materials featuring Hoskinson

Today, $1,000 in ADA vouchers is valued at zero yen, as the coins themselves have not been issued. Zero yen provides significantly less purchasing power than the 140,ooo-yen Bitcoins the organizers collected, citing the “ETH went 60x” figure alongside Hoskinson’s prior association with the Ethereum Foundation. IOHK has since invested in hiring “community managers” to “manage” ETC stakeholders, while disengaging with their Cardano investors in Japan. The company chose not to disclose to the ETC community their contractual obligation to develop a separate smart contracts platform through 2020. Meanwhile, the manipulative fundraising practices of the coin offering have raised the ire of cryptocurrency investors in Japan.

Japanese cryptocurrency investors reacted negatively to photos from ICO business seminars participated in by IOHK co-founders Charles Hoskinson and Jeremy Wood, with Cardano Foundation chairman Michael Parsons (front row)

During a presentation at the Blockchain Startups Singapore meetup in November, Silbert stressed that ICOs did not positively inform his decision to invest in the Ethereum Classic platform. He defined store of value through monetary strategy, internet of things functionality, and smart contracts applications as investment merits of ETC. Legally questionable initial coin offerings, by contrast, he predicted could attract negative attention from the Securities and Exchange Commission. As the stated purpose of our reporting is to assist in protecting investors from predictable losses, we view backing shadier coin offerings as an irresponsible allocation of resources in the context of Digital Currency Group’s trepidatious outlook on ICOs.

Digital Currency Group does not view ICOs as justification for investing in Ethereum — Coindesk Link

Our contention here is that 1) irrational app-coin exuberance and 2) potential SEC intervention should be kept in mind by ETC investors when considering participation in a risky initial coin offering. We do not support disingenuous and manipulative crowdsale tactics, nor do we believe that we have seen the last of hoaxes like the BorgDAO. As more capital flows into ETC, the likelihood of stakeholders being victimized only increases. The worst thing we could do is allow a culture of runaway acquisitiveness to rob us of our cautionary principles.