On Wednesday the US Securities and Exchange Commission (SEC) put out a press release.
This one had the title ‘SEC Charges Former Bitcoin-Denominated Exchange and Operator With Fraud’.
Another day, another example of fraud in the crypto world. Now I might also add a couple of weeks ago the SEC put out a press release with the title ‘Deutsche Bank to Repay Misled Customers’.
If you think the world of crypto is the only place with scams and fraud, think again. There’s just as much in the financial system you ‘trust’ today. But you probably aren’t as scared by the system you’ve known your entire life.
Nonetheless, we’re talking about crypto here today. And the new charges by the SEC are just some of many more to come.
In fact we expect that, should the SEC decide to rule harshly, a whole number of crypto projects may be in a spot of bother. That’s why, starting yesterday, we are bringing to light the difficulties in crypto. Specifically we’re looking at the wave of ‘initial coin offerings’ (ICOs) we’re seeing.
Of the hundreds and hundreds of ICOs we’ve seen, we could probably name two that did a great job — Civic and the 0x Project.
Almost every other project (regardless of how good their idea is) has in some way made significant errors managing their token sale.
That’s why we decided enough was enough. And today we’re giving our view on a few key points to help run the ‘perfect ICO’. Now, again, we will add there is no such thing as true ‘perfect’. And these tips aren’t comprehensive.
To run an ICO properly requires far more than a 1,200 word article. The good ones take months, sometimes years to prepare properly. The bad ones take weeks.
And when you’re dealing with a whole new kind of market, hype, fear of missing out (FOMO), and speculators, there are going to be issues.
Still, that doesn’t mean projects should be blasé about the ICO process. A start-up that gets it right can build a loyal community. On that gets it wrong could put their whole project at risk.
As a potential ICO investor, this guide could help you find the projects with a chance to succeed. Or send up a few red flags on those that won’t.
The first problem that ICOs have is how they manage their most important asset, their community and network.
We’re not going into a 20-point plan of how to market an ICO. That’s a whole different topic. But the number one thing good ICOs should do is clearly explain each stage of their ICO to their community. Make it clear how it will work, who will get access at what point, and what restrictions people will have.
That means 100% transparency on any seed rounds or private pre-sale rounds. And always use contribution caps — even for seed and pre-sale rounds. The aim is to build a network, not reward a few big fish.
I believe all crypto should go to the community for funding in a token sale. Sure, some early seed capital to get started is important, but with caveats. This also is a discussion for another day.
But there’s one function that’s more important than any other.
Whitelisting your contributors.
You must build a whitelist of potential contributors. You must make sure that as many people get access to your project, while also balancing it to be worth their while.
Just bringing in a huge number of names and allowing a 0.1ETH contribution helps no one. It builds a network, but alienates those 50,000 who want some skin in the game. And even if you do decide to go for numbers over value, you must manage 50,000 people full of FOMO and hype.
That’s why you also must verify the identity of everyone that’s taking part.
Furthermore (and this is where projects fall down) you need to implement a queuing and ranking system for your whitelist. If it’s 1,000 people or 100,000, you need to queue them and rank them.
Equally importantly, you need to get a contribution commitment — I have yet to see an ICO manage this correctly.
For example, project X asks how much you want to contribute to the sale when you sign up. You put down US$10,000.
In all reality you’re probably only going to contribute 1 ETH (US$800). Most people ‘overbid’. They whack down a big number because they think it will push them up the queue. You must prevent that from happening.
It causes havoc for projects. It means sale estimations can be completely out of whack.
New ICOs need to whitelist based on timestamps of registration. Then they need to get a commitment of contribution. They also need to confirm and whitelist the address contributions will come from. This is important so that you can manage your community.
Building the queue means that at the sale, groups of people will have dedicated timeslots to make their contribution.
This eliminates the mad-rush the very second an ICO opens for sale.
For example, let’s say you’ve built a whitelist of 5,000 people. The first 100 have one hour from 12:00pm to make their contribution. Then those from 101–200 have from 1:00pm to 2:00pm to make their contribution, and so on for the next 50 hours.
Yes, maybe it takes 50 hours — maybe 100. But who cares? Selling tokens in five minutes is nothing to be proud of. It shows a lack of care for the community. And stupidity.
Then during the sale, have strict rules in play. If an address does not contribute the initial committed value of that was indicated at registration, their contribution is bounced.
That person then goes to the back of the queue. All the way down to 5,001. It’s incentive to commit early on — and a disincentive to overbid.
This process should cycle through all registrations. It should only take the contributions from those who commit, and stick with their first commitment. It means they’ll have to read the whitepaper, and understand why the project has merit. Ultimately, it will attract more qualified contributors.
That way you can then also work out an estimated contributions cap per person. If you’ve built a whitelist with firm levels of commitment, you can more accurately cap amounts.
Take time and eliminate FOMO
Then, only if after your whitelist is empty and all people — even those that were cycled to the back of the queue — have been processed, do you open it up with no contribution cap.
The likelihood is a well-qualified whitelist with firm commitments will sell out well before you hit the end of the queue. Making this clear too will encourage people to whitelist early and with firm commitments.
Even if you still get through your whole queue without hitting the hardcap, still queue new contributors.
Give every user time. Maybe a 15–30 minute window to contribute. And keep them in groups. This eliminates gas wars and extreme FOMO.
This kind of queuing system was put to excellent use when Civic (CVC) launched their token sale. Extrapolate this with firm commitments and robust whitelisting, and you can create an ICO that gives everyone a chance.
It’s also easy to eliminate the phishing emails and spoof websites. It just takes a little planning. And awareness of your community.
But most projects don’t do any of this.
The actual token sale is an afterthought. The allure of fast, easy money is hard to ignore, and many rush their token sale to market. They just bring in as many names as possible and let everyone fight it out when the doors open. Like Boxing Day sales, but worse.
The best projects take their time. They treat the whole process like they’d be raising capital in ‘traditional’ markets. They get the right advice and the right people in place.
Of course the actual ICO sale is just one of the things needed to make a great crypto project. There’s plenty more. From operational plans, to a legitimate business plan, to how you manage your community and communications.
It’s not just a matter of, ‘Here’s an idea, here’s a website, here’s a whitepaper…go!’
Those projects won’t last. Those are the ones to steer away from. Find the right ICOs with the right criteria marked off, and you’ll go a long way to finding the best investment opportunities.
Editor, Secret Crypto Network