ICO Pruning

The ultimate guide to ICO selection

With the recent influx of ICO offerings and in the aftermath of the recent Chinese ban, I like to offer several guidelines for how to select an ICO for investment.

ICO is an excellent mechanism for entrepreneurs and startups to raise funds without giving up equity. It is also an excellent tool for small investors to invest in technology startups. However the wild west like environment surrounding this type of crowdfunding has lead to proliferation of low quality offering which are only likely to enrich their seller and not provide real value to the buyer. See many examples here

Before you read on, please understand that I’m also shamelessly promoting my company crowdfunding campaign https://www.jelurida.com/ico

So what should you look for before investing in an ICO?

Here are some pre-conditions which will allow you to quickly filter out ICO offerings which are unlikely to deliver on their promise

1. The ICO has no Whitepaper or has no legally binding terms & conditions document — skip
2. The ICO has a Whitepaper that describes what the team would like to achieve but without any technical explanation and measurable milestones and description of how the raised funds will be spent — this team likely lacks the technical skills to implement its plan — skip
3. Is the ICO backed by celeb, rock star, rapper or even a rock star investor — this should generally ring some alarm bells, since if the team had a real product to sell they wouldn’t need this, however, this can also characterize a legitimate product with aggressive marketing — continue with caution
4. The token issued by the ICO promises a share in the company or some sort of voting rights or decision making which may characterize it as share or security — this team may run into issues with the authorities — continue with caution
5. The team behind the ICO has no proven domain specific expertise in decentralized applications development — finding experienced blockchain developers is a very difficult task these days, and this could hint that the team is just hitchhiking on the ICO trend — continue with caution
6. The team sold large proportion of the tokens in a pre-sale to private investors before the public offering or keeps large proportion of the tokens to itself — this represents in general a bad business practice in my view but can be excused as a necessary step in order to fund legal and marketing activities — continue with caution

Now that we skipped or marked the suspicious offerings, let’s deep dive into the actual application.

As an investor you have to realize that the token you’ll receive is first and foremost an operational token used to participate in an application or service developed by the ICO team. Whether or not you’ll use this token for its intended purpose or as a speculative investment its up to you, but I seriously recommend to evaluate the functionality of the token before buying it.

To better analyze this, let’s separate the ICO offerings into two types, blockchain infrastructure token and blockchain based token.

Blockchain infrastructure token represents a stake in a future blockchain or decentralized ledger technology. When looking into this type of token, check if the team already has substantial technology and intellectual property which they develop on top of (this is a good sign) or if they are going to clone a product that someone else has developed (this is a bad sign) or even worse if they are planning to start from scratch.

Now consider that blockchain technology is notoriously difficult to develop, it is difficult to parallelize and requires deep understanding of security and cryptography, skills that the typical corporate developer typically lacks.

Therefore if the team behind the ICO does not control a key component which represents significant intellectual property, then there is a huge risk that even if they have a good idea, someone else will steal it and develop it before them.

Blockchain based token represents a token which is traded on top of an existing blockchain infrastructure such as Ethereum or NXT. When evaluating this type of token, I recommend that you use the ability to scale as a primary filtering criteria. Many of the recently issued ICO tokens and the ones in the pipeline, completely ignores scaling issues. These tokens are easy to spot but I leave it to the reader as an exercise. When evaluating the application represented by these (mostly Ethereum based) tokens, it easy to calculate that even if the team fully delivers on its promises, the scale of transactions required by the application, is on an order of magnitude higher than what the Ethereum protocol can support. Let alone that this token will need to compete with 100’s or 1000’s of other applications on the same blockchain space.

Therefore when looking into blockchain based tokens, you need to take great care and understand how the token will scale behind what can be provided by existing blockchain infrastructure.

To summarize, ICO represents a very attractive option to raise funds for the both entrepreneurs and small investors. However investors are urged to use caution when evaluating ICO offerings and only invest in those offerings which represent real technological breakthrough and pragmatic solutions to real problems.