Ultimate checklist to critically evaluate an ICO
The ICO storm has only begun. Initial Coin Offerings or ICOs is a technique many early-stage projects are using today to raise crowd-sourced funds.
How? Typically, the project in question puts their underlying cryptotokens up for sale in exchange for existing cryptos.
Who buys? Anyone can. You, me, your friends, your neighbor-next-door, ANYONE! As opposed to IPOs where companies reach out to angels and VCs, ICOs are open to the general public.
A flowchart depicting the basic mechanism of an ICO. Copyright reserved.
While projects/startups sell a percentage of tokens to raise money, everyone who invests a.k.a tokenholders buy these tokens when they have faith on the project and expect it to become a success and subsequently the token prices to shoot up- giving them a massive ROI. This way early investors who take risks and invest in a potentially big project stand to benefit the most.
Additionally, since token prices during crowdsales are usually low which makes it even more lucrative. FOMO is real!
With companies raising whooping sums like the record-breaking $252 million by Filecoin and $232 by Tezos, more and more projects are preferring to go for an ICO instead of countless VC funding rounds.
There’s around 600 cryptocoins that exist in the market right now with new ones being created every day and there’s no stopping anyone!
What’s the issue then? Due to a lack of regulations and legal standards, projects often disappear after pulling in all the $$$$ (scam), orchestrate pump-and-dump schemes or simply fail to pull through/scale.
While no interference from 3rd parties, banking institutions or the government is seen as the USP of any decentralized system, in reality greed has taken the hearts of many and time and again you’ll see that resurfacing.
To be on the safe side, analyzing all aspects of a given ICO is as important as it is overwhelming.
The Checklist 📝
Till regulations set in or there are more mature criteria and frameworks to evaluate ICOs (which I’m sure will emerge in the coming months), we must be equipped to analyse every aspect of an ICO if we want to see our shiny dollars back.
Before I jump right in, here’s an an insightful thread of criteria used to evaluate ICOs by crypto enthusiasts and professionals on HelpTap (Full disclosure: I work on the product-driven growth side of HelpTap, a platform where members share their knowledge and opinions around the blockchain, ICO and crypto space on private one-on-one chats).
While a lot of amazing pieces have been written about the must-read technicalities, with this checklist I’m going to try and simplify the process of evaluating ICOs so that anyone from not-so-technical backgrounds can better weigh their options. Here are the factors:
1. Stage of the Project 🛠️
A few months back even a slightly innovative project would have (as it has) generated enough buzz to raise huge sums of money. However, with the initial buzz dying down and people becoming more skeptical of scams, the stage of the project has come to be a deciding criteria if one is looking to make a sound investment.
Typically a projects offers an ICO on three different stages:
👉Website only project (=Idea)
👉Website backed by whitepaper (=Idea+Plan)
👉 Working Product backed by user base (=Idea+Plan+Proof of Concept)
- Website-only Project
Comparable to idea stage startups, website only projects are the riskiest to put money on. If you want assured bang for your buck, mere landing pages(no matter how aesthetic) should not make it into your investment portfolio.
2. Website backed by whitepaper
Most popularly, ICO stage projects belong to this stage. They usually have a well-structured whitepaper that clearly explains the tech behind the project, their potential place in a sizeable market, the core use of their issued token and a well thought out roadmap.
If the whitepaper comes across as an unplanned compilation with a lack of actionable milestones, is not transparent and does not add any clear value, you might want to back off.
^The last feeling you should get after reading a whitepaper. Source: Giphy.
After reading the whitepaper, ask your yourself: Did the project even need to built on a blockchain? Or is it better now that it’s on the blockchain?
Further, you could check the Github repository for loopholes in their code. Even if you’re a non-techie check the number of commits on their open-source- this shows the continuing development on the project. Lack of it goes without saying is usually a bad sign and indicates stagnancy.
3. Working product backed by user base
By far the safest bets, projects with a validated use case and user base tend to be the most reliable. Tezos for example published their whitepaper as early as mid 2014, has been in dev since with close to 600 commits on their Github repo showing a)transparency b)good following in the developer community c)working product.
Beware: Zero presence of Github, a sophisticated landing page with punchy words but no real data, messy whitepapers providing no long-term scalable value.
2. Type and Purpose of Coin 💰
Since ICOs indicate the generation of a brand new coin for a given project, it is key to evaluate the type and innate purpose of the coin being issued.
Gil Penchina outlined the importance of evaluating the purpose of a coin brilliantly here.
Analyzing the value proposition of the token being issued is the first step. Is there a clear cut proposition?
Does the coin add core value to the ecosystem of the project? Does the project absolutely need a new coin?
At HelpTap for instance, we have an in-built coin system (in-app coins till MVP is validated) with a simple yet intrinsic mechanism attached to it where members reward each other for the help they provide by answering their questions, giving them recommendations or providing consultation services in private chats. Helpcoins can be thought of as proof-of-knowledge on the platform.
Point is: One must objectively evaluate whether the coin adds any real value to the value proposition of the platform.
Another crucial factor to look into would be whether or not there’s a hard cap on the supply of tokens. An important feature of a decentralized currency is that as opposed to money, the value of a token will never depreciate over time. Token networks where new coins keep getting created and added to the economy tend to diminish the value of each coin (as seen with paper money)!
Beware: The coin is unnecessary and does not solve any real-world problem.
3. Roadmap 📍
“In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.” — Warren Buffet.
Scalable, well-structured roadmaps are another factor to look into. While evaluating the roadmap ask important questions like:
- Have they laid out a plan to deploy raised funds? Does their plan include marketing, R&D, etc?
- Do they have a clear product building pipeline?
- What is their user acquisition strategy?
- How do they plan to grow their team?
Beware: Unclear roadmap, too little or too much in the pipeline.
4. Team 💪
After evaluating the stage, token effects and roadmap of a project, it’s advisable to weigh up the expertise of the team backing the project. Safe to say that if a team has prior blockchain experience then there’s nothing like it. This means they know what they’re getting into and will handle it like a boss.
If not, do a background check on their prior projects. Have their successfully scaled before? What experience do they bring? Is the team active on blockchain communities like Bitcointalk?
These are usually good indicators of not only whether the team can pull off the project.
On the other hand, scammers will use fake or no identities at all since they obviously wouldn’t want to put their reputation on the line.
Beware: No mention of team, team members have no LinkedIn/Github presence.
5. ICO dynamics 💱
Last but not the least, ICO dynamics itself can tell you a lot about the intentions(transparency, trust and ethical direction) of a project — whether or not a project has been built for actual long-term betterment or is just a ponzi scheme.
Typically projects offer anything between 20–40% of their total coins up for sale, 20–40% for the network, while the rest is reserved for the core team.
Trustworthy projects go a step forward and link their token distribution to the roadmap.
It’s best to see: What is the total supply of tokens? When and how are they going to distribute? Who gets the unsold tokens?
Beware: Overwhelming percentage of coins held by core team or advisers which defeats the whole purpose of a distributed economy.
Bottom Line
Just as is with startups now, it will get much harder for cryptocurrencies to raise money as criteria to evaluate becomes stronger and we get pickier. Having said that, ICOs might just become a mainstream way of raising money — a more transparent, democratic and easier mechanism for companies who are not looking to give their shares away and believe they can be sustainable on the block.
If you think there are other criteria that should be included in the checklist, I encourage you to share your thoughts in the comment section.
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