Why most ICO’s are destined to fail? “UET” term
Reasons of ICO to fail
At the beginning of the summer, the Bancor ICO managed to raise $153 million in about 3 hours. Raising so much money in so little time is just out of this world. But, that isn’t the only ICO that managed to attract an astronomical amount of funds in such a short time. Take BAT for example, the team behind that project managed to raise about $35 million in just 30 seconds. Now you may not have heard about the UET ICO, which stands for “Useless Ethereum Token”, well, they managed to draw about $40,000 in only 3 days. So, why is UET worth mentioning?
UET is nothing but a basic coin, that has no value whatsoever, all one can do is just use it as a store of value and transfer it from user to user via trade. It’s quite difficult to believe that something so stupid could raise so much money in just under 3 days. As a matter of fact, ICO’s have managed to raise over 1$ billion dollars in 2017.
Sure, all of these insane funds make us throw more attention towards ICO’s. However, the truth of the matter is that most of them will inevitably fail. There has been a considerable number of cryptocurrencies released over the last couple of years; the number is somewhere in the thousands. Now, despite ICO’s being a hot topic, most of these new cryptocurrencies have utterly flopped. As a matter of fact, a lot of them were merely blatant scams. There are a ton of ICO projects flooding the crypto market that raise a ton of red flags and should be labeled as a scam immediately.
Sure, there are some scammy ICO’s out there, but why are most of them going to fail?
It should be noted that we do not dislike ICO’s. We think that if done authentically and adequately, they provide a great way of funding genuinely innovative products and services.
So, does an ICO work exactly?
Essentially, developers declare their intent to pursue a particular project or service. They create a whitepaper, business plan, chat groups, make posts online, recruit team members, get some advisors on board, and eventually launch a token. Usually, developers provide the public with a limited supply of tokens that will be sold during an initial coin offering. A limited supply of tokens guarantees that they will have some sort of value and that the people behind the ICO are not simply trying to pump out money and run away. Some ICO tokens may have a pre-established cost that may decrease or increase depending on the stages of the crowd sale and how the public reacts to the project.
But what are these tokens? They act as currencies in a projects platform. Similar to how tickets or coins are used in slot machines or arcade games. Some coins provide their holders with things like voting rights, and etc. Generally, tokens are bought by investors by sending a certain amount of Ethereum from their wallet to the Ethereum address of the project in question. After a successful transaction, investors receive their tokens.
Well, all of this sounds relatively simple, and hard to screw up. Okay, but still, why do most ICO’s flop? Because, on occasion, the team and its developers are quite ignorant towards the following factors that can make or break an ICO: Utility, Security, Cryptoeconomics.
Let’s start with Cryptoeconomics.
Two different concepts are used to form cryptoeconomics, cryptography and economics. Most developers understand the cryptography part as it is quite essential for them jobwise. Many teams devote a lot of focus to the cryptography aspect of an ICO while not devoting nearly enough attention to the economics behind the project.
For an ICO token to hold any value in the future, there has to be demand for it. A lot of ICO’s see demand for their token initially, but that quickly fades. Holding an ICO is very appealing to a lot of people because it’s a super easy way through which funds can be raised. Many of these funds are actually raised for a simple concept, not even a completed product or service. Which, naturally spells certain problems.
Many early ICO adopters have made an absolute fortune by investing and speculating in the ICO and cryptocurrency market. Their returns have of course attracted many people. This leads to many unexperienced investors towards “fomo”, which stands for, fear of missing out. So, essentially what happened was that investors were blindsided by the fact that a lot of ICO’s barely had anything done and just started pouring money into any project they could find, expecting wicked returns. Basic hype backs a lot of the money going to ICO’s.
ICO development teams quickly picked up on these market tendencies and began producing ICO’s centered around products that have little to no actual value. With most teams just looking to release an appealing whitepaper bloated with cool graphics, great promises, and nothing more.
How do you explain the hype?
A fundamental economic principle known as the Greater Fool Theory can be used to explain how hype factors into the ICO and cryptocurrency market. The theory argues that the price of something does not increase because of its perceived value, but rather, because of some irrational beliefs that are attached to the item. The same idea can be applied to ICO’s. There are a ton of new dapps and cryptocurrencies that get introduced to the crypto ecosystem; however, they really add nothing of value. Yet, the public and ignorant investors hype these coins and projects up so much that the token price experiences great amounts of inflation, becomes overvalued, and eventually dumps when people realize that what they invested in was a lost cause.
The current ICO market is very much like the dot-com bubble of the 90’s
When the internet started getting extremely popular towards the end of the 90’s, a lot of tech companies sprung up looking to attract investments. A lot of investment funds began pouring into these tech startups. Of course, everyone experienced a fear of missing out and boarded the hype train without really doing any research.
Many companies that attracted millions worth of investor funds ended up failing, a lot even turned out to be complete scams. A great example of fomo, tech bubbles, and the greater fool theory. It’s quite easy to form a connection between the great tech bubble of the 90’s and the ICO’s of today. For example, most of the investing done in today’s ICO’s is based off of pure speculation.
However, there are those projects that end up being wildly successful. Such as Ethereum, in part, this projects success can be attributed to the dedicated team of developers that stood behind it and worked on improving and pushing the project forward on a constant basis.
The utility factor
What does utility mean exactly in regards to ICO’s? Well, utility stands for the received satisfaction from utilizing services or goods. Frequently, ICO’s have a tough time of getting the most out of their tokens utility. An important thing to note is that ICO tokens must have a critical role in the ICO’s ecosystem for the value of the final product to be substantial.
If your ICO’s token disappears from the crypto ecosystem, will your project collapse? If not, then you really don’t need a token or an ICO. You really don’t want your tokens to be held by investors for the sole purpose of flipping them on the market to buy more bitcoins later.
