Top 10 reasons why the ICO model failed

The first iteration of the ICO model had serious design flaws. The lack of rules, regulations, and sanity turned a great idea into a playground for scammers and fraudsters.

I’ve compiled a list of 10 reasons, in no particular order, why the ICO v1.0 is losing steam.

That doesn’t mean the token-sale concept itself will disappear. It will not. It will simply evolve and mature.

Shipwreck @ Dhoxax (via Depositphotos)

1. There is no such thing as a utility token?

If it walks like a duck and it talks like a duck. It’s a duck. The fact that people bought utility tokens, expecting to make a profit, by definition (and by law in most jurisdictions) equals all utility tokens to securities.

For a token to be a utility one had to have some form of a token economy, proving how the token would be used inside an ecosystem. In most cases those token economies were built on untested and unproven assumptions, without even having products, let alone users or customers. White papers described thriving token-economies, which promised growing demand for tokens, which in turn would result in dramatic price increases, turning the investment very lucrative. The fact that profit was expected proved beyond a reasonable doubt that utility tokens were in fact securities.

Most utility tokens described in ICO’s are in fact securities.

Rene Magritte

2. Utility tokens, without a utility, have zero intrinsic value and are fully dependent on trader signals

Since most ICO’s raised funds without having a product or actual users (or customers) there was no real utility for the issued tokens after the ICO.

The only utility of most utility tokens is buying and selling. #futilitytoken

The absence of a real token-economy resulted in a zero demand for the token as a utility, making the whole demand, and by design the price, fully dependant on traders.

Copyright KAL

3. Zero control, zero governance and zero accountability

Apart from the utility, defined in the white paper, utility tokens didn’t have any rights attached to them. Companies, which issued the tokens, can do with the raised funds whatever they wanted to do. This obviously resulted in abuses.

Some started traveling the world, giving keynotes here and there, paying a lot for this privilege and on top of that flying first or business, and staying at luxury hotels. All paid by the token sale and without actually building anything of value.

Some considered the ICO as an equity-free grant from the crypto-community and just ignored the token-holders completely.

4. Too much capital, too early

To build a successful startup you have to go through an iterative process, nailing the product-market fit, finding your ideal customers, creating a product people love and are prepared to pay for, and then finding the best distribution channels to fuel growth. There are no shortcuts.

Having little capital early on forces startups to be very creative and come up with disruptive innovations.

When a startup has tens of millions of dollars, they are able to hide serious mistakes by throwing money at it, which essentially will keep the project from reaching its true potential or keep failed startups alive, in a zombie-state, as long as there is money.

ilolab (via Depositphotos)

5. Paid “Fake News” reporting by CryptoMedia

Crypto-media made a killing during the ICO-era. The majority allowed paid interviews and articles to appear as journalistic content, attaching a false sense of credibility and trust to ICO’s, which didn’t deserve it.

6. Advisors-for-pay

A whole class of advisors-for-pay appeared. Some even openly communicated their fee for lending their name and face to an ICO. Most of those paid “advisors” work at ICO-ratings sites, guaranteeing a high rating if you paid them enough.

This approach favored the most fraudulent ICO’s to become “popular” and raise huge rounds. After the ICO was over, these advisors tended to cash out immediately.

7. Bounty Hunters

In some cases, bounties do have a value, for example rewarding people with tokens for translating white papers and content.

But rewarding people for posting super-positive paid content about a specific ICO on social networks is far from a fair practice. It creates an army of yes-men who blatantly copy the ICO’s narrative as their own. They are attaching a false sense of signaling, investor and community interest and trust.

8. Discounts and timers created a false sense of urgency

Every ICO had a constant timer and discounts, which constantly were ending. Apart from the fact that huge discounts devalued the ICO’s perception a lot of people were drawn in this way. It’s human nature to be attracted by huge “Groupon” discounts.

9. Industry-level troll-farms to create fake signaling and fake vanity metrics on Bitcointalk, Reddit and Telegram

ICO’s hired troll-farms, which continuously upvoted and commented to posts on Bitcointalk and Reddit, keeping the ICO top of mind.

Telegram groups went from a few hundred users to tens of thousands overnight, by adding fake accounts, creating a fake sense of community interest, driving up the trust of the ICO even further. Lots of investors considered the amount of activity as a reason for buying tokens.

10. Inequality between Equity- and Token-investors

And last, but not least, there is an unfair inequality between an investor who invested in the equity of the company, which issued the tokens, versus investors, who bought those tokens.

In most cases, the ICO brought in a lot more capital than the capital raised in exchange for equity. But where equity investors actually have a piece of the company, access to company information and the ability to keep the founders in check, token holders have no such powers.

Conclusion

Although the concept of the ICO made raising crypto-capital easier, the lack of ground-rules, control, governance and common sense it opened up the floodgates to abuse.

That doesn’t mean that the concept of investing in startups via tokens is totally dead. It does mean that we need to add sanity to the process.