The term “scam” has been around in the cryptocurrency space ever since the birth of Bitcoin. It is getting more and more attention these days, due to the collapse of BitConnect and emergence of myriad fishy ICOs. People are now desperate for reliable measures to evaluate the legitimacy of cryptocurrency projects. Currently most projects have no real, working products. No one can predict the future of these projects. It’s a risky affair to invest money in them to begin with. But this is more so, when get-rich-quick scammers are trying to exploit the space. Therefore, it’s a healthy, necessary thing for more informed people to raise an awareness about the widespread scam practice and provide people with proper ways to detect scam projects.

As with anything, however, a standard of judgment significantly differs from person to person. So it is with cryptocurrency, more so for reasons particular to it. And there are certain parties that are taking advantage of the lack of the established standard of judgment. Given that the prices of cryptocurrency can be sensitive to news, some people attack a certain coin by spreading negative or fake information about it. Instead of educating the public with investment and technological knowledge, those “scam hunters” have created a state that is analogous to the witch-hunt practice, which was prevalent in America and Europe in the 15th-19th centuries. Just like back then, those scam hunters in the cryptocurrency space are going around and persecuting projects based on rumors, biases and self-interests.

This is toxic. Although some projects might be rightly persecuted, too many innocent projects are falling prey to the scam-hunt that is a scam itself. To diagnose the state of the scam-hunt, we now turn to a recent incident quite exemplary of such practice in the cryptocurrency space. We hope to provide you with an insight into the widespread , malicious scam-hunt practice, so that you can protect yourself and your favorite projects from being attacked by scammy “scam-hunters.”

“TNW: Skycoin is a scam. We’re sure of it. 99%”

Bryan Clark’s article on TNW (March 8, 2018)

In February and March 2018, Tristan Greene and Bryan Clark from The Next Web published two articles denouncing a cryptocurrency/blockchain project, Skycoin. After Greene’s article — “Skycoin: An Anatomy of Cryptocurrency Scam,” Clark’s followed — “Exclusive: We suspected this shady cryptocurrency project was a scam. Now we’re sure of it.“ (Skycoin is a cryptocurrency project that is building a decentralized, surveillance free and reliable internet of the next generation. It’s currently ranked around 120 in CoinMarketCap). It was rather puzzling that Greene and Clark were relentlessly attacking this minor cryptocurrency project as a scam, more surprisingly, twice in a relatively short period of time. And they’re sure of it, 99%. That’s a quite bold statement, to say the least. After reading their articles, though, I found a couple of problems with their arguments, which raised a suspicion of Greene and Clark waging a malicious scam-hunt against Skycoin.

Before we delve deep into the details of Greene’s and Clark’s articles, we need to understand what people mean by “scam” in the cryptocurrency space. Here is the list of attributes usually ascribed to a cryptocurrency scam.

No working product or technology No proper development team No legitimate technical description (aka whitepaper) No sound business model

Note that each in itself, or combined, does not make a project a scam. It is a scam only when that project is being intentionally designed in a way that is likely to bring monetary gain to its inventors while causing monetary loss to its investors. A scam here can be defined as an act of manipulation by taking advantage of an information gap between inventors and investors, regarding the four elements listed above. It is usually easy to see such gap in other fields. However, since cryptocurrency is heavily reliant on the esoteric language of computer science and cryptography, the information gap is easily concealed by extensive marketing and manipulation of information. The most crucial, deciding factor of a scam project as such is this intentional manipulation and exploitation of the information gap for the sake of monetary gain on the side of inventors.

Now that we have a shared understanding of what “scam” means, let us turn to the problematic articles on TNW. To give you an idea, the gist of Greene’s and Clark’s articles is that Skycoin is trying to make money by selling useless miners and dump SKY that devs hold when the price soars. More specifically, they criticized Skycoin as a scam on the basis that:

Pre-mined cryptocurrency is a scam

“Skycoin is 100 percent pre-mined”

2. Technical description (aka whitepaper) they cannot understand is a scam

“It’s impossible to know what kind of algorithms they’re using, and the whole white paper itself is about blockchain consensus algorithms.”

3. Hardware node whose function and value they cannot understand is a scam

“You’re being sold a device called a miner to work with a coin that’s already been mined.” “If you’re willing to spend about $10,000 (at the time of this writing) in bitcoin to get a cobbled-together Orange-Pi cryptocurrency miner (that isn’t for mining) you should probably demand a clear and concise explanation of how this is going to make you money.”

4. Lack of transparency of the organizational structure is a scam

For a company that tries to cover its tracks by claiming Stephenson was never affiliated with the company, nor was he its COO, SKY didn’t exactly bother to cover up evidence proving otherwise

“Anatomy of a cryptocurrency scam-hunt”

Now, let’s begin an operation of the scam-hunt waged against Skycoin. Since Skycoin did most of technical stuff in their response, I will focus on the non-technical side, which Greene and Clark actually prefer to stay in (rather odd for tech writers, I thought writing about/deciphering tech was their job).