If the tokens you release play an integral part in your projects ecosystem, then you must figure out how to maximize their utility for investors. A proper business model should cover exactly how you plan to maximize the cost of your tokens for investors.
All tokens must have a purpose, features, and a role.
Let’s take a deeper look into the utility factors underlying tokens:
Value Exchange: Tokens must help sellers and buyers make trades of value within the projects ecosystem. This allows tokenholders to reap certain benefits for completed tasks. Exchange value is one of the most vital aspects of Tokens.
Toll Form: Tokens may also act as tolls or costs for certain functions to be used in a projects ecosystem. For example, the upcoming ICO NAU, requires users to possess tokens before doing anything in their application and web interface.
Token Rights: Holding tokens may also grant investors access to certain rights within the project ecosystem. Some tokens grant their tokenholders the right to vote on which future projects get pursued and which do not.
Functionality: Tokens must enrich their holder in some form or shape for using them in the ICO’s environment. In some projects, tokens are used to carry out essential functions, or place advertisements.
Basic Currency: Tokens can also be used as a store of value and in exchanges, inside and outside of the project’s ecosystem.
Earnings/Dividends: Certain tokens entitle their holder to receive dividends, driving the value of tokens up.
In order to get as much utility out of your tokens as possible, it is crucial to have your token match up with at least some of the factors mentioned above. Additionally, if you cannot clearly explain the role of your tokens, then your token simply has no utility to offer.
Another critical aspect underlying tokens is something that is known as “Token Velocity”, which essentially analyzes if whether or not people will actually hold tokens for a while, or just sell them off immediately. A huge issue with most ICO’s is that they are looked upon by investors as simple means for liquidating capital, instead of long term value generators.
Over the course of the past years, ICO’s and their coins have been performing worse and worse. This is primarily due to the fact that many ICO’s are blatant scams. Because of this, investors end up holding absolutely worthless tokens that have no intrinsic value. This is the reason as to why Ethereum, Bitcoin, and a few other coins are performing so strongly. They have potential and actual uses, unlike the totally lackluster projects that have been produced as of recent.
Developers should devote a great deal of attention towards token velocity. It is quite easy to quantify the token velocity for coins. Simply divide the total trading volume by the average network value available. When applying this calculation to the bitcoin, it should become quite apparent as to why the bitcoins velocity is so high. There is literally no other coin with so much network value, and people know that it will continue growing in price, so they do not want to trade it.
In order to have optimal token velocity, developers must ensure and answer the following:
The token in question is actually required for the project?
Is the token being exploited as much as possible?
Will people only use the token for liquidations?
Will people see value in holding the token for a long time?
Is the token doing as much as it possibly can?
The security factor
Security is an extremely critical factor for any ICO. At all times during the ICO and especially after. There have been many cases when ICO teams and investors have been hacked, and ill-willed individuals run off with loads of money. Reputable sources like Chainanalysis state that the chances of someone falling victim to them are 1 out of 10. Usually, individuals get scammed or become victims of theft due to poor code, phishing schemes, and mismanagement of their personal keys.
The DAO, or the Decentralized Autonomous Organization was a highly sophisticated smart contract that was meant to completely change Ethereum for good. The DAO was designed with the idea to fund all future decentralized applications created in the crypto ecosystem.
If users did not want to rely on the DAO, they could split off from it, however, they would have to hold their own Ether for up to 28 days before it could be successfully spent. The crypto community saw obvious issues with this, however, the DAO founders dismissed them. Lo and behold someone was able to exploit loopholes in the DAO and stole about 50 million dollars.
Essentially, if users wanted to leave the DAO, they would do so by submitting a request. Users would be given back their ETH in exchange for DAO tokens, and everything would be registered on a digital ledger. The thief was truly sneaky, he generated a recursive function in the request, took DAO tokens from users and provided them with their ETH, however, before the transaction was registered more ETH was transferred for DAO tokens, causing a leak of $50 million. The price of Ethereum dropped by almost 50% overnight.
The DAO incident remains to be one of the most brutal hacks ever executed in the crypto community. Actually, the damage was so severe that the Ethereum digital currency had to be split into ETH and ETH classic.
Scams and schemers
Phishing schemes are responsible for the theft of over 225 million dollars in ETH. As of today, more than 30,000 individuals have become victims of cryptocurrency related cyber theft. However, what is phishing and how is it so dangerous? Well, phishing is a method through which hackers gain hold of vital information by means of impersonating trustworthy and reputable individuals.
Email phishing scams are the most common. Con artists might pose as an exchange, prompting users to follow a link provided within an email to an exchange website, which then prompts them to enter their login and password. In the blink of an eye, hackers gain access to user exchange accounts and siphon them dry of all their crypto holdings.
Situations like the ones mentioned above are precisely why it is vital for crypto enthusiasts to keep their wallets and keys as secure as possible. Thankfully, Blockchain and crypto storage technology have come a decent way, ensuring that users can feel safe about their holdings as long as they go by industry recommended security procedures like hiding their private keys, cold storage, and making backups of their wallets.
Better safe than sorry.
ICO’s are all the hype right now, with the amount of ICO’s increasing exponentially every month. Just because a lot of ICO’s fail or are scams, does not mean that we are against them. On the contrary, we believe that we are in a unique age with revolutionary products and services popping up left and right. However, the real gem ICO’s tend to fly under the radar.
Being a developer, it is your responsibility to be as honest and transparent as you can be with your investors. ICO’s are meant to be meaningful and improve the world we live in. Therefore, make sure that your token and ICO can add value to the crypto ecosystem. Hopefully, you aren’t planning to hold an ICO to leave people hanging just to make some fast cash.