Emerging Technologies Law is a blog by William Ting which examines 21st century legal, business & Social tech issues.

Vitalik Buterin: 90% of ICOs to flop

Vitalik Buterin: 90% of ICOs to flop

 token buyers should demand substantive rights (CC0 Creative Commons)

token buyers should demand substantive rights (CC0 Creative Commons)

     At a recent conference, one of the founders of Ethereum Vitalik Buterin publicly said that 90% of ICO projects or ERC20 tokens launched on top of the Ethereum protocol will likely fail in the long-term. This is a big percentage, so it is crucial to distinguish between hype and reality. So who is Vitalik Buterin? He was named as one of the top 50 most influential people by Bloomberg, along with Jeff Bezos and Elon Musk.

     Even though in 2017 alone, companies have already raised over $2 billion from ICOs, Vitalik believes that many more interesting token projects are not receiving deserved attention from potential investors.

     The key problem that Vitalik sees is the highly centralized nature of almost all popular ICOs. Most attorneys in this field (wrongfully in my humble opinion) believe that "KYC" and account opening issues are key. KYC safeguards merely allow token issuers to get to know their "contributors" or token buyers (who are now mostly accredited investors anyways) better but do not provide them with substantive rights against the issuing entity. As I have written here, it may be good practice for token buyers to demand the right to vote on protocol upgrades. For example, Tezos expressly allows its users to do so.  Its governance document says that its stakeholders can approve protocol upgrades that are then automatically deployed on the network: 

"[w]hen a developer proposes a protocol upgrade, they can attach an invoice to be paid out to their address upon approval and inclusion of their upgrade. This approach provides a strong incentive for participation in the Tezos core development and further decentralizes the maintenance of the network."

     It is unfortunate however that the token holders of Tezos may never get the chance to use the protocol upgrade voting mechanism given Tezos' dramatic implosion. On October 25, 2017, its contributors filed a class action lawsuit against Tezos' founders in California state court. Regardless of the unfolding debacle of Tezos, at least the market can draw one important "lesson learned": the right for investors to vote on protocol upgrades, which is still a good idea and a right step in future governance documents.

     On a side note, it is interesting to see that the issuers of a "successful" ICO announced that even though it has lost more than US$100 million in the recent Parity hack (the second time in about 5 months), "[its] ability to build Polkadot [the proposed product underlying the ICO] as planned and to the original timetable has not been affected." Wow, that is pretty amazing considering that most startups would have struggled to keep to their original business plan if they were to have lost the bulk of their funding overnight. If losing so much money did not even affect the original business plan, then why was it necessary for the founders of Polkadot to solicit public investors money via an ICO in the first place? Hmmm.

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