The Case for Tezos Crowdsale: A DAO-level Investment Risk
This is a post from an investors’ POV and doesn’t have the intention of placing the integrity of the project as a whole in question. It was made with the objective of warning potential investors (not long term participants who do it for the tech)
What is Tezos?
Tezos is a new decentralized blockchain that governs itself by establishing a true digital commonwealth. It facilitates formal verification, a technique which mathematically proves the correctness of the code governing transactions and boosts the security of the most sensitive or financially weighted smart contracts.
Tezos is an exciting new project that aims to compete with Ethereum. It’s based on Proof of Stake and has a focus on governance. This is because the Tezos blockchain can upgrade itself via consensus with no need for hard forks.
I’d say this is where it differs from Ethereum. It aims to be more decentralized and flexible.
Smart Contracts: Michelson Language
The language is stack based, with high level data types and primitives and strict static type checking. Its design cherry picks traits from several language families. Vigilant readers will notice direct references to Forth, Scheme, ML and Cat.
More information on the new language that is used to power the smart contracts on the Tezos blockchain can be found here: https://tezos.com/static/papers/language.pdf
The Crowdsale
The Tezos crowdsale will be uncapped. This means there won’t have a limit on how much funding they can receive. Billionaire investor has declared he is backing the Tezos project. There has been some hype about this but it’s not necessarily good as we will see.
The Potential DAO 2.0
“The DAO” as it was called, aimed to be a Decentralized Autonomous Organization. It ended up gathering around $150 million, being the biggest crowdfund in history, even surpassing the Star Citizen game.
“The DAO” code is a smart contract written using the Solidity language, created to be used on the Ethereum blockchain. As it turned out, the contract contained a serious flaw which allowed the attacker to exploit it and drain the funds.
Why did this happen? The reason, other than the negligence of it’s creators (who, by the way, ignored previous warnings from community members regarding the code that would eventually be exploited), was that a new programming language was used.
People were still not used to it. Contracts written using new languages are subjective to programming errors and even unknown attack vectors. That’s the main problem. It’s something new. People don’t know where to look for mistakes. That’s normal. However, there will be always someone to take advantage of that.
This is specially dangerous (and attractive to an attacker) if people’s money is at stake.
The ICO Hype
The crypto community is currently living some sort of “bubble” regarding ICOs (Initial Coin Offerings/Crowdsales). Many projects get huge sums of money without having much to show. This situation has reached a point where ICOs are reaching their goals of millions of dollars in minutes. Cosmos crowdsale got $17 million in around 30m, the Gnosis crowdsale gathered $12.5 million also in a few minutes with developers retaining 95% of all tokens. This gives the -yet undelivered project- a value of around $300 million. The 1st Blood Crowdsale a few months ago also gathered $5.5 million in around 5 minutes.
This made the Tezos team to opt by chosing an uncapped model, in order to give everyone a chance. Fair enough.
The Risks of the Tezos Crowdsale
Dillution: An uncapped crowdsale means there is no limit to how much funding it can receive. This means the more money goes in and people participate, the more their investment gets dilluted. Tim Draper hype and ICO bubble will easily make Tezos gather +$100 million. Could easily see it raising way more funds than “The DAO”.
DAO 2.0: New programming language. It’s hard to even know where to look for in order to find potential exploits. Lots of money at stake. Nice target for an attacker.
Husband and Wife: Lead by Arthur Breitman and Kathleen Breitman. I know this sounds… low. Yet, it’s a risk worth considering. What happens in the unfortunate case where they diverge and separate from each other? What impact will this have on the project? Are they able to work together? If not, who quits the project? What importance does that person have on the project, giving they have been working on it for years and know it better than anyone else? I believe it wouldn’t have as much as impact as this but, what would happen to Ethereum if Vitalik quit? Like it or not, Vitalik is Ethereum.
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Just know the risks before participating on any crowdsale. Did this post because I find this to be a critical one. Expecting a ridiculous amount of money to be gathered and this to be a very high risk crowdsale for investors. This, of course, assuming one participates expecting a decent ROI.
Again, Tezos clearly seems like an interesting project. That’s not what I’m arguing here. This post is from an investors’ point of view.