Although there are hundreds of “blockchain” scams promoting themselves at any given moment, you are not likely to be bothered — they mostly exist outside of the crypto ‘echo-chamber’, targeting get-rich-quick and binary-option type of people.
However, you are sure to see a lot of quasi-scams — projects where founders are not planning to disappear with the money but are not really committed to bringing the product to the market either. Instead, they will collect the money and keep pretending to develop the product for years, simultaneously cooking their next ICOs.
Here is an incomplete list of red flags: too many ads, voting bots (you should feel some bias in comments), multilingual websites, more than four social channels, expensive explanatory videos, pop-up support chat windows, an address in London or Moscow, many advisors, “replacement” or “disruption” promises in slogans, fluffy diagrams for the roadmap and the use of proceeds, involvement of irrelevant celebrities and “important people”.
No Relaxed Compliancy
A maniacally thorough compliance has become a must. Most cryptos do pass the Howey test. There is a ~100% probability that authorities of all countries with financial markets worth mentioning will step in and delist most tokens on exchanges on their territories. Distributed trading is most likely to arrive too late. This very serious issue is not yet fully incorporated in the current level of prices. It really makes sense to stay away from ICOs without a completely paranoid legal set-up in Switzerland, Singapore, Mauritius (once/if it is ready), or other regulation sandboxes for crypto assets.
No Overfunded Snobs
There’s no problem in finding the few “best” assets at any moment — due diligence newsletters and reviews from the best ICO trackers will do the job. The problem is that many such ‘loud’ tokens are extremely hard for mere mortals to purchase at an early enough stage, when it is yet a reasonable deal. You don’t want to waste time and efforts on guys who will almost certainly accumulate too much money. Overfunded projects is a fresh phenomenon, so we don’t know how bad it is. Common sense tells us it’s a pretty limiting factor in the long run — relaxed people never deliver. Max caps they designate these days aren’t helpful, and most of them are way too high anyway. One exception from this rule is if you see a project with a minimum target set close to maximum cap. For instance, devs will only work if they collect in the range from 25 to 30 million USD. It this case, founders know exactly what they want and what they can expect. However, in most cases, you will see something like “3 to 30 million” meaning devs don’t have a real action plan.
No Stretched Emission
Cryptos are supposed to be “anti-fiat”. The rate of new token issuance and investor dilution should very quickly go down over time. Many decent projects have abused the parameter lately. Just to be on the safe side, I would avoid ICOs where founders keep over 20–25% of entire emission in any “safely vested form” — otherwise, that makes the token a sort of fiat.
Bad Cells on the Technology Stack Layers Map
Decentralised world as mapped by A. Lange
A pruritic feeling is developing that the entire decentralisation trend is strayed because of the ICO frenzy. For example, investing in tokens that are backed up by Ethereum celebrities has become one of those cases where you have to approve the broad principle of an idea (to remain politically correct and socially accepted), but can’t help being in a bit of an abhorrence at the prospect of putting it into practical effect. Much the same thing had bothered Hamlet.
Some areas of activity are just not compatible with the ICO concept and need to be filtered out from the map. The crypto space can be segmented in various meaningful ways, but I personally like A. Lange’s four-sectors visualisation:
- Protocols and infrastructure
- Middleware and devtech
- Capital and liquidity
- Applications
Protocols and Infrastructure Layer
Private Blockchains
To me, these two words are an oxymoron and the idea is wrong. This does not mean an investment into such privately controlled organisations can not be profitable. The world is full of long-functioning false concepts. The important notion about investing into private blockchains is the consistency and fairness of the offer: “We are building something behind closed doors and invite you to participate and benefit in return to some investment”. That sounds normal. The technology sector is booming. It will take corporate leaders years to figure out they are wasting money on new intranet. So, it’s a good middle-term investment.
This is not the case for ICOs of public infrastructure projects.
No Public Infrastructure
There’s a bunch of projects that try to sell you the idea to invest into “public protocols” or “underlying infrastructures”. You might hear them marketed as “reinvention of Internet”, “self-updating meta-blockchain”, “bedrock of a *** industry”, and the like. Many such projects demonstrate good scientific backgrounds. Not too rarely are they presented by star teams.
However, the very fact that tokens are for sale suggests the products won’t fly. I don’t know how Nature does that, but not a single broadly adopted low-level infrastructure on Earth (like IP) has ever been for sale in any form. No ‘founding team’ has any [open and legal] dominating influence on any important global network. No group of beneficiaries perform any ‘healthy market-making’ on any essential framework. In traditional sense, a project should either be a straightforward for-profit endeavor with a limited intellectual property disclosure or, otherwise, easily accessible and co-developed by the entirety of humanity. Public platform-level projects which run ICOs are neither fish nor fowl.