Pre-mined cryptocurrency is a scam

“Skycoin is 100 percent pre-mined”

The first and second points can be easily dismissed. For example, would they say Ripple is a scam, because it is 100% pre-mined? Are all the ERC20 tokens also scam, just because they are pre-mined? Without understanding a specific architecture and distribution plan of each pre-mined coin, it is simply absurd to base scam judgement on being pre-mined. Skycoin kindly offered a detailed explanation for this in their response to Greene’s article. It also explains much of the third point (hardware node) as well.

Despite the team’s effort, though, the article was completely ignored in the following article by Clark. Clark did not comment on any technical side that was pointed out by Greene, which was then refuted and explained by Skycoin in its response. Clark went ahead and criticized a different side of the project. (One cannot help but ask — is this a fair stance to take against a project you so confidently deemed as a scam? Shouldn’t you pay more attention to what the other side has to say, which is valid seen from a third person’s point of view?)

2. Technical description (aka whitepaper) they cannot understand is a scam

“It’s impossible to know what kind of algorithms they’re using, and the whole white paper itself is about blockchain consensus algorithms.”

The second point doesn’t require much explanation. It is obvious from their articles that Greene and Clark did not understand Skycoin’s whitepapers. Or they did not try to do so in the first place. Moreover, the fact is that they are far from being experts in computer science and cryptography. Even a blogger cited in Greene’s article to back up his view did not critically engage with the whitepapers at all, and the blogger’s qualification to judge cryptography and computer science is questionable. A novice’s lack of capability to understand papers written for experts can never be seen as a signal that that project is a scam. If you couldn’t understand it, that’s not the project’s fault, but simply your own. And there are myriads of cryptocurrency projects out there whose technology and whitepapers most non-experts won’t understand. So are they all scam? Not likely.

3. Hardware node whose value and function they cannot understand is a scam

“You’re being sold a device called a miner to work with a coin that’s already been mined.”

The third point requires us to pay more attention. After all, this is where Clark and Greene emphasize the most to criticize Skycoin as a scam. Again, you can find the technical details here (neither Greene nor Clark seemed to have read it). In any case, the punchline of Greene’s article is the following:

“If you’re willing to spend about $10,000 (at the time of this writing) in bitcoin to get a cobbled-together Orange-Pi cryptocurrency miner (that isn’t for mining) you should probably demand a clear and concise explanation of how this is going to make you money” “When you sell someone a $600 cryptocurrency miner that isn’t for mining and only works on a network that doesn’t exist, and you charge them $10,000 for it — it looks like you’re peddling snake oil.”

If this is the case, Skycoin could well be categorized as a scam for meeting the deciding factor described above — “[an act of] intentional manipulation and exploitation of the information gap for the sake of monetary gain on the side of inventors.” Once again, though, upon a closer inspection, we learn that this point can be easily refuted as well.

Skycoin’s miner, Skyminer, costed 1BTC and a purchaser received a hardware and rebate in SKY worth about 0.95BTC (the 1st and 2nd batch’s shipment). Greene and Clark acknowledge this, yet one important point they are missing is that, this SKY rebate came at a discount. For instance, the first batch miners received SKY rebate far below the market rate then (0.0019 when the market rate was about 0.003. UPDATE: for the later purchasers it was 0.0021 when the market rate was slightly higher than that). There was no lock up period — they just had to wait for a few days until they received their rebate SKY, and could do whatever they wanted to do with it. According to the team, it was meant to incentivize early joiners of the network (in addition to the network reward they would be receiving when the test net is launched).

How to “make money” from this? What an easy game, just purchase a miner and take arbitrage. There was no lock up period for this rebate. Two or three days after their payment, they were able to make profits from immediately selling their rebate SKY at the market rate. That could be already +50% gain for the early purchases of the first batch. How could this be Skycoin’s scheme to scam people by selling miners and make money? That’s just far from true to anyone’s eyes (Clark’s claim that Skycoin was propping up the market prices by this rebate is also wrong. It was OTC trading at a discount rate, which does not prop up the market prices, rather the opposite). Great for those buyers — they’ve already made some profits, and now they’re about to make more from joining the network of nodes. Even for the later purchasers who got rebate at a smaller discount, they could just sell SKY and get back 1BTC or slightly less.

So this is basically same as buying SKY by OTC (over the counter trading) and there is nothing special about it (far from being a scam). At this point, we see that whether/how much miners earn is no longer relevant to Skycoin being a scam or not, because purchasing Skyminer is just another form of OTC with a gift box full of Orange-Pis and electronic parts that could potentially make you more money. The Skycoin team could not have been more generous.

