ICOs continue to generate negative press. In the latest research, the University of Pennsylvania Law School has presented findings highlighting the fact that the majority of ICO projects fail to deliver on whitepaper promises. They further found, more worryingly, a surprising amount of retained centralization among ICO projects. It claims to be the first detailed analysis of the inner workings of ICOs and the paper is titled ‘Coin Operated Capitalism‘.
The problems with ICO projects are well known. Only a small number actually go on to become successful, and nearly 50% of the 2017 ICO projects are now dead. But the undisclosed code is a more worrying and subtle trend to spot. The Penn professors found that –
“Surprisingly, in a community known for espousing a technolibertarian belief in the power of ‘trustless trust’ built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures.”
This is one of the most troubling findings. The potential modification of the governing structures means that the ICO project is no different from any centralized scheme. A high failure rate is acceptable, but undisclosed code which gives developers the power to change the way the network operates is fraud, no different from what has been previously observed in the financial markets.
The only tangible difference is that now developers are potentially manipulating the network instead of other actors. Thankfully, this is not the case in any of the larger coins which have more scrutiny over the years by experienced developers.
Centralized governance models
What can happen in some cases is that a revolutionary type of ICO project comes along which has a great product, but due to centralization it is effectively undermining the principals of DLT technology. Obvious examples of this include Ripple, with 60% of the tokens held by a corporation, and EOS, which has a designated centralized authority for dispute resolution. EOS raised over USD 4 billion in its ICO project.
Tezos is another controversial ICO project, generating massive user funds on the basis of a whitepaper and no working product. The Penn paper also mentioned the Polybius ICO, raising over USD 30 million, and subsequently failing to complete what was outlined in the whitepaper.
The fact is that many ICO’s are not decentralized. They simply claim to be, provide an idea with some clever marketing, and nobody has the time or the capacity to actually check the source code.
Where to go from here?
The issues are not overly worrying for most within the cryptocurrency community. It is understood that in any new venture there is going to be a testing period to separate the wheat from the chaff. While there are many failures, these will be dwarfed by some of the technological innovations which are already bearing fruit.
This is a period of growth for the industry, and hype, FOMO, and speculation have tarnished it to a degree. People were investing in projects they had no idea about, and that is not really a flaw of DLT or of the ICO model. FOMO permeates all markets and has been around a long time.
Additionally, there are already many alternatives available in the cryptocurrency industry, which is in many ways the personification of free market principals. The Initial Loan Procurement is an alternative option brought to fruition by Blockhive, where investments in the project are legally backed with DLT based smart contracts. Airdrops are becoming quite popular, and ICO projects are going to have stricter requirements in the future.
Digital Nomad with an interest in Zen and Blockchain technology.
Law graduate with 3 years experience as a consultant in the capital markets industry and 4 years experience freelancing on UpWork as a Creative Writer.