Even if some random ‘devs’ manage to collect enough contributions and build the product, why should we trust particular individuals and hand them the management of an infrastructure? They did not manage to mysteriously detach themselves [like Satoshi did] to prove their exceptionality. Neither did they manage to deliver the product on their own [as Linus did]. They are merely a group of living, active, possibly greedy beneficiaries, the very presence of whom around the project kills much of its decentralisation and ‘trustlessness’ flavour.
Capital and Liquidity Layer
No Crypto Funds / Asset Management
ICOs for asset management are probably the most anecdotic thing in the entire crypto space. A fund collects investors’ money, unites the resources, scales the skills and abilities, and buys various assets. A unit of a fund is a portion of those assets. Period. There’s absolutely no room for any pre-paid token anywhere in the scheme. It cannot represent anything but a share in an asset management company itself. Such company can’t be worth much because the market is very young and there’s no possibility to already have a long track record to support the brand. The value of a new asset management company with no track record and no assets under management is principally zero.
Thus, you should not pay any price for a newly emitted token of such company, that’s just ridiculous. If you pay something, 100% of that money has to go into buying assets on your behalf. It’s fine if after a year or a quarter of managing your assets the fund charges you some management and success fees, but on day one they must not spend a cent of your money on anything else but buying assets. That is obviously not how crypto funds’ ICOs behave.
Exchanges and Wallets
This may be a good investment, but it would be much better to do in the traditional way: buying equity of the company. There’s nothing a token can do for an exchange or wallet business besides being a voting share of a DAO (distributed autonomous organization). No DAOs with serious infrastructure on the background are in operation to date. You don’t want to pay for the tests of the concept which has great chances to face regulatory resistance.
Analysis and Research
In this segment, everything depends on a particular project. You may come across a promising business plan and a fair token setup. This segment is worth specific attention during the current market boom times.
Validate Competitiveness in Crypto-specific Terms
Apps and middleware are the main pools for selecting good ICOs for your portfolio. Due diligence of the team and the code might be time consuming, but it is always doable. Validation of the business plan is extremely hard, though. There are new factors in the crypto space that are not present in the “normal” startup world. They make assessments very non-trivial. To name just a few:
Is the industry sector likely to have a free alternative DApp with no limitations of an “access token”?
Access tokens are merely a form of fees (through artificial market restrictions); the fancy “inner economy” setup doesn’t take a modicum of the mercantilism out of the concept. The underlying business model has to stay competitive, including price aspect. What applications will still be relevant considering that the crypto/decentralization movement changes the fabric of markets and provokes tectonic shifts in the demand structure? As pseudo-p2p services (Uber, Airbnb, etc.) turn into true p2p, which ones will we still pay for and which ones will become essentially free?
An important example here is pirate torrents — for decades they serve well to the large chunk of the world with more broken law enforcement. With decentralised tech, the geography of unlawful apps will only grow. So, if you sense a next “torrent” to threaten the considered project, you better skip it.
Will there be an enthusiastic social driving force behind the project?
Although everybody is talking about cryptos now, it doesn’t release DApps from the inconvenient status of opposition to incumbent institutions. It is not easy for a crypto product to find its position in the competitive and regulatory landscapes. Add here that blockchain-based app are generally slower and they also may be comparatively inconvenient for unprepared users. Something has to counterpose that downward competitive pressure. It takes some extraordinary market force for a crypto app to stay alive, as libertarian and anarchist forces helped Bitcoin during the early days.
That sort of support may take many forms. For example, small businesses can be considered as the people (the “nation”) where individuals are oppressed not by central banks and not with worthless inflationary currency, but by banks with inaccessibility to credit. So a project that may solve this “yet another libertarian task” might be a great investment if its marketers find ways to deliver the message.
Most of the shrewd conversations on the sidelines of crypto economy conferences have long ago pushed the libertarian narrative off the trend and fashion. These days, the crypto market capitalization is mostly driven by the ‘general understanding’ that Web 3.0 is good for our economy and society health, while the passionate movement of the early days of Bitcoin is almost forgotten.
But no matter how pompous this may sound, every smug blockchain-agnostic fellow still owns his great chance to work on the post-ICO well-funded project to the same few percent of our folks who were revolutionary-minded and anarcho-libertarian enough to cherish the hope through the tough times back in 2009–2013. So I see a team condemning banks for monopolising the loan business and building a platform for SMEs to get financed through some sort of blockchain factoring. I vote for them. That might really work.
Does a DApp address a deep and basic need so it can hope to survive the intense evolution chopper for long enough?
Every adequately populated industry sector has shown much resemblance to the biosphere development. The fundamentally new aspect in this analogy in the case of the crypto is the presence of something that is very much akin to the DNA itself. In the context of DApps, the expression “DNA of the industry” is not just a salable nonsense of marketing windbags any longer — we are observing some actual heritable mega-Code cooking up. The software is really evolving, inheriting the best parts from project to project, and it really is stored in each and every living cell (node).
