How to evaluate an ICO
ICO announcements seem to be the new big thing. Blockchain entrepreneurs do it to raise money. Investors/Tokenholders are hoping have a return on investment of let’s say 100% — 1000%. The common line of thinking seems to be: I was late with bitcoin, but I could be an early adopter for the next big thing…
Long gone are the days where people mined/bought coins to support the idea of censorship resistant immutable network. It seems like gloves are off for an ICO gold rush. Make money, fast!
New Kids on the Block
And even though many devs and entrepreneurs are still in it for the betterment of society, and to build cool new tools, it seems that profit maximising thoughts are on the rise, bringing new group dynamics to the crypto community, thus changing the rules of the game. Furthermore, with new ICO announcements made on a daily basis, it is hard to keep up with all those new kids on the block. How on earth is one supposed to study and evaluate the viability of each and every new ICO?
Fact is: The underlying technologies are still in public beta, thus immature and prone to bugs and attacks. The only real killer app with some kind of track record so far seems to be bitcoin itself. Everything else is still a prototype, white paper, and sometimes not even that. Business models are untested, network effects almost inexistent.
Just a flashy landing page?
If you have a good look at all the landing pages of all these new blockchains, dApp and DAOs, you will soon figure out, what is what, and what is not, because more often than not, it’s just a flashy website. So how can we distinguish the flashy from the real deal?
I’m well aware of the fact that there is no such thing as an exact science for evaluating investment opportunities of emerging technologies. Maybe the best strategy is to shoot randomly, protect your downside, and hope that something will stick. Nevertheless, this is an attempt to cluster some questions that might be helpful in the evaluation process of a potential ICO.
While this paper is supposed to be an investor’s guide, my principal goal is not to make investors rich but to keep the community healthy. The last thing any of us needs is a crash, inevitable to the hype we are facing right now, with a lot of so called “stupid money” flowing into the system.
What type of token is being issued?
Depending on how you answer this question, a very different set of questions will be relevant.
- Blockchain Token
Private or Public Blockchain? Scalability? Consensus mechanism? Privacy? Governance? What problems does it solve that previous blockchains before have not solved? Purpose of the token? Rights attached? All criteria listed below.
- dApp Token
Purpose of the token? Sustainable revenue models of different stakeholders? Rights attached? All criteria listed below.
- DAO token
Does it manage a lot of funds? Splitting mechanism? Governance of Edge Cases? Security? Rights attached? All criteria listed below.
Purpose of the token?
- Is it a token with an inherent value or a share?
- What will be the token used for? ETH for gas, BTC for payments…
- Is it an incentive mechanism for the stakeholders?
- Does it contribute to a sustainable economy in the blockchain or within the dApp/DAO?
- If it is pre-mined, how is the token distribution?
- How will be the token distributed after the ICO? How much goes to the founders?
Stage of project?
- Landing Page only
- White paper
- Proof of Concept
If landing page only…
- Forget it!
- Is it well structured?
- Does it explain the technology in depth?
- Do they have a roadmap?
- Does it survive swarm review & expert opinion?
- Is it written for marketing reasons?
- Does it need a blockchain, or is there an off-chain solution to solving the same problem?
If proof of concept
- Does the project have an alpha version before the fund raising?
- Were there a lot of commits on github?
- Testnet available?
- If it doesn’t have an alpha version, a well written Whitepaper and a good team could compensate for the lack of progress.
Security & Auditing
- Any external audits of the code?
- Has it been running on testnet for sometime with no major issues is a good sign.
- Does national or international regulation apply?
- If yes, how could that effect the business model in the short & long run?
Founders & Team
- Track record
- Previous projects
- Technical know how
- Formal education
- Do they run a blog/reddit/slack?
- How interactive are those social media activities?
- Are they reporting progress?
- Size of a community depending on stage of project
- Core value proposition: What problem does it solve?
- How much demand is there for the project, short & long term?
- Does the project get discussed in the relevant communities even before launch? This could be an indicator for big interest.
- Why does the project need funding at the moment of the ICO?
- How were they funded up to that point?
- Do they have a cap on the crowd sale?
- Is the amount of tokens issued limited to the initial crowdsale?
- Are they putting too much money into marketing?
Special thanks to Valentin Kalinov for his Input!
- Special thanks to Valentin Kalinov for his Input!
- Follow up post: Token Valuation Canvas, Shermin Voshmgir