ICOs: You’re scammy and you know it

99%+ of the ICOs out there are scams. It has the very unfortunate side effect to make good teams/projects look dubious by association, so it has to stop.

I spent a lot of time thinking about what defines legitimate players. I feel the framework is now robust enough to be shared.

First three parts are definitions of what are Decentralized Networks (I), Tokens (II) and ICOs (III). Once these concepts clearly defined, identifying legitimate players is pretty straightforward.

I. Decentralized Networks are Networks without a Central Operator

• A Network happens when a Community of Users interact through an Infrastructure, following Rules (Rail, Money, Religion, State…) Most traditional companies (factories, restaurants, shops, agencies…) are not building networks
• Traditional Networks are governed by Central Operators, which are in charge of building the Infrastructure and defining/enforcing the Rules. Central Operators are useful but they have their own agenda, and are in good position to take a cut on the value created by transacting Users. Facebook and Google are good illustrations
• A Decentralized Network is a Network without a Central Operator, whose Rules are enforced by the Infrastructure itself (you can’t double spend bitcoins, for instance)
• Infrastructure & Network still have to be created and updated by an Organization (Individual, Foundation, Company …), who needs an incentive to do so. It’s hard, since the Infrastructure belongs to the community (Open Source in the case of software) and all the value stays at the Users level, without anyone taking a cut on it (that’s why Open Source is notably difficult to fund for VCs). Ideologic incentives work in some cases/with some people, but is not always enough to mobilize and organize large groups in a sustainable way

II. Tokens are the lifeblood of Networks

Tokens are a fiction used to help human interact with Networks in a cognitively elegant way:

• It is tempting to imagin Tokens like “assets” you can “own”. But a Token is actually an entry in the Network Database that says “The Networks owes x% of it’s production to person Y”. It’s way more easy for a human brain to own “1 million euro” than “a debt vs. the Eurozone of 0,00001% of its GDP”, or “Filecoins tokens” than “rights to get x% of the Filecoin Network storage capacity”
• Tokens value consequently increases when the Network grows (remember, it’s just a database entry that says the Network owes you x% of it’s production)
• Tokens’ practicality is even more useful in the context of Decentralized Networks, since there is no Central Operator you can go to if you don’t understand the rules

This ease of use has various side effects:

• Less friction means more transactions, which is good for a Network
• Since Tokens are easier to understand, it’s easier to think they are valuable and to speculate on their price. A positive effect is that Token Holders have an incentive to help the Network to grow, which kickstarts the Network effect. Second (negative) derivative of this logic is that there is an incentive to hold (=not use the Network) if you think the Network value will grow
• It makes possible to manipulate the wealth dynamics between Users by creating / destroying Tokens (cf. Keynes’ “Euthanasia of the Rentier”). Decentralized Networks make sure this possibility is used for the greater good of the Network and not for the interest of the Central Operator (in theory, at least, since founders who are large Token holders can be tempted to manipulate the market)

III. ICOs are the Business Model of Settling Organizations

An ICO (or SAFT, if the actual Tokens emission happens later) is a two-legged Business Model for the Organizations that create and update the Infrastructure & Rules of a Decentralized Network (let’s call them “Settling Organizations”).

First leg of the Business Model — The ICO itself:

• An ICO is (or should be) a transaction between the Settling Organization and the Community of future Users, in which the Community pays the Settling Organization to build the Infrastructure & Rules
• It means that, exactly as in a traditional IT service deal, the money paid by the Community does not belong to the Settling Organization. It has to be used to build and maintain the Infrastructure & Rules
• Tokens ease of use is handy in this case, since the transaction is actually a crowdsale that happens between the Settling Organization and thousands of Community members

Second leg of the Business Model — Post ICO:

• The Settling Organization retains x% of the Tokens, which gives it a strong incentive to keep updating the Infrastructure

Conclusion — How to spot a legitimate ICO?

3 easy questions to ask:

• Is this Organization really building a DecentraNetwork, or is it just a traditional company looking for easy and unregulated money?
• Is there value to Decentralize this Network ? Some things work very well in a centralized way, plus decentralization is still an early and very costly/underperforming technology, it’s not a good idea to decentralize everything
• Is the value of the Infrastructure the Organization says it will build correlated to the amount and Tokens % they are asking ? (example: Asking €x00m and x0% of the Tokens to “build a new currency for Africa” by cloning Bitcoin is questionable)

If answer to these 3 questions is yes, an ICO may be an appropriate Business Model for the project. The rest is traditional VC analysis (team, market, product…)

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