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ICOs are no longer a niche corner of the fundraising world. In their analysis of ICO versus venture capital fundraising for 2017 and the first few months of 2018, Crunchbase found that ICOs generated three and half times more funding for crypto-related startups than traditional venture capital. During June and July of 2017, ICO fundraising across the entire tech world exceeded angel and seed-stage venture capital funding. ICOs have already surpassed the $3.88 billion they raised in 2017, raising over $6 billion during the first three and half months of 2018.
The massive amounts of money raised through ICOs are bringing plenty of the trappings of mainstream respectability with them, such as interest from establishment investors and (for better or for worse) the scrutiny of the SEC. But they’ve also attracted an increasing number of scammers to the cryptocurrency sphere. A report from the Satis Group, an ICO advisory firm, recently concluded that a whopping four out of five ICOs are scams (though other analysts have shared less damning estimates, such as an MIT paper estimating 5 to 25%).
German ICO Savedroid is one of the most recent scams to hoodwink the ICO world. After raising $50 million for a (supposed) product that would manage user investments, Savedroid’s website was replaced by a mocking image from a South Park episode and its founder and employees are nowhere to be found. Savedroid now appears to be an “exit scam,” a con job in which an individual or team will offer an ICO, then simply disappear with the money rather than following through on any of the products promised. Vietnamese company Modern Tech recently pulled off an even more prolific exit scam, stealing $660 million.
How can savvy token buyers tell the difference between scam ICOs and legitimate ones? There is no absolute foolproof way to avoid scams, but scammers are usually more interested in gathering large amounts of money quickly than they are in designing a meticulous long con. Which means potential token buyers can get a sense of an ICO’s likely legitimacy through some basic investigative work.
Check Company Connections
In a popular post on Steemit, user moonjelly demonstrated just how easy it can be to fake superficial elements of a legitimate ICO, such as an aesthetically pleasing website and credibility on the popular Bitcointalk forum. Rather than paying for real developers and other employees, many scam ICOs will use their website to boast of a fake staff using information culled from the internet. At times this strategy can go comically wrong — see the Miroskii ICO, which landed in hot water after using a picture of Ryan Gosling to represent their graphic designer. For less obvious cases, it’s important to check up on staff members’ claimed credentials and experience in the blockchain world (keeping in mind that some credentials, such as Bitcointalk rankings, can be faked).
Some ICO scams profit by claiming connections to established companies. Popular messaging service Telegram made waves earlier this year when their ICO raised $850 million in their first round of token sales. Those token sales were entirely private, but many scam websites still popped up claiming to provide Telegram’s “official” public ICO.
Some of the most promising ICOs out there are in fact tied to well-established companies, who are combining blockchain innovation with their hard-won expertise and sway in their market. SuccessLife is a new token venture launched by Success Resources, a group with over twenty-five years of experience offering personal development events featuring speakers such as Tony Robbins and Richard Branson. The personal development industry is valued at almost $10 billion, and token purchasers are likely to feel reassured by Success Resources’ market presence and experience in this valuable industry.
Diligent investors can assess the relationships ICOs claim to hold with other companies. While Telegram’s website has no link to a public ICO, Success Resources’ website discusses and links to the SuccessLife token sale in multiple locations.
Use Cases And Code
Keeping an eye out for plausible use cases is a good idea whether investors are checking specifically for scams or more generally for quality tokens. Use cases imply that tokens have been thought-out and are meant to be true utility tools rather than cash grabs.
DAOstack is one example of an ICO offering a use case. This platform, which describes itself as a “WordPress for DAOs,” provides a comprehensive user-friendly toolset for developers building governance modules to operate within their own decentralized autonomous organizations. DAOstack’s platform can be accessed with GEN tokens.
The first DAO to be built on DAOStack, the Genesis DAO, will be launched in 2018. This DAO will use governance modules built on DAOstack, such as a unique holographic consensus technique, to build out DAOstack’s capabilities and user interfaces, and generally steer it into the future. DAOstack is ultimately making their own product into a use case for itself, demonstrating applicability and thoughtfulness that buyers are unlikely to find with scammers.
DAOstack is also one of many ICOs sharing vital information that non-scam token launches should make available: their open-source code. DAOstack has a robust Github repository of their ongoing code development process. While anyone can fake a website and a group of employee profiles over the course of a few hours, real code product requires expertise and time. Serious token purchasers should audit code, or work with partners who have the ability to do so, in order to identify quality products, and ICOs who aren’t scams will often provide that code gladly.
Disclosure:
The author has had a working or personal relationship with one or more companies mentioned in this article in the past. Access to mentioned company’s management and information was made through the author’s personal network. All information was vetted prior to posting.
Disclaimer:
This essay is not intended to be a source of investment, financial, technical, tax, or legal advice. All of this content is for informational purposes only.
How to Spot a Scam vs. the Real Deal was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.
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