The Whitepaper Can No Longer Be Trusted

2 businessmen over the printed ICO whitepaper, one looking suspicious

The current ICO boom is often compared to the California Gold Rush that ingrained hope into thousands of opportunists that they could get stupendously rich overnight. Same as in the 1850s, people fall victim to the greed for gain which blinds their sight and strips them of ability to comprehend when someone wants to rip them off, purposefully or even unwillingly.

The realm of blockchain and cryptocurrencies is still not well understood by the majority of investors of all calibers, not to mention the general population, and, most importantly, not well regulated, which presents a perfect opportunity for some crypto startups to get away with unfulfilled promises or even fraudulent practices. These startups include not only outright scams that launch a marketing campaign with the sole purpose of getting as much money as possible from the gullible (and inexperienced investors) and then vanish in the boundlessness of the Internet. This relates also to the top ICOs of the last couple of years that managed to attract the attention of vast masses of crypto enthusiasts as well as millions, if not billions of dollars.

How ICO projects delude the investors

Woman looking through a magnifierWhen it comes to large and well-known ICO projects, the deceit comes not so much to coaxing out money, but rather their failure to abide by the fundamental principle of all blockchain-based projects which is decentralization. This notion is clearly pointed out in the scientific work written by a group of researchers from the University of Pennsylvania under the title “Coin-Operated Capitalism”.

According to their study, where they have rigorously analyzed top 50 ICOs of 2017, most crypto projects don’t come even close to meeting the goals declared in their whitepapers. They say that despite the seemingly general adherence to the libertarian concept of trustless trust, the non-necessity of the trusted third-party to carry out various transaction in the network, has been compromised by the fact that a significant number of ICO projects are covertly organizing their business structure in a way that allows them to keep a centralized control over the distribution of funds (tokens) and the overall line of development of their eco-systems.

Oftentimes, it is achieved by introduction of alteration to the initial code without announcing it to the public. This leads to changes in the entire operating system which becomes more geared towards centralized administration.
There are shining examples of centralized crypto projects that hold the top positions on coinmarketcap, with Ripple being the most successful of them. The founders of Ripple have the full control over the global payment network called RippleNet, and own 62% of all existing XRP tokens.

Another company that was suspected of centralizing its operations was EOS that emitted tokens which are currently placed 5th on coinmarketcap. They exercised control over its network through special nodes and acted purely in the interest of a small group of people who held the vast amount of this cryptocurrency.
Lastly, there is an infamous TRON, the founders of which not only resorted to the tactics of centralization but also were accused of having their whitepaper partially plagiarized.

Why centralization and concentration of capital in the hands of a small group of people present a great threat to other investors? First of all, it put the decision-making process and the future of the project in general into the hands of individuals who, at some point, may put their own interest above the well-being of a particular community. Going back to the aforementioned Ripple, in 2015, they froze all account that belonged to Jade MacCaleb, one of company’s founders, and set off the alarm bells for all XRP holders who realized that all their funds could be blocked at the will of company’s management. Besides, it is well-known that centralized blockchain networks are much more prone to various cyber-attacks than decentralized ones which means that these companies are deliberately putting investors’ money at risk.

Judging by the results of the research presents in the “Coin-Operated Capitalism”, there is a definite possibility that many newly emerged crypto projects will walk in the footsteps of the above-mentioned companies.

The discrepancies between whitepaper and practical actions

As already mentioned, the researchers studied every bit of information related to the 50 most successful ICOs of the last year (press releases, tweets, statements), putting a specials emphasis on whitepapers and code. Here is what they have discovered:

  • 32 out of 50 projects claimed that they are going to limit the emission of tokens, though only 25% delivered on their promise. The unrestricted emission of tokens may lead to sharp fluctuations of token price and unexpected pump’n’dumps.
  • 80% of those companies who promised in their whitepapers to provide vesting (the gradual release of funds in the form of rewards to company members or token holders) have failed to include it in their whitepapers.
  • What’s most troubling, is that out of 10 startups that stated in their whitepapers that changes into token operations can come into force retroactively, only 4 startups have publicly declared their intentions to apply such changes.
  • All in all, the scientists came to the conclusion that 40 out of 50 ICOs had some discrepancies between pledges and their practical application in the code. Does it mean that the concept of trustless trust, a cornerstone of the entire blockchain industry, is gradually failing? It remains to be seen, though the tendencies are quite worrisome.

The ways to safeguard against such lack of integrity

A white-haired man reading a printed document in a dark roomAccording to Boston College studies, 55.8% of startups that carried out ICOs in the last year went bankrupt in just four months after their launch. Only 44.2% of them were able to get through the 120-day period. However, as we have seen from the University of Pennsylvania report, even those that made it to the top 50 still conduct unfair practices with regard to their community and investors.

It is obvious now that the diligent study of the whitepaper is an insufficient measure against possible fraudulent manipulations. Besides, given that the crypto industry is still heavily under-regulated, there is little to no possibility that anyone would be held accountable for such manipulations and the resulting losses.

Unless you have confidential relations with the founders of a startup that is about to launch ICO, there are basically only two ways how you can safeguard against possible risks. The first one is to analyze the code which should be found in the public domain on the Internet, such as GitHub. If you don’t know how to read the code, hire someone to do it for you. In case there are any irregularities with the code or even hints on possible manipulations, refrain from investing in this ICO.

Secondly, invest only in ICOs that offer shares in the beneficiary company that handles all financial operations. Certainly, not all companies offer this option, but if they do, it is probably a winner.

You can find ICO listings on this site too, however, you’ll have to manually check them yourself.

Add a Comment