Blind Trust requirements
In the past years, the Ethereum network has seen the launch of numerous ICOs. This is good, but unfortunately, most ICOs still ultimately rely on investors’ blind trust. This attracts only the more risk inclined investors, while even the moderately risk adverse will rightly avoid investing in what looks like get-rich-fast schemes or even outright scams. The main issue with a classic ICO is the fact that its token is often not linked to any meaningful action in its system. Even when it is, in the overwhelming majority of cases, the investor is expected to blindly trust that the project initiators will deliver on their promises.
Risk of incorrect or manipulated reviews
The ecosystem addresses the problem of trust through a couple of websites that provide ICO reviews and assess the potential risk of investment. This solution to the problem of trust is inherently suboptimal: not only are these services highly centralized, but they are also paid for by the ICO under review. Bias? and even abuse? is very likely, even with the best of intentions.
Problems of existing crowd funding platforms
In existing platforms, the owners have ultimate control over which projects get to launch through the platform. Thus investors skip an investigation phase that would make sense before investing in a project. Their agency is thus relegated to the owners of the platform who vet projects for launching. Furthermore, some projects even create their “internal currency” token, which, in turn, comes with its own set of problems and significant risks. One of them is the requirement to mint it and sell it at will, in order to maintain a stable price, this dilutes the initial supply. Another one, is the need to rely on the platform’s success in order to find buyers for a recently funded campaign. Finally, from a security perspective, most platforms are not backed by transparent open source code. Instead, they are closed source centralized entities that use human labor for day-to-day operations. One could argue that the venture capitalists/serial entrepreneurs who own the platforms, as well as the human labor they rely on to run the closed systems, are perhaps best qualified to vet and run investment projects. However, we maintain, the problem of trust/risk remains unaddressed, insofar as such a system will be fraught with issues of competence, integrity, and natural human error.
Project delivery risk
Existing projects fail, in most cases, to provide a coherent system for linking the project to its roadmap and its tokens.
Ecosystem price damage through large dumps
A common phenomenon unaddressed by existing platforms, is that, each time a new ICO is funded, a large amount of ETH is subsequently dumped on the exchanges. This drives the token’s price down and removes value from the network.
Token supply and mechanics
In an ideal system, the collected ETH is used for covering development expenses, while owners’ remaining token supply should be seen as the main source of profits. Having a larger stake in the project incentives the owner to deliver. Owners should lock their tokens until project delivery in order to limit their ability to dilute token market value during development.
PRE ICO funding phases
In trying to emulate classic systems, the ICO pre sale has mostly missed the point, i.e., that a pre-sale is usually targeted at already existing investors, with contractual rights to buy newly created shares. Instead, in the ICO model, pre-sale has become merely a means to raise funds for marketing or logistic purposes, by offering a substantial discount to anyone who wishes to participate and undertake the initial risk. This creates the inability to refund participating investors in the case of a funding failure, and also fuels reckless investment and hoarding for the purpose of dumping at a better price once the sale period ends.