With the recent Bancor Initial Coin Offering (ICO) raking in over 150 million USD in ETH, it is undeniable that ICO’s are huge. They are hyped throughout the community, and they often sell out within hours, minutes, or even blocks.
With “The DAO” incident still fresh in the memories of many, ICO’s can be a little worrying. This post will include the common concerns relating to the rapid ICO growth, and my opinion on their validity.
Speed of sale
ICO’s that are extremely popular can and have sold out in only a handful of blocks. Some see this as a problem because many smaller players have trouble buying only a few tokens without spending a ridiculous amount of gas to get their transaction verified before the token is sold out. Purchasers will likely have to use a program like Parity and take advantage of its automatic sending feature to attempt to send their transaction at the exact block number that the ICO begins.
I see this as one of the weakest arguments against the current ICO model. ICO’s are held to collect funds, and are not intended to allow everyone to have a piece of the pie. While it would be nice to allow those who only wish to purchase a small number of tokens without expending a large sum of gas, this is a problem with the platform itself, and not the ICO model. If a whale wishes to buy up 30% of the tokens in one transaction, I do not see why he/she should be limited from doing so.
Legitimacy and success rate
How can you tell if an ICO is going to succeed? There is no foolproof method. Many like to analyze the project’s team and their past projects or contributions to the cryptography and programming world (for example, Brave).
It is horrifyingly easy to make some fancy mockups and a technical whitepaper to generate interest in your project, and this is something that worries me. It would not be hard to generate interest in a facade of a technology and make away with the funds, especially with the current buzz around promising ICO’s. Auditing of project code is helpful, but not every project supplies code to be audited before a crowd sale, or the project may have no publically written code at all.
Another common argument about the danger of ICO’s is often called “dumb money”. When people talk about “dumb money” in the Ethereum space they are talking about people who do not have a full understanding of the technology, and rather see it as a means to get rich quick. These people could be looking for Bitcoin 2.0, or want a share in the price growths of ETH. The argument is usually based around the fact that “dumb money” generates hype around ICO’s or even ETH itself without actually understanding the technology itself, hiking the price up to an unhealthy point. They likely do not plan to use the tokens for their intended use in the ecosystem, but rather list them on exchanges as soon as they are accepted.
Widespread effects of a failure
Perhaps the scariest thing about ICO’s is what happens if one fails. The effects of an ICO failure would surely have community wide ramifications, but what exactly is an ICO failure? An ICO failure could come in many different forms. Funds could be mishandled, smart contracts on the network could be exploited in a way that causes funds to be lost or stolen, a project could not make any progress with the collected funds, or many other things. A failure of a large ICO could have an effect on the price of ETH if holders sell in fear of a collapse, or leave a bad taste in the mouths of potential buyers. The network may not be ready for ICO’s, but that isn’t stopping them.
What happens in a failure? It’s hard to say, but I am sure we will find out soon.