Link Round-up: ICOs and Ponzi Schemes

Last week, the Brave browser company raised $35MM in funding through an ICO. Which leads to the very obvious question, “what the hell is an ICO?” And, as you dig deeper into this question, the follow-on question “what differentiates an ICO from a Ponzi scheme?” Let’s find out, shall we?

First, a quick definition of an ICO or “Initial Coin Offering.” In a nutshell, companies are creating tokens that represent an asset (in the Brave case, access to advertise to a user) and then selling these tokens. Generally, these tokens are created on the Ethereum network and purchased using ETH, the Ethereum cryptocurrency. In other words, you can only buy tokens in ETH, and the proof of your ownership is managed by the Ethereum network. (Update: Thoughts on Tokens – this is an excellent introduction of the underlying token and ICO concepts.)

So far so good? Down the rabbit hole we go!

  • Tulips, Myths, and Cryptocurrencies – after a long but fascinating introduction regarding the famous Dutch tulip bubble, Ben Thompson makes the argument that although cryptocurrencies and ICOs may be in a bubble, it is the result of bad timing, in other words it is too early to be investing so heavily in these products.
  • What if the bitcoin bubble bursts? – No less a publication than the Economist says, “If there is such a thing as a healthy bubble, this is it.”
  • ICOs and VCs – An attempt at legitimizing ICOs by an entrenched VC, Fred Wilson. He previously announced a Token Summit and has been discussing cryptocurrency and tokens on his blog.
  • Dissecting Ponzi schemes on Ethereum: identification, analysis, and impact – research analysis on the creation of Ponzi schemes on the Ethereum platform. Helps explain the different types of schemes, the prevalences of schemes, and also a quick introduction to a high-level programming language on Ethereum, Solidity.
  • It’s not just a Ponzi, it’s a ‘smart’ Ponzi – FT connects the dots between the above paper and ICOs. Essentially, given the lack of real-world buying power of most cryptocurrencies, the entire game can be seen as a giant ponzi scheme or, at best, rampant speculative market.
  • Dear SEC: ICOs & ‘Tokens’ are killing innovation – Further argument that ICOs are simply unregulated IPOs that give insiders access to liquid capital with no requirement or strong motivation to follow through on the underlying products or services.
  • The Rise of Cryptocurrency Ponzi Schemes – I found this article late, as in, just now. It ties together the wide-eyed promises of the potential of legitimate ICOs with the dark underside of scamming and ponzi schemes.

My conclusion: given the lack of any real value being backed or created by these cryptocurrencies and tokens, the entire market seems to be in the midst of a massive speculative bubble. I leave it to the reader to decide whether or not it is ponzi schemes all the way down. It seems inevitable that the SEC will come down on the issue of ICOs, the only question is “how hard” and how that will wind up impacting the /r/ethtrader investor class.

Amusing bonus link: PonzICO – The fully-transparent Ponzi ICO scheme, a parody effort. The whitepaper is an amusingly cynical read.

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