Don’t Trust an ICO That Launches on Ethereum

I’m a huge advocate of blockchain. I also like money, making it, and using technology to do so. As the CEO of a high-tech company, and veteran programmer I want to tell you: don’t launch products on Ethereum and don’t invest in companies that do so.

The headline of this post is worded strongly for a reason. I was somewhat inspired by this Tweet by @APompliano:

First off, this statement is true. I have made some friends recently with companies such as NEM and Tendermint — finding talented blockchain engineers is incredibly difficult for them.

Also, I have been personally coding on various blockchains for about 6 months now and I can say that blockchain is one of the hardest technologies to learn and utilize — and I’ve been a programmer for 10+ years.

Yet one ICO after the other is raising millions of dollars proposing to build their new platform on Ethereum with their own ERC20 token — do they have magical expert blockchain and banking developers hidden in their closet somewhere?

Being in high-tech as long as I have been, I can tell you with confidence that these founders have never built a blockchain app and have not performed the proper research on their technology stack.

Why Ethereum Won’t Work For These ICOs

So enough preaching and on to the facts.

Ethereum is a public blockchain.

This is an incredibly important thing to understand. A public blockchain is a blockchain where every transaction is made publicly available to… um the public. Using blockchain explorer tools like Etherscan one can look at every transaction made on Ethereum — who it came from and where it went.

This is pretty cool right? Full transparency. Maybe you are super excited that this product you believe in is decentralized — using ERC20 and Ethereum. Great! We’ll maybe not so great.

Is The Product Really Even Using Ethereum?

Let’s take a look at SALT.

SALT — Blockchain Backed Loans

ICO Raised: $48 million

This product sounds exciting right? Blockchain backed loans? Wow — and all on Ethereum. Actually not so.

From the whitepaper:

SALT Membership is an Ethereum-based Erc20 smart contract representing levels of access to the SALT Lending Platform. It can be redeemed for products and services and other rewards offered through the platform.

and there is this too:

SALT Memberships exist on the Ethereum Blockchain and loan collateral is recorded on its native blockchain.

So what the media portrayed as amazing new decentralized ICO/product actually has 99.9% of its functionality on a private blockchain and likely private servers — all of which is not public (you don’t get to see what they do with your money/assets). Only membership fees are paid in Ethereum (which also isn’t a great idea IMO).

I’m not against private blockchains, but they didn’t even specify what technology they are using. They didn’t tell us where the developers are coming from. They DID tell us all about Ethereum to get us excited — but it is only for their payment system. Is there really any value in a blockchain application here at all? There’s nothing in the white paper except magical rainbows and unicorns and $48 million dollars.

Can Ethereum Do What The ICO is Proposing?

What about the big ICOs that say they are building a fully decentralized platform — all on Ethereum? Wow FULLY decentralized — all code living on thousands of nodes and no central database. The future is HERE!

Of all the ICOs you should worry about it’s these kind. They have no idea what they are talking about — no technical expertise. Let’s look at an example:

Loomia

Currently in private token sale. Obviously backed by big investors etc. And they have a pretty cool angle:

In a world where personal data has become a precious commodity, sold behind closed doors by large corporations, the LOOMIA TILE gives individuals the right to own their personal data, along with the freedom to choose how to share or sell it.

While wearing a tile in your clothing that identifies you sounds a little strange to me — I do think its cool to take my digital identity away from companies like Facebook and Google — selling me to whomever they will. Ok so im ready to invest in Loomia — this is amazing!! Wait — we had probably better look at the whitepaper first right?

The Tile Platform is the P2P software that collects and manages data from the LOOMIA TILE and exchanges information with the network of LOOMIA users. The Tile Platform is serverless; it is designed so that at no point does the app need to offload data or connect to a central server. Each instance of the app connects to other user instances.

Ok this is sounding pretty dang sweet. Let’s see how they are going to do this. There is a 3 fold stack:

1. The decentralized app for user interactions and data collection
2. The decentralized data storage for longterm housing and and retrieval of data
3. The blockchain for distributed, verifiable, universal record keeping

The whitepaper mentions they will use Blockstack Atlas for their website/apps (user facing stuff) — Blockstack is pretty cool, check them out.

But Blockstack is its own Blockchain — so Loomia is going to take the Atlas portion of Blockstack.

