The Initial Craze For ICO Tokens Led To Thousands Of New Millionaires, But Failed At Protecting Investors
Initial Coin Offering (ICO) was the go-to method for anyone in the decentralized space to raise capitals for its potential project. ICOs were basically the modern-day crowdfunding and rode on the phenomenal rise of Bitcoin prices in 2017. However, ICOs became one of the easiest ways for scammers to get away with millions of investors money.
ICOs were not well regulated and had little to no requirement to show a working product. A fancy white paper and a bit of bought publicity can easily get an investor's attention. As a result of this, the ICO era led to thousands of new millionaires, but it failed to protect the interests of investors who bet their money on these projects.
According to a survey of 50 ICOs in 2017 which fetched the biggest capital, conducted by two academicians David Hoffman, a law professor at the University of Pennsylvania and David Wishnick a fellow at the same institution. The survey revealed that the ICO bubble led to the creation of thousands of new millionaires before the bubble finally busted.
What Led Investors To Pour Their Money In These Projects
The cryptocurrency was still quite an unfamiliar domain for many in 2017, but the phenomenal rise of Bitcoin was followed by tons of free press and investors flocked the scene as there saw quick money. The fraudulent ICO operatos used to trick investors with technical jargons and stating many promises in the white paper, most of which were not fulfilled.
As per the survey, most of the projects failed to deliver on most parts of the promises made in the white paper. It was also found that investor protection and the promises were not hard-coded into the contracts. Thus, by mining a few words here and there in the contract operators were able to get away with things like minting more coins than promised, diluting the overall market value and share of investors.
Another Survey conducted by the University of Pennsylvania discovered that 25 of the 36 projects with explicit restrictions on team divestment had not included the parameter in their code.
Another shocking revelation suggested that 12 projects allowed themselves to centrally modify a smart contract code, thus violating the basic principle of decentralization. Of these 12 projects, only 4 of them informed the investors about this aspect of their smart contract codes.
The ICO rating websites were also not well equipped as they only cared about the security aspect of the project rather than the nature of the smart contracts.
Hoffman concludes his survey with an article which states that,
“Such market integrity measures won’t just protect investors, they will also build trust in the asset class itself and enable it to move from a curiosity to something of real economic worth”