Stupid ICOs

There are good projects that are putting a death sentence on themselves by introducing an unnecessary token and raising money through an ICO.

An example is a for-profit company that makes an app and charges fees to its users. It then issues a token. The purpose of the token is to be used to pay the app fees. The company sells the token in the offering with the promise that as the app becomes more popular, the token will appreciate in value.

This creates two groups of stakeholders that sooner or later will have opposing interests: the equity holders in the company, and the token holders. The team has a responsibility towards both of these groups, which puts them in an impossible situation.

Founders are blinded by the promise of raising money without being diluted. Instead, they create a second mechanism for extracting value (tokens) that becomes competitive with the first (shares).

They have effectively diluted anyways -- there is a finite amount of value that can be extracted, regardless of the mechanism.

The main problem is the conflict of interest. It will likely lead to both shares and tokens to zero.

It’s frustrating because some of these projects could have been successful companies otherwise. 


Thanks to Tomek Kolinko for the conversations that led to this writing.

1 response
'This creates two groups of stakeholders that sooner or later will have opposing interests' -> what if you separate the streams of revenue, say a gaming platform that will allow the fees for a publishing of a new game on the platform accruing towards the equity-holder, while the profits from trading collectibles within the game to token holders. it does not appear to be a zero-sum game