Star Ratings and Blockchain Stock

Matt Levine shared some thoughts on the upcoming ICO from Overstock.com’s subsidiary, T0 (t-zero)

There are two fundamentally different ways to think about “the blockchain” in finance. One way emphasizes the qualities that originally made bitcoin interesting: its trustless, decentralized nature, in which no one owns or controls the system as a whole. This is of course the philosophy behind bitcoin and Ethereum, but it is also the philosophy behind some of the more interesting and successful initial coin offerings. “The point of an ICO, done right,” I wrote recently, “is that you are not building a business; you’re building an unowned system for everyone to use.

The other way to think about “the blockchain” ignores those philosophical ideas and just treats blockchain as a technology improvement.

He goes on to portray what a mere technology improvement would look like for T0:

“All stock securities will eventually become tokens” [Overstock CEO Patrick Byrne’s quote] sounds ambitious, and in a way it is. If it’s true, then the opportunity for blockchainy stock exchanges like tZero’s to displace incumbent banks and exchanges is enormous. But in another way it is a retreat from the more interesting ambitions of blockchain proponents. It’s not a new form of business organization, a new way to build decentralized protocols to displace corporations as the engine of technological innovation. It’s just the regular old form of business organization, through public stock corporations, but on the blockchain.

Not exactly the future most crypto-enthusiasts are looking for. It needs to be more than that.

3 Keys to Optimal Token Sales

Albert Wegner with thoughts on Optimal Token Sales:

Though he goes into much more detail, the basics are:

  1. Keep initial sale small.
  2. Hold one or more subsequent sales of increasing size
  3. When the protocol is ready, hold a final sale and/or distribution that gets all but a small fraction of the initially available tokens out for use.

Some of his ideas are quite similar to what Vitalik described previously (which he also cites). Before getting to the right way to hold a token sale, he lays out the two extremes in token sales with the right way somewhere in the middle:

The most potential for trouble are token sales which are one-time, large (possibly even uncapped) and take place when minimal specification / technical work has been done. In these the risk of outright abuse is highest (eg team starts paying themselves above market salaries, lavish perks), as well as the risk of nothing of use ever shipping is highest also

Conversely, the least problematic and the best incentives for the operation of a protocol would come from a highly distributed “helicopter drop” of a token that can immediately be used in a fully functioning protocol. The team makes no money here so there is zero potential for abuse, there is no technical risk (by assumption) and the recipients have a windfall so they will have no issue selling or using the token.

“99%+ of the ICOs out there are scams”

From Pierre Entremont early this month, 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.

He’s not the only one that things many ICOs are scams, though the 99% figure seems high. While most projects may not succeed, it seems ridiculous that 99% of projects are out to purposefully deceive investors/token holders. Entremont lays out his questions to ask for determining if a particular ICO is legitimate:

  • Is this organization really building a Network, 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)

Most certainly don’t pass those questions and are using token sales primarily as a fundraising method .That doesn’t necessarily make it a scam, in my opinion, but they aren’t capturing the full technological potential presented by tokens and blockchains.

Thursday Links

  1. Guide to launching an initial coin offering – by Chris McCann. Given the relative newness of ICOs, he acknowledges it’s an evolving process:

    Given the blockchain industry is relatively new, there isn’t a whole lot of information on the topic (from a project’s perspective), and with each new ICO, teams are learning best practices on what to do and what not to do. Below is a guide of all of the information we collected about the ICO process, with input from people who experienced the process first hand…We will update this post with changes as we collect them.

  2. Brett Winton on How to Value a Cryptoasset. This is a precursor to Chris Burninske’s post, which we mentioned last week. Definitely still worth a read.

    At the simplest level, the network’s value is determined by the value of tokens that get held aside in user wallets to facilitate the network’s transaction flow.

  3. Lawrence Lundy on Convergence and the larger scale implications of blockchain:

    This means we constantly underestimate the pace of change and as software eats more industries, improvements compound as traditionally human-centric industries like healthcare, logistics and agriculture digitise. As these industries come online and capture, process and automate data; ownership of this data will define the state, market and nation over the next half a century. Blockchains are therefore one of the most significant technological innovations since The Internet and fundamental to Web 3.0.

    The development of blockchains is a good example, as exceptionally talented developers push the boundaries of cryptography with zero-knowledge proofs and smart contracts but fail to see the implications on broader governance structures and political philosophies.

  4. CB Insights’ published Blockchain Investment Trends In Review with lots of analysis and data on the amount being raised both via VC and token sales.

    The steady decline of early-stage equity deals may indicate that blockchain, like other emerging technologies, is undergoing the evolution from creation, to crowding, to consolidation.

    However, according to CB Insights data, blockchain’s consolidation may be tight, with blockchain companies failing at a higher rate than tech startups in other areas. Of 103 blockchain companies that received initial seed or angel funding in 2013 – 2014, only 28% managed to raise additional funding, and just one company made it to Series D: Japan-based cryptocurrency exchange, bitFlyer, with a small $1.8M round.

    In comparison, of 1,098 tech companies we tracked that raised seed rounds in the US in 2008 – 2010, 46% raised a second round of funding. An additional 14% went on to raise a fourth round of funding, versus blockchain’s 2%.