Because of the actual alive Code, the crypto Evolution is especially evil. It is much more intense than evolutions in incumbent industries. No evolution implies to favor any specific user class or achieve any specific goals at all. But as time in crypto goes on faster than outside, the Code uses a lot of new fuel for its self-improvement — new DApps, with their users and developers meekly contributing on the background. Without that excessive fuel of living organisms — new projects — the Code would fall apart under constant attacks of competing incumbent technology paradigms and old business traditions. The conditions of the exceptionally hostile environment forced the Code to surround itself with this living protective armor. This armor is constantly crumbling — single projects come and go. DApps and numerous founders’ entrepreneurship destinies emerge and perish so that the Code lives on.
The abstract Code is primal. The analogy with the bio evolution reminds us of countless species and organisms that have ascended and disappeared, while the Code lives on, with 4/5 of it being identical for all organisms, from lichens to humans. How do we manage to pick the right crocodile species among all reptiles or shark among all fishes, when we are still in the Ordovician Period?
One strong guideline is to stick to basic business and human needs. The crypto community often mocks projects that aim to decentralize some “irrelevant” business sectors, implying that blockchain is for new and innovative fields. It is not.
What will happen to the app (and your investment in its tokens) when/if the hosting platform declines/collapses?
Considering that we don’t know what platforms will survive and what platforms will gain significant market shares (for example, Bitcoin will survive but may never be a popular host, despite RSK and similar concepts), what qualities should an application have now to survive platform-to-platform porting and constitute a solid investment? What type of applications will be relevant and socially supported enough so that the token price will not be drowned by the decline of a hosting platform?
An easy, recluse-type solution is to buy assets based on Lykke or similar marketplaces, but that way you cut yourself off from 99% of the current ICO market. The practical way to filter is to consider the level of platform dependence. For example, many Ethereum tokens are just some kind of placeholders, they don’t really utilize Ethereum and can easily be ported through some burn-and-birth procedure. The weaker the “emotional correlation” of the considered token with a platform the better. This consideration pretty much kills such investment intentions as Consensys-supported ICOs.
In Search of the Heirs of the Genius Code
The universal property of evolutions — the discussed crypto one is no exception — is to have a negative gradient of constructive perfection in time. Many people believe that biological evolution works with ever-improving results. For example, algae has comparatively simple construction and, therefore, is “primitive”, while seagull is complex and beautiful. In reality, however, ancient algae is a much better solution in all dimensions — technologically, energetically, and even informationally. Algae introduces photons directly into the molecules of its body, transforming the shower of cosmic energy into life. It will exist as long as the Sun exists. It eats a star, while a seagull eats a yawning fish. It’s a fish parasite. Countless monstrous pyramids of parasitism on Earth consist of a constantly changing parade of doomed species that have lost the connection with their Sun.
The evolution was forced to be a genius and perform this huge leap at that historical phase when the only food was the star radiation. We simply do not see the rest of the unsuccessful crowd. It’s gone. Similarly, Bitcoin wasn’t alone in 2000s. The website devoted to community and other non-fiat currencies had a collection of functioning alternative monies with over three hundred entries. Some significant cities, like Calgary, had their own currency. Of course, technically most of them were usual databases, but not all. For example, there were hardware solutions using mesh networking based on wireless chips you have in your bicycle speedometer.
If the bio evolution served to progress life, not the ‘code’, the seagull would have long ago turned into a fields-manipulating gravi-flyer. However, it is still a mechanical glider with pumps and peristaltic conveyors. The quantum exchange has been replaced by the poor hydrodynamics of blood circulation. As a result, the cost of scaling transition is a degradation from a genius molecule handling ecosystem to an organism that, despite all the richness of its regulatory dynamics, dies from the blockage of a single arterial tube. We can observe a similar situation now in the blockchain space. Technically, it’s already a complete mess with dozens of layers and thousands of patches. More importantly, it will remain like that. And even more importantly, it is perfectly natural.
The evolution of cryptosystems, in its very beginning, has found all the necessary technology, human motives, and even the right public language (“Bitcoin had no or wrong PR” is a myth, it had very specific, correctly targeted, and careful enough PR instead). It was a “molecular genius” who, with laconic mastery, has transformed the hollow public discontent with the policy of quantitative easings into the real monetary system of a new type. But later, the Evolution, for years, has mired in the obsessive muttering. The masterpieces of first ‘nucleotides’ of original Bitcoin gave way to intricate ‘chromosome’ phrases of various muddy projects none of which has brought any comparable results. From the vertex achievements of the system where each byte was counted and each process harmonized, the Evolution has deteriorated to the sloppy solutions of the hundreds of projects in the ICO parade.
On its third year of existence, the ICO space has already become extremely contaminated. It started to threaten the entire decentralization movement. We are walking not very far from the cliff of compromising everything including the great achievements of early Bitcoin. To prevent throwing out the child along with the water, the ultimate goal of a serious ICO investor should be to invest efforts and support into valuable “mutations”, letting them to break out from piles of genetic trash.