ICOs are Cancer

New tokens are now available from snake-oil salesman to “cure” all ailments (source)

The Problem

  1. Government regulations designed to protect poor people from making risky investments have ended up allowing only the rich to participate in some of the most lucrative investments. The way the government views things, if you have less than $1MM you are not an “accredited investor” and can’t be trusted to make important financial decisions on your own behalf.
  2. Access to liquidity for early investors. When you invest in a startup, even in the best case scenario it takes many years before you’ll ever see a penny of your investment returned. VC funds typically have 8+ year time horizons.
  3. More investment for startups. Starting a company is hard. Isn’t a tool that allows more connections between investors and startups only a good thing?
  4. Platform profit-sharing (utility tokens). If you were an early user who helped contribute to the success of a social network like Facebook/Twitter/Instagram/WhatsApp/Reddit/etc, then you receive no extra compensation for helping that company achieve success.

#1 Government Regulation

The highly centralized companies are in for a painful lesson about decentralization.
Not understanding technology and having staff shortages can only protect you for so long.
This technically works, but do you think it’s a future you want to invest in?

#2 Access to Liquidity

#3 More Investment for Startups

That doesn’t strike me as a tough funding environment (source)
It’s no surprise the ICO process gives us a perfect market for lemons

#4 Platform Profit-Sharing (aka “Utility Tokens”)

  1. Most companies are not actually platforms with powerful network effects, so the value added by the early users doesn’t justify granting them ownership in the company. Remember that the users are signing up voluntarily (and sometimes paying money for the privilege), meaning they already believe in the benefits of the service.
  2. It becomes very hard to pivot or make adjustments if the model you built your utility token around doesn’t work. You have too many stakeholders and it wouldn’t be fair to change the economics that they had agreed to if you decided for example to launch another product that didn’t have use for the token. It would also crash your utility token’s price, similar to the way managers of publicly traded companies optimize for quarterly results over the long-term health of the company.
  3. Designing a cryptocurrency protocol is enormously complex and outside the scope of building a company. There are probably only 1,000 people in the world qualified to do it. You now have to think about security, node communication, scalability, proof of work/stake/burn/space, regulatory compliance, stability, bitrot, etc.
  4. There are already lots of effective ways to reward and incentivize early adopters. For example, having a short twitter handle is a great benefit of being an early twitter user. For paid services you can offer lock-ins where you get a cheaper plan for many years. Many services have waitlists and reward the most beneficial users (perhaps those that share on social media) with earlier access. Kickstarter has also raised billions of dollars for unproven ideas.
  5. The whole point of money is that it solves the double-coincidence of wants problem that makes barter massively ineffective. Requiring customers purchase your tokens in order to use your services is a huge barrier to mainstream adoption.
  6. It confuses where the value is. Are customers using your product because they like it (and thus are willing to pay) or because they hope that everyone else will use it and their tokens will become valuable? The former is the foundation for a lasting enterprise, and the latter is how you create a house of cards. Tokens can encourage founders to go after the wrong customers.

The “Solution”

  1. Lack of Basic Investor Protections
  2. Misaligned Company Incentives
  3. Not Actually an Investment
  4. Massively Complex Regulations and Other Distractions
  5. Fundamentally Incompatible with the Legal System
  6. Private Key Management is Really Hard

#1 Lack of Basic Investor Protections

That this is even possible tells you what kind of crazy market we’re in.

#2 Misaligned Company Incentives

#3 Not Actually an Investment

“It’s neat” is rarely a good investment thesis

#4 Massively Complex Regulations and Other Distractions

#5 Fundamentally Incompatible with the Legal System

Only bitcoin has a chance to survive against a state actor as it’s a decentralized bearer asset; there’s no person to threaten with arrest and no bank account or physical property to seize.

#6 Private Key Management is Really Hard

What You’re Involved in Reflects on Your Character






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Michael Flaxman

Michael Flaxman


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