You may think a cryptocurrency initial coin offering is a good way to raise money, but Ethereum co-founder Vitalek Buterin doesn’t.
The Ethereum co-founder and blockchain guru says that cryptocurrencies that have no purpose outside their own closed systems will quickly lose their value, and that’s a matter of simple economics.
As we draw closer to the end of year, one thing that 2017 will certainly be remembered for is the rise of the cryptocurrency initial coin offering or ICO. Although practiced in previous years, the fundraising ventures witnessed a bonafide explosion this year, with now literally thousands of ICOs having been hosted. Goldman Sachs reports that since June, ICO fundraising has now eclipsed traditional early stage VC investment in tech startups, with the full cryptocurrency market including heavyweight Bitcoin now worth more than $200 billion.
Predictably, the trend has attracted its share of naysayers, many of whom worry that ICOs could merely be cash grabs without substance. Investors aren’t typically given a stake in the company but are instead issued digital tokens, which can then be traded or, if available, used for services provided by the company’s digital platform. That scenario has caused some to compare the ICO boom with the dot-com bubble of the late 1990s, as both, the claim goes, involve high levels of investment in assets that don’t (or didn’t) have any record of generating revenue.
But there’s a problem with ICOs even if there’s a revenue-generating stream, says Buterin, who argues that based on simple economics, if tokens only have purpose as a medium of exchange within a given company’s closed system, that token will eventually lose all of its value.
Speaking last week at the Inclusive Blockchain Conference at the Singapore University of Social Sciences, Buterin made a point of singling out ICOs which are “just trying to make money out of nothing,” saying that this type of behaviour is a detriment to the blockchain and cryptocurrency movement.
Buterin gave the example of an Uber-like ICO for tokens called Dubers, saying that if the only value of a Duber is to pay for ride-sharing services, then people will be constantly exchanging that token into something more usable, essentially holding onto Dubers for as little time as possible and eventually (or quickly) driving the price of a Duber down.
“Eventually the Duber’s price is going to drop to zero,” says Buterin. “This is an example of an economic model that doesn’t make sense.”
Buterin says that there are other ways to raise funds, if that’s a company’s goal. “As a community, we should try to move away from this kind of system,” says Buterin. “My heuristic for an ICO or what would make sense for that kind of blockchain protocol is, can you come up with a design where the system does not have a token and development just gets paid for with fees?”
“If you can’t, then basically you’re trying to create money out of nothing, and you should really stop,” he says.