How ICOs are becoming increasingly unfair and what founders can do about it.
When you were born and raised in Germany you’re among the most privileged people in the world. You can travel to 161 different countries, and everybody will be welcoming you and your money. A German passport will come in really handy when dealing with finances, and with an average German income, you’ll have more ‘spare money’ than most other people pay for their monthly rent. That’s how I thought when I invested in my first ICO: ‘loosing 50,- USD won’t do much harm, you won’t miss them’. It turned out that with as little as 50,- USD you could earn a four-figure-sum on ICOs in 2017.
Go back one year, and you had a number of great projects that you could invest in with as little as 50,- USD. That has changed. Not only will most token sales have a minimum contribution today, but they will also impose restrictions, both jurisdictional and organizational, that make it increasingly hard to get a place in an initial token sale. It’s become so hard that even I as a privileged German citizen am having problems securing my place in today’s ICOs.
Let‘s put the figures into perspective: cryptocurrencies are a worldwide movement. In the Telegram groups and forums, you’ll meet people from all corners of the world. Actually, if you have a closer look, you’ll see that a significant portion of the ICO fanbase are people outside of western industrialized countries. This doesn’t come as a surprise once you forget your well-trained western-centralized vision of the world. In pure numbers, we Europeans and Northern Americans are small. To add to that, a large chunk of the work put into ICOs does not come from us privileged western people who have a 10.000+ USD budget per year to spend on blockchain; it comes from people for whom a 50 USD investment is a hell lot of money. And since it’s a lot of money, these people put a lot of energy into the marketing of ‘their’ ICOs.
That’s okay. The relatively small amounts of FIAT-equivalent that you earn by participating in bounty campaigns are worth more in most parts of India than they are in Belgium. It does pay off. However, cryptocurrency used to be a community-driven endeavor. What matters most in decentralized systems is the decentralization and decentralization comes from spreading both the work to run a decentralized system (mining) and its merits among as many people as possible. Some might argue that the allocation of wealth in Bitcoin is far from equally distributed and I will agree. But contrary to Bitcoin, many new blockchain projects and especially those who offer an ICO have more and more entry barriers that prevent a fair distribution of (possible) earnings right from the beginning. Remember: if it’s not open to everybody, it’s not a market.
84% of all Tokens are Being Sold in Private and Pre-Sales
Two things make cryptocurrency increasingly unfair:
- Regulation that prohibits citizens of certain countries to participate in crowd sales
- Badly organized ICOs
While the first one is out of the crypto sphere’s hands, the second does have lots of room for improvement. Still, it seems that the more popular and sophisticated ICOs become, the less likely it is that your contributions will be welcomed — be it because you have the ‘wrong’ nationality, a slow internet connection, insufficient funds or simply aren’t lucky enough to get in on time. During the first two months of 2018, already 2 billion USD have been raised in initial coin offerings. A whopping 84% were sold during private and pre-sales, leaving only 16% to the general public. Some companies claiming to build a fair decentralized system for purpose XY even skip any kind of public contribution completely. That’s a disgrace to Satoshi’s vision, part of which was that access shall be open to anybody. If a company (or a foundation) decides to sell their premined supply to chosen investors who then sell it at x5 the price in the first week of trading, then there’s something horribly wrong with crypto.
High Demand for ICOs is a Big Challenge for Founders
In the course of the last months, ICOs have risen in popularity. While the Telegram group size of a popular project used to be 10k six months ago, even a mediocre ICO can easily reach 30k group members today. Just have a look at the largest Telegram groups ever created, and you’ll find many well-known ICOs among them. This is putting a lot of pressure on founders since they need to find a way of how to both select the ‘right’ investors and prevent the systems from overloading.
What worries me a lot is that even for me as a very privileged person, it is becoming more and more difficult to get into token sales. Often, this is due to a bad organization of the KYC process and/or the token sale. To add to that, the communication with the community often can’t live up to how complicated holding an ICO really is. The most common phrases I read in blockchain projects are ‘We apologize’ and ‘We did not expect that much interest.’ Well, you should have. It doesn’t come as a surprise that opening the floodgates for your ‘blockchain 4.0’ or ‘future of blockchain project’ will clog the Ethereum blockchain. It’s also no surprise that the KYC form that you’re making available via ‘Google Forms’ at 2 pm GMT will be shut down by Google because their servers will interpret your community followers as a DDoS attack.
Popular ICOs need to answer four questions prior to building their community and slowly leading them to the token sale:
- How are we going to make sure that every follower will be able to participate in our token sale with a reasonable hard cap (per capita and overall)?
- How are we going to structure the access to the token sale without risking that in a first-come-first-served-scheme large investors will buy a majority of all tokens?
- How are we going to organize a KYC process for a five-figure sized community?
These are hard questions to answer, and there are different ways of how to organize your ICO:
- Set up a whitelist: first come, first served
- Set up a whitelist and filter through your potential investors according to different criteria like community support or quotas
- Implement strict KYC procedures that will eventually filter out many participants, thereby making it obsolete to sort through your whitelist
- Increase the overall hard cap
- Set a hard cap per capita
- A combination of some of these
Still, the last weeks have been the most frustrating ever since I started investing in ICOs. It is obvious that founders are struggling to keep up with the demand for their tokens. At the same time, the solutions they come up with seem to make it a lot worse — not only for people with low funds.
