Choking on ICO tokens
I am really trying to keep an open mind with regards to ICOs on Ethereum and this supposed future where every application has a (different) token. However, my suspicions towards the intellectual honesty of their advocates are increasing by the day.
I posted my initial thoughts on tokens back in May.
Since then what seems like every blockchain VC has jumped wholeheartedly on this view of the future. It is normal for me (and others) to disagree with them on the likelihood of this future. None of us know what the future will look like. But it is not normal for supposedly smart and open minded people to assume this view of the future is inevitable. No one who is invested in the ICO space seems willing to discuss the downsides of every application having a token or the technical challenges presented by it (on top of the security, scalability and user experience challenges that are already present when building on a blockchain).
Perhaps I shouldn’t be surprised. This view of the future is a financially attractive one for them. Who wouldn’t want to make a 10x or 100x return within 12 months? Who wants to guide a startup through a decade-long slog of building a business on an experimental protocol when you can receive a large allocation of ICO tokens and quietly exit at the moment of your choosing? Put the blinkers on, don’t question anything and see the money roll in.
However, the ignored arguments keep mounting. Assume every application you used required a token to access it. It is equivalent to every road not only requiring a toll but every road requiring a toll in a different currency. Imagine driving down your road paying a dollar. Turning the corner and needing to pay a euro. Driving onto the highway and needing to pay a pound. The logistical nightmare this creates when you substitute established, relatively stable currencies with massively volatile tokens that are (loosely) attached to early stage startups is simply mind-boggling.
Even if we assume this is a future we wish to build, we are so many years off from building a user experience that is even remotely acceptable.
In addition, Dan Boneh highlights in this short talk (1 hour 48 minutes in) just how difficult it is to write secure smart contracts on Ethereum. Before the dotcom crash, there were millions of people capable of building software that didn’t need to be secure. With ICOs it would be difficult to find a hundred individuals on this planet capable of building secure, bug-free smart contracts that won’t lose their users’ funds. Even Gavin Wood, the co-founder of Ethereum merged in code that left an Ethereum multi-signature wallet vulnerable to hackers. A Turing complete programming language was a great marketing gimmick but if you are a developer incapable of taking advantage of it, you’re better off using Bitcoin’s limited scripting language and OP codes that have been throughly tested by capable core developers.
There is a real danger here that venture capitalists from a16z (arguably the most respected VC in the space) down to your average third world unaccredited investor get embroiled in the 21st Century global internet version of boiler room scams and ponzi schemes. There are parallels with the subprime mortgage crisis (admittedly the ICO bubble is currently tiny in comparison). A conceptual breakthrough (invention of the Bitcoin blockchain) taken to wild extremes because no one put on the brakes on and asked each other difficult questions. Some investment banks (e.g. Lehman Brothers) jumped in feet first and ended up collapsing in 2008. Smarter investment banks (e.g. JP Morgan) participated but were a lot more conservative. The returns were too juicy for JP Morgan to boycott it entirely but when the house of cards came crashing down in 2008, they were the last card standing. I’m sure a16z is smart enough to follow a similar path to JP Morgan but it is a treacherous ethical tightrope. There is a lot of money to be made but it is by hoovering up stupid and uninformed people’s money before the bubble bursts.
ICOs are unlikely to financially ruin any particular VC (at least in the short term). However, the pungent smell of a ICO bubble bursting will damage the perception in Washington and elsewhere that Silicon Valley is a force for good and undo all the exceptional education and technological leadership a firm like a16z provides. Silicon Valley is one of the few bright sparks in the global economy that provides opportunities for ambitious and intellectually curious people to address the world’s biggest problems. If that spark dies and it shows itself to be no better than a Wall Street boiler room scam, the world really will be a dark place.
