The Current ICO Model and Its Problems

Most, if not all, of those reading are aware of the current ICO model. An ICO begins, investors send ETH to a contract until a time or investment goal has been reached, then tokens are distributed among the investors — often with the owners of the ICO keeping a sizeable percentage for themselves.

It has, of course, been made apparent that this model brings its fair share of problems to investors.

No protection for investors

A study from ICO advisory firm Statis Group revealed that more than 80 percent of all ICOs conducted in 2017 were scams. 4 percent failed, and 3 percent have since ‘gone dead’.

In fact, from a total of $11.9 billion invested in ICOs in 2017, $1.34 billion (11 percent) went to scam projects, with the majority going to Pincoin ($660 million), Arisebank ($600 million), and Savedroid ($50 million).

It’s little wonder the SEC are cracking down on ICO funding with figures like these, but interference from a centralized body cripples one of the key advantages of blockchain technology. Could there be a decentralized solution?

Increased sell pressure on ETH

Snapshot of a spreadsheet detailing a handful of ICO projects and their ETH spent within the last 30 days.

It’s undeniable that ICO projects are selling the ETH they raised in their respective token sales. Indeed there’s no reason why they shouldn’t — after all, isn’t that the entire point of an ICO, raising funds for a project?

All of these ETH sales contribute to an awful lot of sell pressure, and it stands to reason this results in a significant suppression of the price of ETH, especially when considered in conjunction with the next point.

Funds raised aren’t just in the form of ETH

ICOs are primarily token sales. Investors receive tokens in exchange for the ETH they send to the project, at a typical ratio of around 1 ETH = 1000 tokens.

The project responsible for the ICO tends to then keep a healthy percentage of the tokens being sold. In EOS’ case: in addition to the 7.12 million ETH ($4.1 billion at the time the ICO closed) raised throughout the lengthy ICO, Block.One retained 10% of all EOS tokens. That’s a further 326,000 ETH ($187 million) worth of newly minted tokens simply going by the ICO price, arguably plenty of funding for a project with no more than a whitepaper at the time.

This contributes to further sell pressure on ETH. Often the only trading pair this new token has is ETH, so investors who simply want a quick profit will trade into ETH, increasing the ratio against the token, then sell to a fiat currency (USD, EUR, GBP…), decreasing ETH’s value against the dollar. On its own this isn’t a huge problem, but combined with ICO selling of ETH for funding it amounts to substantial price suppression.

Heavy impact from exit scams

As discussed above, if an ICO results in an exit scam by the owners, investors are left out in the cold. They’ve lost 100% of their invested ETH, and have (in most cases) a valueless token in return.

Is there a way to alleviate some of these problems that doesn’t involve interference from the SEC? Without introducing some sort of governance system to monitor potential scam ICOs, it’s difficult to remove the ability for owners to walk away with investors’ ETH, but there might be a way to lessen the impact.