Dissecting Plutus’ Orbit

I spent this morning looking into a new ICO (Initial Coin Offering) being offered by Plutus.it. As of writing this piece, Plutus had already raised $428,959.52.

Let’s start with the ‘problem’ the Plutus team identified:

“Not enough merchants accept bitcoin. That’s the crux of the problem, right? Most merchants have been slow to get on board making it difficult for daily use.”

That is like saying there aren’t enough trees because people aren’t buying axes.

People who already own Bitcoin do not use it for their consumer spending.

Bitcoin has turned into a speculative commodity and financial safe haven (especially in countries with weak or restrictive currencies). It is not a replacement for credit cards. Plenty of merchants are already accepting Bitcoin online, and not enough Bitcoiners are shopping at them.

In fact, if anything, 2016 was the year that general merchants started turning off Bitcoin acceptance due to lack of volume.

Credit cards aren’t broken. Consumers like them, know how to use them, and have no reason to switch away from them. There are only extremely specific segments of eCommerce where Bitcoin is a good fit.

If they had a reason to switch, they’d move to ApplePay/AndroidPay or any of the dozen consumer facing startups trying to ‘kill’ credit cards (good luck boys!)

Moving past that, let’s look at the rest of the features of Plutus:

From Plutus’ whitepaper
  • Decentralized exchange (that isn’t done yet) built into a smart contract on the Ethereum network
  • A token, called Plutons which are a decentralised Ethereum asset
  • An Android application that users can download and use at NFC terminals
  • Plutus holds an escrow account at a partner bank which will receive fiat from traders on the exchange
  • Plutus holds an account at a virtual debit card issuer to generate virtual cards at the NFC checkout
  • Plutus’ internal servers to interface with the mobile app and track BTC payments

Risks on the Plutus Network:

Mobile applications

These applications will be developed by Plutus. Unfortunately they’ll most likely only be able to list on the Android Play Store. Apple is incredibly restrictive when it comes to financial mobile applications. That means a sizable slice of users won’t be able to use the application at all. There is also an incredibly small risk of the app distribution channel becoming compromised.

Centralized infrastructure

There are a number of different parts in the Plutus network that can be targeted by a malicious actor. If Plutus the company, or the servers they run to validate transactions, becomes compromised the network could lose funds or become nonoperational.

Inability to run the exchange due to banking issues

Since all of the fiat on the network is run through a single bank account operated by Plutus, the closure of that account would effectively end Plutus. Without a bank account to exchange BTC for fiat, the mobile app would stop functioning. The bank account would most likely be closed once the account hit a limit of fraudulent activity.

Inability to issue cards from the VDC issuer

Plutus might also run into issues with their virtual debit card issuer. The closure of that account would also spell an end for the network.

Difficulty in user acquisition

As mentioned above, only Android users will be able to download the app, but additionally, all users and traders will need to submit KYC documentation before they can use the network. If that isn’t a barrier to entry I don’t know what is.

Development work left to be done

They do not have an operating decentralized exchange yet and I was told it would take roughly 6 months for that part of the platform to be finished. I’m concerned about the complexity of running such an exchange on the Ethereum network. Other shared ledger projects have taken years, not months, to develop.

The investment opportunity itself:

For the actual ICO, 850,000 Plutons out of a total of 20 million minted are being offered.

Eventually, Plutus app users will begin receiving ‘cash-back’ in the form of Plutons when paying on the network. That is how more Plutons will be issued.

The value of a Pluton will be set by individuals wanting to purchase plutons on the decentralized exchange.

In summary,

This is a highly speculative token which exists for use on a platform that isn’t functioning yet and is centralized entirely around one company.

It is risky and based on a problem that doesn’t exist. Plenty of merchants accept Bitcoin, but not enough people spend bitcoins, simply because they don’t use BTC for spending. Even if Plutus get operational, the actual volume they’ll see from their userbase will be extremely limited.

I like to look at companies and investments from the problem they’re trying to solve first, before moving into the technical moving parts. Spending Bitcoin using a credit card (linked to an exchange account) is not something new. However if Plutus moves away from trying to serve non-existent Bitcoin consumers and pivots into another problem they might be able to turn their idea around. It’s the people behind a company that will make it succeed.

Caveat Emptor.

(Disclaimer: This is not investment advice. I hold no Plutons nor have any investment for or against Pluton.)

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