The Community Does the Marketing and Large Investors Get the Tokens
One of the most popular ICOs of 2018 was Refereum. Yet, it was one of the most disappointing ICOs I have ever seen. I will not ease my words here: I think the way they treated their community was disrespectful. And that’s why Refereum serves well as an example of how not to launch a blockchain. Still, Refereum in itself is a great project. They have an MVP that works well, great partnerships, a top-class team and there is a need for disruption in their business area. So what has gone wrong?
In Refereum’s business model, RFR tokens serve as a means of payment for marketing and developing video games. Video game enthusiasts can play video games and stream their gaming sessions on the platform and, by doing so, earn RFR tokens. You can also buy video games with RFR on the Refereum platform. The ultimate goal is to reward those who put a lot of effort in video games with a fair share of the industry’s revenue.
People interested in Refereum had the possibility of earning RFR tokens from the beginning on by using the platform and referring it to friends. Refereum made a great effort in putting the community aspect up front. I’d even say until the actual token sale (or what would be left of it), the communication with the community was excellent. They just didn’t live up to it. Looking at how they achieved that massive community growth, their vivid community management leaves a sour taste.
Refereum made it very clear that not everyone was going to get a place in their token sale and that they didn’t want to sell their tokens off to speculators. Instead, they claimed that they wanted to establish an “orderly system that maximizes the percentage of community participation.” They heavily encouraged people to use the platform saying, “the best thing you can do right now is join Refereum.com Season II and enjoy and share the platform.” People followed, yet the instructions on how to get a seat in their token sale were quite opaque. It still seemed very clear that to increase your chances, you had to use the platform and show your love for the project. First of all, everybody signed up for their MVP which was already working well. So eventually, every potential investor became a Refereum customer — whether or not they were actually interested in video games. Then people started referring other people. A typical question around the Refereum community at that time was: How can I gain more points? Well, there were several ways: you could start streaming your gaming sessions, you could refer other investors to their website and/or Telegram group, and you could even buy games and get rewarded with Refereum points. Still wonder how they managed to reach 100k members in their Telegram group? That’s how.
On February 8, when their ‘pre-sale’ was supposed to start and everybody was waiting for instructions on how to participate, the more than 100k members of their Telegram group received this message: “THE REFEREUM TOKEN SALE IS COMPLETE.” Refereum reached their overall hard cap with an unknown number of chosen investors. They ditched the ICO which was supposed to happen a little later this year and claimed that they had chosen those investors who had shown the most interest in their actual business.
However, in the eyes of many investors, Refereum sold off to a small number of ‚whales‘ or other more privileged investors and used the ‚community‘ to promote the project. In my opinion, people have good reasons to think so. Imagine you’re a young Pakistani guy, spending all your spare time promoting blockchain projects; imagine you’re a small investor, ready to invest 1000,- USD into Refereum, referring the hell out of it, sharing every tiny piece of news with your friends, waiting impatiently for the start of the token sale and all of a sudden, everything is over.
Founders need to realize that the community is not only a way to kickstart your token into the wild but a significant marketing factor. Without the community, there is no Ian Balina because there is no liquidity in the market. If you as a marketer for a blockchain project go all in on community and referral marketing, you make a certain promise to the people helping you out which is: ‘you’ve been here right with us from the start, you’ll get your place in our token sale.’ That is one trend in ICOs that is completely getting out of hands: the community is being degraded to marketing only.
KYC Procedures Should Not Be Used to Filter Through Your Investors
But even if you’re willing to give all of your followers a place in your token sale, it’s easier said than done. There are a couple of other examples that illustrate this. Take WePower for example, another very popular ICO in 2018 with a large community of interested investors. As with the majority of token sales, WePower made their investors undergo a KYC-procedure. Unfortunately, it didn’t go as expected. I‘ll take myself as an example in this case. As mentioned in the beginning, due to my nationality alone I am among the most privileged people in the world. With my German ID I can open online bank accounts in Germany and the European Union without any problems. KYC procedures had never been an issue for me — until a few months ago. Suddenly, I started receiving rejections for the same documents that I had used in many previous ICOs. I have experienced this with WePower as well as with Dether — both very popular ICOs. And there is only one explanation for it: founders send out KYC rejections randomly in order to filter through their whitelist applications.
With Dether, the case was most apparent: they were surprised by the number of applications for their whitelist and very obviously had difficulties to go through all applications in time. 1941 out of 5309 KYC applications were rejected. Among them mine as well as many others who also claim that they never had problems with the documents submitted. This is both: bad organization and bad communication.
I do realize complaining might be easy in my position since I don’t need to go through 30k passport copies in bad quality. I also don’t need to build the infrastructure necessary to handle all those whitelist applications. But I do know two things:
- Tokens should be available to those who have been following a project for the longest and invested the most energy
- Dishonest communication is unacceptable in an industry that is all about decentralization
I hope that the maturation of token sales and the influx of institutional investors will not further kill the community aspect and that, in the future, small investors and blockchain enthusiasts will still have a fair chance of purchasing tokens in token sales. One possible solution is a dutch auction as it is planned for the Metronome token sale. If this goes well, future blockchain projects could take this as an example of how to organize their initial token distribution in an orderly and fair manner.