ICOs, Tokens & Smart Contracts
Musings in Cryptocurrency
ICOs
If you are new to the cryptocurrency market, like most of us, you likely are wondering what the fuss is about regarding ICOs (Initial Coin Offerings). The ICO concept is simple, project founders create something of value that leverages the blockchain in some way, and they raise crypto in an initial offering to fund the project.
The two big differences between a traditional IPO and and ICO;
- An ICO requires cryptocurrency as the investment capital (not fiat currency)
- The investor does not receive shares but instead receives tokens in the project.
Sounds relatively straightforward right? That’s where the sensibilities end.
Recently Mangrove Capital Partners published a report on 2017 ICOs that showed us if we had invested €10,000 in every ICO since the beginning of 2017, we would have seen in excess of 1300% return, including all the projects that ended up through the floor.
That beats all the public market indexes, combined. Here is the NASDAQ YTD performance taken from Macrotrends.com
Just getting into the presale on some of these tokens is not easy. In order to get the preferred price, one needs to be part of the presale. Many ICOs fail, but some go to the moon. The first half of 2017 saw more than $1.3B in ICO investments, making this the year of ICO:
Many ICOs have interesting ways in which they handle the onboarding of investors. In addition to running these unique qualification gauntlets, transferring the required cryptocurrency to participate can be daunting as well. Some ICOs have a high bar which require access to large pools of cyrpto in the first place. Before one can participate, you first have to buy the parent pair that represents the ICO that you are interested in, this case it’s mostly Ethereum.
Tokens
Tokens are what make up the majority of all ICOs today, think of it as a marker of value, your ticket to the show, hold onto your ticket, as there might be a prize later. Tokens don’t represent ownership in the company that created them, nor are they considered securities in many countries. In an ICO, the investor would buy the token and the company would use that money to complete the project or portion of the project, which is based on the token itself. If the creation is successful in market, the token increases in value. The number of tokens per ICO varies greatly. ICOs are crowd sales of ICOs and empower the creator, they remove the need for 3rd party bankers and venture capitalists. They are a completely new way of looking at financial markets and will overturn the way people think about launching new companies and projects.
Smart Contracts
The majority of ICOs that came out in 2017 were built on the Ethereum Blockchain, thanks in no small part to Ethereum / Smart Contract relationship.
Smart Contracts, in layman terms, are like an “event construct” on the blockchain. Think of them as contracts based on a (if this, then that) methodology. As an example, imagine a real-estate token with a smart contract that automatically sealed an agreement when all subjects were removed from a real-estate purchase offer then remitted the deposit to the seller from the buyer’s crypto wallet.
Not all Smart Contracts are made the same. Here is an excerpt from the Quanstamp whitepaper:
Between June 2017 and October 2017, the number of smart contracts grew from 500K to 2M. Within a year, we expect there to be 10M smart contracts. This will create an exponential increase in the demand for auditing. There aren’t enough security experts in the world to audit all smart contracts today, and this shortage will be even more acute in the future.
In the summer of 2016, a someone made off with $55M in Ethereum coins from a project that later came under SEC scrutiny; The DAO, due to a bug in its smart contract. A year and a month later, another hacker stole an estimated $30M in Ethereum coins from various companies due to a bug in the smart contract code, in the Parity multi-sig wallet. This obviously does not bode well for Ethereum-centric ICOs (the vast majority) and Ethereum-based projects in general.
Some have tried to solve this problem before by applying human cycles to audit smart contracts, which, as you can imagine does not scale very well and is fraught with error unto itself.
The potential costs of smart contract failures will also grow. As of October 2017, about $3.2M (11M ETH) was locked in smart contracts. The number of dollars locked in smart contracts will grow exponentially as Ethereum network and smart contract adoption grows. The potential cost of smart contract vulnerabilities will grow commensurately.
ICOs I Like
Quantstamp professes to assert integrity and trust within the smart contracts on which some of these tokens are based. In essence their service will audit and provide a “stamp” of approval for these smart contracts providing a level of comfort to those who are buying the tokens, or using a service where the said tokens are to be the underpinning of the service offered.
This audit process could have potentially saved investors and users millions of dollars in past and present ICOs.
Here’s how it works in the Quantstamp world:
Quantstamp is a specialized network that connects developers, investors and users around a transparent and scalable proof-of-audit.
The network acts as a critical piece of transparency by enabling automated checks on smart contract vulnerabilities and automatically rewarding verifiers who identify bugs.
Quantstamp tokens allow the platform to operate in a scalable and fully decentralized fashion, delivering computation fees to verifier nodes, and bounties for locating vulnerabilities.
Their white paper goes into much finer detail.
Things get weird
A few weeks ago, I was surfing various ICO lists online and happened upon RCN, Here is an interesting site that lists all the upcoming ICOs with an accompanying Calendar so you don’t miss out: ICO Drops. I joined a few Telegram group chats, Telegram is the go-to group comms ICOs seems to prefer and there was a buzz around RCN.
The pre-sale for RCN began on October 24, and seemed to be going quite well, until the final 6–7% of the capped amount of was reached. For reasons not entirely clear to anyone, an early investor (or investors) listed the tokens on a secondary exchange and started dumping large quantities of RCN (then known as Ripio) at a price what was considerably less than the whitelist / presale token purchase price. The whitelist pre-sale ground to a halt and those wise to the blunder bought up whatever they could get their hands on knowing that the crowdsale was closing soon and the prices would likely skyrocket well past the ICO price.
It was truly bizarre. I watched trades in near real-time on this secondary market as early insiders were dumping tokens and others were snapping them up.
From what I can gather, the smart contract associated with the RCN token did not have a transfer-lock function, which would have precluded anyone from trading the token ahead of the crowdsale completing.
Here is another reason why I like Quantstamp. Had RCN collaborated with Quantstamp prior to ICO, they could very well avoided the whole secondary market issue as a Quantstamp audit would have found this shortcoming and alerted them to it.
I had a brief exchange with Richard Ma, CEO at Quantstamp, he had this say on the subject:
I think Quantstamp has a bright future and a compelling business model, hoping to get in on the presage for this one.
Summary
As a serial entrepreneur, you can only imagine how the concept of ICOs excites me. Having created a fair number of startups myself, the idea of crowdsourcing via crypto means it’s globally accessible. That has real appeal when creating products and services that have global utility, especially if the investment instrument is the same technology used in the product, it’s a brilliant concept. One thing is for certain, cryptocurrency is here to stay, I can’t wait to see where this takes us! Next time I hope to talk about ICO investment pools, more on smart contracts, alt coin strategies and what is driving Bitcoin to $10k.
About the Author:
Thanks to the influences during my early childhood, I have spent the last 20 years in the VoIP industry with brief stints in the financial sector, mostly in mutual funds and basic securities. As a technologically curious person by nature, I have been recently researching cryptocurrencies, cryptotokens, ICOs and their underlying technology. This is not financial advice, investment advice, nor legal advice. I am not a financial advisor. I am simply sharing some of my experiences and some of my plans in relation to how I approach cryptocurrency. My thoughts and opinions are my own and do not reflect the opinions of any organizations I am affiliated with.
Referenced material:
https://www.coindesk.com/so-ethereums-blockchain-is-still-under-attack/
https://coinmarketcap.com/charts/
https://quantstamp.com/wp-content/uploads/2017/09/Quantstamp-Whitepaper.pdf