So let’s check it out https://github.com/blockstack/atlas

At time of writing this repo has 35 commits and no documentation. So this begs the question — how is Loomia going to find Developers that can work with this brand new blockchain technology? But there’s more:

When we move to run Atlas on Ethereum, we will use the ENS (Ethereum Name Service), which like BNS has the ability to provide human-meaningful names.

So apparently they want to use Ethereuem as the blockchain (not Blockstack) for Atlas.

What will go on the Ethereum blockchain? Looks like User ID Registry, SKU Registry, DATA HASH IDS, Token Contracts. This is all fine, but has anyone thought of the Ethereum fees that will need to be paid by users and/or Loomia for each of those pieces of data to be stored? Also WHY does this data need to be on the Ethereum network?

Why couldn’t Loomia launch their own public blockchain and their own token without any outrageous Ethereum gas fees? Also why does my digital identity need to even be on a public blockchain — Ethereum is open to millions of people, developers, and hackers. What if your poorly written smart contract compromises my digital identity? Remember when recently a core developer on Parity wrote a bad smart contract on Ethereum that caused $31 million worth of Ether to be stolen???

Loomia mentions they will use Storj for hard data storage which is a cool blockchain based storage system.

This is cool, but now we have Loomia using Storj, a 3rd party for profit company with their own architecture, depending on Blockstack, promising to use a small new framework called Atlas, will somehow convert/repurpose it for Ethereum, and somehow they are going to find the people to build this.

It’s really clear to me they are making guesses. Educated, but still guesswork. We all have to do guesswork at some point, but the problem is companies are raising millions of dollars and promising the world when they can’t deliver the world.

Consider this:

  1. Do you know any developers who have integrated Storj?
  2. Do you know any developers who are experts at Blockstack?
  3. Go talk to an Ethereum developer — can you help me get Blockstack working with Ethereum? (if you can find an Ethereum developer)

What SHOULD ICOs Be Doing?

So I’m not hating on Loomia or SALT. They are using their right to capitalism and industry and I admire that — the problem is they aren’t spending the time to build out their product before they raise the money. And what will happen is many ICOs will fail and run out of money — others will change their entire technology stack. You as an investor will reap nothing in return.

Use Anything Else Except The Ethereum Public Blockchain

ICOs really should just stop using Ethereum. There are HUGE security vulnerabilities with the public smart contracts. Solidity is a fledgling programming language with many issues.

Hyperledger

Hyperledger is led by IBM and the Linux Foundation and is quite fantastic.

It has a full suite of tools to make developing secure, scalable, blockchains super easy. ICOs should launch their own blockchains — they don’t need Ethereum.

You can create public, private, and permissioned blockchains. You can create cryptocurrencies on top of it, and you can do this with well tested programming languages you are already familiar with.

Hyperledger has amazing documentation and tutorials.

NEM

If an ICO really just needs to launch on a big public network then they should absolutely choose NEM over Ethereum.

Similar to Hyperledger NEM allows developers to write to the blockchain in any programming language. There are no crazy variable feels like Ethereum and your smart contracts aren’t exposed for the whole world to hack. You can launch your own cryptocurrency without writing any code.

NEM also has amazing documentation and tutorials.

Final Thoughts

If an ICO chooses Ethereum they have A LOT of roadblocks to overcome, including the BIG change to Proof of Stake this year. Fees are also a huge issue with Ethereum — what will you tell your users when Ethereum gas prices go up to $2 per transaction? “Everyone, PLEASE don’t use our app today, you will be charged too much money”

ICOs should think about Ethereum fees — they don’t seem to ever think about this. They should be honest about what they don’t know. Ethereum has huge security flaws. Unless you are an expert banking developer who writes perfect code, you should not be writing smart contracts for $45 million dollar ICOs.

Why not write transactional code off of the blockchain, then open source it? Much more secure because hackers can’t attack your contracts.

Why not create your own blockchain network on NEM or Hyperledger? Can be public or private. Why would different industries want to share a giant database? Why can’t you launch your cryptocurrency on your own blockchain? You’ll still have to fight to get it listed on exchanges no different than an ERC20.

When choosing an ICO to support, look deeply into the tech behind the white papers. Be leery of Ethereum and don’t waste your money!

I’m aiming to train the world on realistic blockchain development — coding and launching blockchains, ICOs, Ethereum development, and more. Check out my company Devslopes here.