I’ve worked in the crowdfunding space since 2011. I got involved because I believed in crowdfunding and its ideals. I wanted a more democratic kind of capitalism, where the little guys had the power to bring new products to market. It’s the same reason I’m involved in Ethereum now.

Over the years, I worked on thousands of Kickstarter campaigns. I founded Russians on Kickstarter, the biggest community of crowdfunding enthusiasts in the Russian-speaking world. I was involved in founding and organizing Crowdcult, one of the leading crowdfunding conferences. I know the space inside and out.

I see the same shiny optimism now in the Ethereum community as was in the crowdfunding community around 2011–2012. But the more I saw inside the crowdfunding world, the more I understood that reality didn’t always match the vision. Let’s look at some examples of crowdfunding gone wrong:

In 2011, Hanfree ran a campaign that raised $35,000 to develop a long iPad stand, and when they realized it costs wayyyy more than that to develop a product, went broke and deleted their contact details, leaving a litter of lawsuits.

The Doom That Came To Atlantic City was a boardgame that raised over $122,000 on Kickstarter, the bulk of it from people who paid $75 for a pre-order of the game, and waited for it to be developed and delivered. And waited. And waited. When a backer raised a lawsuit, the attorney general of Washington ruled that the project leader Erik Chevalier had pocketed the money.

The worst Kickstarter disaster of all was Coolest. This smashed Kickstarter records, raising over $13 million in July 2014, with about 60,000 backers pre-ordering the cooler for $185. The campaign said the coolers would start being delivered around Feb 2015. Around August 2015, backers are getting mad, coolers are being sold on Amazon for $500, and in spring of 2016 the project says it the record-breaking $13 million wasn’t enough, that it needs $15 million more, and that the people who’d already paid $185 for the cooler could pay an extra $97 for ‘expedited’ shipping if they wanted their product. (‘Expedited’ in this context means ‘more than a year late’.) Unsurprisingly, the law had to get involved here too.

Anyone can launch a crowdfunding campaign, offering anything from a tin whistle to a time machine, and post it online. They don’t need professional qualifications, they don’t need proof of competence, they don’t even need a product. They just need videos, pictures, and text.

While crowdfunding 1.0 did launch some cool and successful projects, like the Pebble smartwatch, it’s inevitable that such an unregulated marketplace has a large share of charlatans and bunglers. And when a project fails, Billy Backer has no recourse, unless he takes the campaign creator to court, which is out of the reach of most people, either because of their financial means or because they’re located in a different jurisdiction.

Can you guess yet why I’m talking about this in the context of cryptocurrencies?

As I write this, the EOS crowdsale is in progress. They have sold 20% of their coin supply for $180 million, meaning they think their product is worth $900 million, more than the national budget of some countries. There’s one problem with their product: it doesn’t exist yet.

Last month alone, ICOs on Ethereum raised over $300 million. A lot of people — competent, incompetent, honest, dishonest — look like this right now:

ICOs share the same dangerous features as first-generation crowdfunding platforms like Kickstarter: they offer no protection to the backers, and no recourse when promises turn out to be empty.

Some ICOs are pure junk, pure scams. But even if the team behind an ICO has good intentions, the game theory of the ICO world is wrong. The incentive is to host a successful ICO, not to deliver a successful product.

They get paid before they deliver anything. If you hire a guy to paint your house, you don’t pay him before he delivers. ICOs have the same problem: paying up front, no accountability. And holding a successful ICO or Kickstarter campaign requires a different skillset from engineering a good blockchain product. The skillset of fundraising is about converting hype/overexcitement/speculation into dollars.

It’s great to be excited about more democratic, crowdsourced ways of doing business. I’m excited too. But no amount of excitement can replace a decent economic model. And a decent economic model is one that protects the customer.

I’m not saying this to insult Ethereum. The problem isn’t with Ethereum or blockchain technology; it’s with the economic model of ICOs. And Ethereum excels at fixing broken economic models. I actually believe Ethereum, if used intelligently, can solve the dangers of crowdfunding, by tokenization and/or equity. I’ll be exploring that in following articles.