In the stock market, initial public offerings are risky investments. For the first time, companies are listing themselves as available to the general public. Consequently, multiple resources are made available. Ordinary investors can access the prospectus that shows the company’s previous financial records, as well as their future plans. In addition, research firms provide expert opinions on the investment’s prospects. Finally, investors go through a broker, who is also able to give them advice.
For cryptocurrencies, initial coin offerings (ICOs) function in the same capital-raising way. However, as the currency does not yet exist, the project can provide no historical performance. The company can only offer whitepapers, which describe their technological platform, as well as the credentials of the management team. Thus, the opinions of experts become increasingly important, as well as reviews from community resources.
To add to the general precariousness of this nascent market, a study published in February 2018 by TokenData found that 46% of cryptocurrencies with a 2017 ICO had already failed. And a different study from ICORating found that although 827 ICOs raised $8.3 million USD in Q2 2018, 55% of them have also failed. Possible explanations for this high rate include a declining quality of projects, more competition for limited funds, greater regulatory pressures, and market fears following Bitcoin’s price plunge.
With the current state of ICOs, it has never been more important to have sound advice from trusted advisors. Yet, how does an investor trust that the reviews and ratings coming from experts and the community are accurate, unbiased, and authentic?
Irrelevant Reviews
When assessing an ICO, many expert review sites consider social media indicators, which include a cryptocurrency’s followers, likes, and retweets. Although these statistics can suggest an ICO’s market penetration, they do not necessarily correlate to a positive assessment of a project’s technology or business strategy. In addition, there are many ways in which a positive social media presence can be manufactured or outright purchased.
Centra, which has now rebranded itself as Phantom, raised $32 million USD in October 2017. Only six months after their ICO, however, the founders were found guilty on charges of wire fraud and securities fraud. The project’s business plan utilised prepaid credit cards, but it was discovered that Visa and MasterCard had no agreements with the company. In addition, biographies of the management team were found to be fabricated and marketing materials were deemed false and misleading.
One of Centra’s social media tactics was to pay celebrities, including Floyd Mayweather and DJ Khaled, for public endorsements, which gave the project an air of legitimacy. Although most experts saw through this show and gave Centra a low rating or marked it as a potential scam, the expert review platform ICOMarks gave the project a rating of 6/10, based heavily upon their strong social media activity. Thus, expert review systems are susceptible to sophisticated and fraudulent marketing schemes.
Lack of Reviews
Considering the flaws in expert reviews, ICO investors may turn to community review platforms, which include Cryptorated, Ignite Ratings, and ICOPicker. Although there is no guarantee that the opinions stated on these forums come from knowledgeable sources, there is the promise that the crowd will — in the aggregate — come to an accurate consensus, or at least be able to provide arguments on both sides. Consequently, a useful community review platform requires a minimum volume of users and opinions. These sites, however, are often depopulated, with listings for many cryptocurrencies and ICOs left empty and unreviewed. Centra, for example, is either unavailable on these sites or has a listing with no reviews.
Perhaps the lack of community discussion stems from low general interest in Centra. If that were the case, then a more famous or popular cryptocurrency should garner more feedback. In July 2017, Tezos raised $232 million USD in the largest ICO ever at the time. The cryptocurrency was touted as a “self-amending blockchain” with an advanced protocol that could evolve without a hard fork. In addition, Tezos was proposed as a democratised community, in which token holders could request protocol upgrades, obtain rewards for contributions, and vote on whether proposals should be approved.
After the ICO, however, internal struggles over management led to multiple lawsuits, issues with the SEC, and an almost year-long delay before tokens reached investors. Accordingly, the cryptocurrency received moderate reviews from expert review platforms, including ICOBench, TrackICO, DPRating, BloktRating, and ICOHolder. Yet even with the enormous ICO and subsequent turbulence, there are very few community ratings. On Ignite Ratings, Tezos has only three ratings with little explanation, which suggests a major issue in building a high-volume community.
Currently, the largest platform for discussion of cryptocurrencies may be Reddit, which has approximately 744,000 and 72,000 subscribers to the cryptocurrency and ICO subreddits, respectively. The website forum is famous for the anonymity of users and threads that are self-regulated by community moderators. In practice, however, moderation is rarely unbiased. The Tezos subreddit, which has more than 10,000 subscribers and several posts a day, is moderated by the founders of the company, who have the authority to remove posts as they please. In addition, anonymity opens up the forum to abuses by employees of the project, the project’s competitors, or malicious actors.
Biased Reviews
The lack of volume on community rating platforms, as well as the anonymity of users, may sway potential cryptocurrency investors to trust expert reviews for their impartiality and knowledge. Yet it can be difficult to judge whether experts are truly free from bias. They may feel the need to be overly negative about a project to demonstrate their authority in the field. Conversely, they may be bribed for positive ratings. For example, the ICO rating agency, Alethena, found that after registering an ICO on ICObench, they were immediately contacted by an expert who offered a positive review in exchange for a fee.
Although it may not always be the case that a positive review has been bought, it does lend doubt to the credibility of expert ratings. Gems is a cryptocurrency that refers to itself as a “decentralised mechanical turk.” It has also been featured on lists of the worst ICOs of 2018. The project created a following by requiring investors who wanted to be whitelisted to promote the cryptocurrency on social media. Raising $150 million USD in their ICO, they kept 75% of the tokens to themselves and lost the support of much of their community.
Despite the debacle, ICOBench features two expert reviews with an almost perfect assessment of 5/5 for the cryptocurrency. These reviews contrast to the website’s own analytics tool, which rated the project as 2.2/5. The discrepancy between these ratings highlights how enormous the potential bias of individual expert reviewers can be.
The Solution
In order to combat irrelevant, nonexistent, and biased reviews, Revain has created a blockchain-based system that ensures authentic feedback for cryptocurrencies and ICOs. First, the company establishes the veracity of reviewers by verifying that they own the coin they review. In addition, single authors cannot write multiple reviews of the same project. Once a review is written, whether positive or negative, it is committed to the blockchain and cannot be removed or altered so investors can rest assured that they are seeing the whole picture.
To maintain high-quality reviews, Revain has a two-step filtration process that uses RAF (Review Validation Automatic Filter) technology, which includes custom filters, a tone analyser, user history analysis, and AI technology from IBM’s Watson that filters out overly emotional and irrelevant reviews. In addition, the company’s platform offers tokens to users who provide thoughtful and carefully considered feedback, which should also incentivise more reviews to be written.
Once there are a significant number of reviews, Revain’s custom algorithm ranks all projects based on their popularity and readers’ impression. This system stands in contrast to many of the expert review platforms, which allow premium customers to purchase higher positions in listings for a fee. With an array of substantive positive and negative opinions, users have the ability to make up their own minds about a project’s potential.
Because there is so little information to judge an ICO, the opinions of reviewers will play a vital role in swaying potential investment decisions. Revain, unlike expert and community rating platforms, delivers the possibility that these judgments will be accurate, unbiased, and authentic.
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