A rather trivial point now (because their criticism on Skyminer being a fish bait is now refuted)is the role of these miners in Skycoin’s network. There is no space to explain all that in this article, but it’s pretty easy to find what they have in store moving forward, if you do a bit of research yourself. You can go ahead and check here and there. I’m rather surprised that Greene and Clark didn’t look into these resources. They limited their sources of information to one interview and one email (plus, a few minutes of the website browsing & whitepaper skimming). Besides the point, but how could this be an attitude of “journalists shoulder[ing] a bit more of the responsibility for informing the public”? (Bryan Clark himself writes in “What the NY Times got wrong about Bitcoin”) I hope they didn’t omit these sources of information intentionally. Am I too naive in hoping so though?

4. Lack of transparency of the organizational structure is a scam

For a company that tries to cover its tracks by claiming Stephenson was never affiliated with the company, nor was he its COO, SKY didn’t exactly bother to cover up evidence proving otherwise

Last but not least, the forth point is an interesting one. Here, for the first time, Clark seems to be winning over Skycoin. After Skycoin published a response to Greene’s article, one of Skycoin’s founders Synth emailed TNW that “COO” Bradford Stephens interviewed by Greene actually never worked for Skycoin. As rebutted by Clark, this did not make sense, because evidences that proved otherwise could be found all over the Internet, including Twitter, Medium and Telegram.

However, upon a closer inspection, there is a possibility that Synth is not lying after all. Due to the decentralized form of the organization, Skycoin does not and did not operate as a corporation nor foundation. Synth could have been honest in saying that they did not have a contract that assigned Stephens the role of COO. Skycoin’s claim is that they outsourced its marketing tasks to a marketing agency led by Stephens, including control over twitter and medium accounts. From there, Stephens went out of Skycoin’s control, calling himself a COO, posting that title all over the Internet and so on. Since the media side of Skycoin was completely overtaken by Stephens, Synth could not intervene with the process. Until Stephens got fired a few weeks after the publication of Greene’s article. Or so it goes, as I gathered from Skycoin’s Telegram.

What could we conclude from the forth point? Clark is right in criticizing the lack of transparency with regard to Skycoin’s organizational structure. I agree that there is a lot of room for improvement in that respect. However, does that count as a signal for a scam project? If we go back to our definition of “scam” described earlier in this article, “it is a scam only when/if that project is being intentionally designed in such a way that is likely to bring monetary gain to its inventors while causing monetary loss to its investors.” Following this line of reasoning, the transparency problem that the organization seems/seemed to be suffering from is irrelevant to Skycoin being a scam or not. It is simply one of the business weaknesses they are/were having, rather than signaling a red frag as a scam. Clark’s article is entirely based on the COO and organizational structure problem, and therefore it’s reliant on a wrong evidence to judge the likelihood of Skycoin being a scam project.

“The scam-hunt may be here to stay, but…”

See page for author [Public domain], via Wikimedia Commons

All in all, Greene and Clark did not offer convincing arguments that Skycoin is a scam project. Rather, based on our analysis, Skycoin is merely falling prey to the malicious scam-hunt. The four points that Clark and Greene offer in their criticism are all too easily rebutted. The fact that Clark intentionally omitted Skycoin’s response to Greene’s article and other details raises a red frag that Greene and Clark were conducting one malicious scam-hunt against Skycoin. We can be sure of it (I wouldn’t say “99%” though, like Greene and Clark did).

But, the main point here is not to say that Skycoin will succeed in the future. That depends on the team’s effort, talent and, ultimately, luck. One sure thing is that it is not right to label a project like Skycoin as a scam. The term “scam” is a deliberate one that must be used with care and research. Otherwise, we will end up contributing to this scam-hunt frenzy, which is counterproductive and destructive for the future of the blockchain and cryptocurrency industry.

Lastly, a few words about media today. The current state of “journalism” like this doesn’t seem very healthy. News articles are rapidly produced one after another without care for quality. Instead of quality, it cares about quantity — whatever stirs the public the most is good. But we cannot blame “journalists.” It’s a structural problem. They cannot afford to care for quality, not to mention truths. As more and more attractive mediums are created, traditional media platforms are losing traffic to their competitors. So they are now desperate to generate traffic by taking any means possible. One way is to manipulate a set of negative human emotions — fear, uncertainty and doubt. The scam-hunt is one extreme case of that.

Over time, crypto projects will slowly start producing real world results, and the scam-hunt shall fade away. Until then, though, we need to equip ourselves against scam-hunters, so that we can continue to support meaningful projects that are falling prey to the scam-hunt. Last but not least, dear our journalists, please don’t be fooled by money and the masses, remember to “shoulder a bit more of the responsibility for informing the public.” (Once again, Bryan Clark writes in “What the NY Times got wrong about Bitcoin”)

Disclaimer: I do not own Skycoin at the time of this writing, but I own Bitcoin. I decided to write this article, primarily not to defend Skycoin, but to criticize the practice of the scam-hunt and its nasty influence in the cryptocurrency space. A deeper reason comes from my frustration with today’s journalism and media. This is my first Medium article. Any feedback will be appreciated. English is my second language.

©2018 LUKE SOME RIGHTS RESERVED