Everyone’s excited about ICOs. The problem is most ICOs are both totally bonkers and definitely securities. In many cases they are also creating hype cycles that take away from real product development. Take it from the founder of one of the most highly touted early ICOs, we need a way better model.

Totally bonkers

Like the first wave in 2014, ICOs are primarily used by crypto-hipsters, failing startups that can’t raise capital from professional investors, unusual economic experiments, and professional pumpsters who just want to make money pumping coin after coin.[1] Additionally there are startups who have no good reason to have a token but just think “Why not?”

Definitely securities

Why are ICOs securities? Among other things the SEC said so. Like the DAO, most ICOs fail the Howey test. They promise profit based on the efforts of a third party. Oh, there is a “utility” you say? Well even there only some small fraction of those buyers actually plan to use that utility.[2] Additionally typically no product exists at time of sale and the users have effectively no ability to influence the direction of the platform.

Incentivize platform under-delivery

“Ship it” doesn’t simply mean get a coin on the market, it means get a product out the door that works. Internal coin hype cycles (esp. with large pump and dump syndicates), and folks who eagerly jump on the bandwagon of the moment. Real software products take 10 years to build. Teams that join in the hype cycles are usually not there a couple years later, they simply jump from one hype cycle to another. Even the most successful projects have had high team turnover regardless of whether not their product really works (cough cough, Solidity).

Totally disincentivize product delivery

Although I recently quipped on Twitter that in my 2015 Y Combinator interview (spun out of our ad hoc Palo Alto Ethereum office) we were effectively asked “What is ether and why should we care?” The reality, is that the YC interviewers asked legitimate questions about the market for ethereum development tools. “Hype aside, what are the real use cases and what will be launched on it?” I’m not sure we had the best answers to these questions.[3] Because for some of us in the space, token-based hype has been enough for now. Who needs a product?

Wait Joel, is there a solution?

In early 2014 I went through a list of the 84 applications of smart contracts and decided to spend the next 10 years of my life working on what I thought was the highest value application, tokenized ownership models. This fit in with a larger passion of mine to democratize finance.

Even more, I decided to do probably the most controversial thing in this already controversial space, to build a business with an actual product and to only launch it with the right regulatory and legal approvals. This required developing, in stealth, a far more advanced legal model than any other crypto project to date.
This means that we are building in precisely the opposite order of other projects in the space. Business and value proposition first, regulatory and legal second, technology third.

I won’t argue against anyone who has gone in the opposite order. I’m extremely inspired by them. But you need more to build a project that is still around in a few decades.

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[1] Among these “crypto-hipsters” are proponents of the decentralized web in general, a position for which I have a great deal of sympathy regardless of the viability of any related business proposition. The appropriate metaphor is if you gave PGP users a coin for all of the ‘true believers’ in its mission, which effectively creates markets for specific ideologies.

[2] Ether ironically is probably an exception here by generating a currency that you can use to buy other tokens on its platform.

[3] Thankfully Consensys picked up this project and it is now doing quite well.

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