Digital currency has an odd quality of being both a religion and a business.
To understand what’s driven the private-equity sized valuations of some of the best-funded projects to date, it helps to keep this in mind. Look back, for example, to the early days of Bitcoin, when adoption was driven as much by libertarian fervor as by personal gain. That feeling is still with us.
The ICO market today is a heady mix of this kind of idealism, individual greed and institutional investors that understand how both drive momentum. Tezos, for example, combined all three in one investor base.
Tezos, like most ICOs, raised funds without a product in the market. Bloomberg reported based on Token Report data, earlier this week, that fewer than 1 in 10 ICOs do have a tokenized product in the market when they raise. At the time we ran that study for Bloomberg (last week), there were 226 closed ICOs in our database. Of those, just 19 had tokens in use on the network. Here they are:
Correction: Counterparty shouldn’t be on this list; they do have a coin in use but have never held an ICO. The number above has been corrected from 20 to 19.
Not that there’s necessarily anything wrong with the other 206. (Shameless plug: You can research all of them in the private beta of our first product, Token Clarity.) In a venture-backed IPO, it’s common to read a scribe of the mainstream press grumble, “hasn’t even turned a profit yet.”
“Doesn’t have a product yet” may be the ICO skeptic’s equivalent, a quaint misunderstanding. You can’t apply Management 101 to a market driven by open-source ethos.
And yet, many projects in the market don’t have either open-source zeal or management sensibility. If I had a shekel for every time I’ve heard a token issuer blithely claim that owning a token will incentivize users to participate in a network. That’s just not happening.
In her book, Doughnut Economics, the economist Kate Raworth provides a useful review of the overwhelming body of literature showing that money incentives do not improve network participation (though we still teach Economics 101 as if they do). The research goes back to the British sociologist Richard Titmuss, who showed in 1970 that blood donations dropped in volume and quality when a cash incentive was offered. For a more recent example, look at Tom Wujec’s data on what happens when you offer a cash prize to people trying to build a structure out of spaghetti sticks and a marshmallow.
Holding a token by itself doesn’t motivate anyone to do anything, except hold onto it if they think it will go up in value, or get rid of it if they think it won’t. That’s what’s driving more than 90 percent of the ICO secondary market today, according to our research. For new entrants, if you can’t tell a story about customer pain, and you can’t tell me you’re building the holy grail, either, you’d better go back to the lab.
Even so, it’s not the failures I fear. It’s the successes. What are holders going to think when tokenized products reach users’ hands and they realize tens of millions in tokens are supporting a business with hundreds of thousands in revenue? Numbers that might look like success after a seed funding are going to look like failure after an ICO. And that’s the optimistic case. Tezos is the subject of the first major ICO shareholder lawsuit. It’s unlikely to be the last.
A couple caveats: We don’t have every single closed ICO in our database (yet). And it’s likely we missed a few that do have tokens in use, but just haven’t done a very good job of publicizing the fact. With many well-intentioned projects, poor and inconsistent disclosure seems to be a big part of their problem. If we missed one, please post it in the comments.