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Blockchain Cryptocurrency Research ICO Smart Contracts Risk

Investors Beware of Misleading ICO Smart Contracts

09/03 – 09/09

Liberal Radicalism - Investors Beware of Misleading ICO Smart Contracts
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WEEKLY RECAP

  • Total market cap. reached $193.42bn (a 18.5% decrease), and 7-day trading volume surged 4.6% for top 100 crypto


WEEK AHEAD

  • 12 Sep: ETC to host Annual Ethereum Classic Summit in Seoul
  • 14 Sep: LTC to host Global Litecoin Summit in San Francisco


THOUGHTS OF THE WEEK

The ICO market has followed the bearish trend of the crypto market in 2018. As noted in our Chart of the Week, the amounts raised via ICOs in August 2018 slumped 50% compared to the start of the year. August 2018 slumped 50% compared to the start of the year. Vitalik B. recently co-authored a paper with Microsoft researchers Glen Weyl and Zoë Hitzig titled “Liberal Radicalism: Formal Rules for a Society Neutral among Communities”. The paper introduces an alternative method for fundraising, in an attempt to solve so called free-rider problems in the crypto industry.

A free-rider problem is a market failure where the total benefits received from a shared resource by individuals outweigh the total contributions made towards said shared resource, eventually leading to the under-provision of the good or service. This problem is apparent in the crypto world where dishonest ICO projects exit early and fall short of investor expectations. We believe a root cause is the smart contracts of ICOs that fail to protect investor interests against insider self-dealing, with an estimated 60% of ICO projects failing to disclose that their associated smart contracts can be modified by a central party. In addition, studies have found that 78% of ICO projects don’t have hard-coded vesting restrictions despite claims to the contrary.

The authors of the above introduced paper propose Liberal Radicalism (LR) as a possible solution. LR principles would inspire smart contracts that allow groups to allocate funds for the maintenance of public goods (public blockchains) without becoming vulnerable to the free-rider problem. Under LR, the funding released to a project should increase incrementally based on the number of project participants and their degree of project involvement, with the latter being referenced from the principle of quadratic voting. LR itself has developed from an urge to resolve the crisis of modern liberalism, according to Hitzig, and this is not the first time that ideological principles seek to guide the development of blockchain technology. While the paper claims that LR works well on blockchain-based communities like ETH and Zcash, we believe one of the main obstacles in implementing the idea will be its heavy reliance on identity systems, particularly for privacy tokens like Zcash. For now ICOs remain a popular fundraising mechanism, and it is crucial that investors pay attention to ICO smart contract particulars, and seek expert advice in evaluating smart contracts before investing.

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