Cryptos, Pokemon:Catch'em all

The parallel is simple to understand, yet counter intuitive to draw.

Up to a certain point, video games were clearly distinct from our reality. With the latest and greatest technological innovations, finding yourself immersed into a virtual world takes the experience to the next level: crowds running all over the place, parking their cars in the middle of highways and rushing to be first capturing Pikachu or Mew-two. The purpose here is easy to understand: “catch’em all”. Gamification at its best.

Now replace Pikachu with Bitcoin, Mew-two with Ether, the “Pokemon Go” app with ICO, and you get the same phenomenon. People projecting themselves in a virtual world, in which they believe that their investments will be somehow transformed into sky rocketing returns. Just realised we have way more cryptos than Pokemon...close to 1,700...vs. 806 Pokemon. Oh wait, have revised my intel and talked to Pokemon experts: if we include all the variations, shinies, and other hybrids - we get 3,627 Pokemon in total...so cryptos have some catch-up to do!

More seriously, the fact that these highly risky and speculative instruments massively enter “the real economy”, without having the proper legal, risk and regulatory framework, should be concerning. Fund raising moved from a mean (to build, sustain, scale a product) to be the actual purpose.

But before moving forward, let’s take a step back. Blockchain? ICO? Let’s cover the basics.

First, blockchain. The initial purpose of blockchain was to design a new economic and transactional model, where the concept of trust is built in the system itself, making all the intermediaries and third-parties involved unnecessary. It has been designed to introduce a perfect system based on Trust and act as “catalyst for global prosperity”. Gartner predicts that “10% of the global GDP will be powered by blockchain in the next 10 years. To understand blockchain better, it needs to be seen as what it actually is: a data base. Blockchain is a data base that:

-        Is “Distributed”. Every person or entity involved shares the same data. A traditional data based get installed somewhere on a server, having an owner and known point of failures. Essentially, in the traditional model, we have no other choice than trusting the owner of the data base. Using blockchain, we all have the same copy or view on the data, there is no central copy, and everyone looks at the same version of the truth

-        Built on “Consensus”. Every person of entity agrees on the data. This is a critical attribute of blockchain. Data is approved by everyone

-        Provides “Security”. The data can’t be changed, with the security being woven into the data itself.

If you take all those 3 together, it gives you Trust, which is what we lack in our traditional system. Whenever you do a transaction, say you buy your morning coffee, it is an average of 13 third parties which could be involved, off the back of the payment and transaction you make.

Among its diverse usage, blockchain powers the world of crypto-currencies. Using the same system based on encryption and mathematics. And trust of course.

Second, ICO. To put it in simple terms, new ventures raise capital by selling tokens at discount (based on digital currencies) with the hope of seeing the underlying currencies appreciating in value - eventually leading to profits, once the ICO is effectively completed.

How does it work? The ICO process is pretty much straightforward: it all starts with the developers declaring their intention of making a project through the platform and putting the word out. Then, a white paper is created, which includes the details of their project (more in an academic fashion). Once their white paper is ready, the developers need to get the backing and confidence from prominent members in the crypto world (acting as “advisors”). They follow on with creating the tokens (along with the various caps), before advertising the ICO (using the platform of their choice, e.g. Waves, ECONOMI, TokenMarket or State of DAPPS for Ethereum only) and finally holding the ICO.

Letting aside the incredible potential of some of these platforms, as Ethereum, which allows people to not only have access to the crypto, but also to create and develop DAPPS (decentralized applications), the real problem can come from seeing brand new ventures raising funds through digital currencies without having a robust enough product. Most importantly, we can see ventures going through ICOs but not having blockchain at the heart of what they do, which tends to increase their risk of failure. All the hype is masking the fact that it is a hard way to raise money. According to an analysis conducted by Bitcoin Market Journal, out of the 877 ICOs completed in 2017, 639 reached their end date and were completed. Out of these 639 completed offerings, close to 42% reported funding figures (raising an average $12,7M sales). In other words, more than half of the token sales that completed did not report how much money they raised. Let’s be open and consider a broad spectrum of why it was the case. One can assume that many of these ICOs have small teams and are exhausted after an ICO sprint. Fair enough. We can also imagine that teams may not be sure on how to report their figures or can simply lack experience in communication. Fair enough…But let’s face it, failing to meet the targets seems to be the top reason of not reporting.

As human beings, we tend to lack perspective. But here, we lost it quite frankly. The combination of the speculative engine and lack of transparency on funding results doesn’t do good on building the concept of Trust that blockchain initially intended to embody.

Like with the broader Technology or science spectrum - there should be a framework (control, risk and legal framework), at least a minimum of ethics put into what we do, no matter how innovative we think we can get.

Don’t get me wrong, I don’t have anything against ICOs and how amazing opportunities are created to build tech companies. I just think that some serious awareness needs to happen, to make sure investors and all players know what risks they might face, and most importantly that we all recalibrate against an actual purpose. To start, we can make sure that

-        The developers describe their project in simple terms, along with the actual purpose

-        The same developers are not anonymous (e.g. names, business plans, locations), and that you are able to contact them. Also make sure that they are reactive when they are sent messages, and that their replies are relevant and specific to your points

-        There is a legal framework between the developers and the contributors (the usual T&Cs)

-        And finally, that the ICO funds are stored in an escrow wallet (that needs multiple keys to be opened, with one of them that must be held by a third party)

It shouldn’t be about speculation but rather about funding relevant projects, ventures and eventually networks that add value to this world. ICO is a powerful way to fund open source Softwares, housed under foundations as opposed to corporations, that can truly drive greater and better innovation. However, some core principles (investor protection, legal framework, regulatory and standard report) need to be built up to help ICOs become a real and safer vehicle of value creation and innovation, and less an instrument of speculation.

Thoughts?