Behind the market madness: 99% of ICOs will fail?

Many companies have raised millions in just minutes, relying solely on a white paper.

To an outsider, this may seem like a surefire way to raise money, but think about it again. ICOs are not about raising money. ICOs are about creating network effects and increasing the value of the ecosystem, which equals an increase in net utility.

Network effects are more important than token and revenue value. Network effects can evolve into multiplier effects ^[1] .

Network effects = more users, more activity, connections to other networks (APIs), brand influence, momentum = scalability. Therefore, not everyone can launch an ICO.

Here are three things to consider before launching an ICO.

1. What is the purpose of your token?

The token you create must provide utility in your ecosystem and increase network effects. Your token must be part of your company's business model. If your token has no utility, you can't launch an ICO.

Ask yourself, if your company would fall apart without a token? If the answer is no, then you don’t need a token at all. Only a few use cases require tokenization.

Most companies don’t need tokens. There is a term called代币周转率. I first heard this term in Kyle Samani’s article.

Token turnover — Do people hold onto the asset or sell it right away?

Token turnover is ultimately about output being greater than input. Tokens are merely a means of circulation, not a value tool. If a token has no value, people won’t want to hold it.

For example: This is also a little-known fact in the ICO space. Most people buy tokens just to get more Bitcoin or Ethereum. Therefore, the turnover rate will increase! Just look at this picture to understand:

Because of their volatility, it seems that altcoins are best used only for trading, but holding altcoins is very risky. This may change in a few years, but currently, there are less than 5 coins in my database of more than 700 that have any interesting developments. In fact, it reminds me of investing in early-stage startups.

This is why most ICOs are doomed to fail from the start. They raise money with a token that has no value. People are literally spending money and getting nothing in return. It's horrible.

2. Cryptoeconomics

Your token must have a reasonable cryptoeconomic model and consensus model in the ecosystem. This ensures the security and utility of the token (which most people ignore).

This requires a great deal of due diligence and the clearest of minds to accomplish. Only a few people in the world truly understand this.

Cryptoeconomics has two pillars: cryptography and economics. Or as Ethereum researcher Vlad Zamfir puts it:

In the decentralized digital economy, there is a formal rule set for the study of protocols that govern the production, distribution, and consumption of goods and services. Cryptoeconomics is a practical science dedicated to the design and definition of such protocols.

To this day, perhaps only a few people in the world understand this.

Cryptocurrencies such as Bitcoin, Ethereum, Monero, and Zcash are all backed by the smartest teams in their fields, who have spent endless time and energy perfecting the crypto-economic model.

So before you start spending your hard-earned money on a crazy ICO, remember that the crypto economy is the lifeblood of cryptocurrencies and tokens. Also, 99% of ICOs don’t spend their time building the crypto economy. Because it’s very… very hard to achieve!

This is also the reason why I almost never invest in ICOs, as most new startups in the industry will not integrate the crypto economy.

3. Security

If you do raise funds through an ICO, and if you play a significant role in it, your first priority is to ensure the security of your clients’ tokens.

At this point, you are a target for hackers, and believe me, they will attack you. Every week, people lose millions of dollars to hackers.

Let’s take a look at this set of data. According to Chainalysis, in 2017, more than 30,000 people became victims of Ethereum-related cybercrime, with an average loss of $7,500 per person. The funds involved in the ongoing ICOs reached $1.6 billion.

Chainalysis, a New York-based company that analyzes transactions and provides anti-money laundering software, said it has lost $225 million to crimes triggered by phishing scams since the start of 2017. In such scams, investors are tricked into sending funds to internet addresses posing as websites offering digital tokens, often tied to the Ethereum blockchain technology.

You have to ask yourself.

- Where are your private keys stored?
- How to protect your wallet?
- How to protect customer token security?

These are issues that need to be addressed urgently.

I only mentioned three issues in the article, but there are many more. I am not writing this article to discredit ICOs. I love ICOs! I think they are extremely revolutionary... maybe one day I will launch an ICO too!

However, what I want to say is that ICO is not just a process of raising funds, but a process of building a network and a new mathematical ecosystem.

I know we will see an evolution of ICOs, from crypto equity to revenue sharing… and a lot of different models. But today, most companies raising money with tokens that have no utility are a recipe for disaster.

Hence the warning!

Notes (↵ returns to text)

1. The multiplier effect is a macroeconomic effect and also a macroeconomic control method. It refers to the chain reaction degree of changes in economic volume caused by the increase or decrease of a certain variable in economic activities. ↵