History Has Some Ominous Warnings for Investors in Initial Coin Offerings

there's one topic out there. They're like, when you guys going to talk about X, and you must have gotten it right. I think I have an inkling of what it is. But we had didn't you do a whole episode on this by yourself? And I wasn't there. Yeah we did, It's true, So I guess that sort of

ends the suspense. It was a good effort, joke, good effort we had, like the whole Bubble series of course, remember that, of course, And every time we would like, oh and today we're talking about another bubble, and someone on Twitter like, oh, you're finally going to be talking about tokens and initial coin offerings and every time we

did it, they're disappointed. But it is true. You know, we've written and there's been a lot of Bloomberg coverage about initial coin offerings, but they've become such a phenomenon and so many people are taught about I c o s and tokens and cryptocurrencies that is kind of like it feels like we have to talk more about them on odd lots. Okay, if if you insist, I've been

trying to avoid the topic. In fact, I did such a good job of avoiding it that when you did that whole episode of I c O S, I wasn't even there. But for ourt listeners who don't know what they are, who've been living under a rock, I guess give us a recap of what exactly we mean. Well, basically everybody by this point is heard of like cryptocurrencies and if they don't understand them, like you know, bitcoin

and so forth. But what we've seen an explosion of in the last year really is organizations and companies trying to launch their own coins and sell launching some new network with the idea that you would buy this coin, and buying the coin would fund the creation of a new network. You would have to use the coin to use the network, and if everyone wants to use the network, then the coins would rise and value and everyone can make a fortune. At least that's sort of the idea.

And we've just seen, you know, day after day, it feels like there's dozens of these new coins being launched, and the question is is this a new funding paradigm, Is this a new way that markets will incentivize the creation of new platforms and networks, or is this just a bubble slash, a get rich quick scheme And there's really nothing there, and it feels like this is one of the biggest debates happening right now. Yeah, more like I see oh ha ha ha ha ha. I been

saving that one. No, but there's in all seriousness, there's a subtlety here because you're talking about um initial coin offerings, which are often these sort of new digital coins that

are attached to the Ethereum blockchain network. And there's also tokens, which are usually a sort of system created to exchange services basically, so there's two different things as they currently exist, but they all have a similar sort of goal, which is to get people interested in create this big network effect as you mentioned totally, and they all have some of the same language and ideology about decentralization and subverting existing organizations and stuff like that. So there's a lot

to dive into. Today, we have a guest I'm very excited to talk to. We're going to be talking to Elaine Oh. She is a software engineered global financial access.

She is a contributor to Bloomberg View, and she has been following the initial coin offering and cryptocurrency space herself for many years, both on her blog and in her career and stuff like that, and I think it's a perfect person to talk about some of the technical aspects and the economic aspects of initial coin offerings and sort of hopefully guide us to an understanding of whether there's something real here or whether this really is just sort of a get rich quick scheme or a bubble that

will all come crashing down. I remember some of the Lane's really early work on this topic, so I'm very excited. Without further Ado Atlanto, thank you very much for joining us. Thanks Joe. What our initial coin offerings or tokens like? If someone asks you, how do you describe what's going on right now? A token is basically a native asset in a network protocol that is used to I guess represent some transferable value. It's break it down a little

bit further. You say, a network protocol a native asset, What is that? What does that mean specifically? Like and sort of spell it out a little bit more. What's been going on? In simpler terms, it's just an imaginary thing that people are selling to raise lots of money in hopes of building a future product. That's pretty simple, isn't it. How about this give us the history of i c o s, because it feels like they just

sort of exploded into the public consciousness this year. But I'm sure you know someone actually came up with the idea at one point in time and they were trying to solve a specific problem. There were a number of i c o s back in uh two thousand, two thousand fourteen. They weren't as prevalenta as the ones today. Probably the most well known I c O was Ethereum. They sold their ether tokens before ever building anything, and

they collected bitcoin in exchange for their future ether. So the creators of Ethereum collected bitcoin to create this new You could call Ethereum a coin itself. Now, what we've seen in seventeen quite a lot is people collecting Ethereum to create new tokens that ride on the Ethereum network. So explain how that works and explain like if there are some specific ones, like you know, what do people

actually proposed they'd be used for. I think Ethereum raised eighteen million dollars worth of bitcoin back when they were doing their token offering. And Ethereum runs basically decentralized apps. These are just little software programs that run on computers all around the world, and the most popular app that people are running on these computers is a token app. And a token app is basically just a ledger that

keeps track of who owns um which tokens. So by sending ether, which is Ethereum's native token, to one of these token apps, people receive an allocation of token in return. What are some of the more esoteric or what's the word I'm thinking of? I guess unusual I c o s that you've seen, because I remember a couple of people mentioning specific examples like um synthorn, which is a token ized synthetic rhino horn afrodisiac. I'm not even sure

what that means. But you know, if you go to one of the websites that lists all the active i c o s, you can find some really odd things on there. I mean, people will basically do an i c O for anything that will raise money. I mean, there are i c o s for tokens that claim straight up that they're not getting anything in return. It's just an experiment to see whether people will send money to a blank token, like there was early on the

Ponzi coin. Then there was the well I mean, there was an f word token where basically you're just getting a a token named the efford. Okay, but wait, there are some actual ones that sound fairly legitimate, in which it appears that a new application or a distributed application might solve some problem and a token and in a native token might be of value. So, for example, there

are ones that offer a distributed cloud storage. So we all know about you know, existing cloud storage, but if you have stuff that's maybe more sensitive and you don't want it all with companies, you can have it distributed across a network of computers and then you pay them in that native token for the service of hosting your documents, which on the service sounds reasonably legitimate. What I want to understand is how does in theory, how does the

token facilitate this? So if I want to, uh, you know, store something very sensitive. Let's say I'm working on some subversive organization and a you know, and an oppressive authoritarian country, and I want to store my organizational documents across all these different computers and nobody can shut me down. Explain how in theory these I c O s or tokens could facilitate that. Well, a token is supposed to represent

a transferral blastset with a market price and UM. In return for storing someone's files, UM, the person would pay you in these UM file tokens, And since these file tokens can then be sold on the open market, you're, well, you're getting compensated for storing someone else's files. So it's

a sort of incentive engineering. Although there are other services like bit torrent that do offer decentralized file storage already, h you mentioned bit torrent Elaine, so on your blog you came up with a really good historical example of a previous attempt to provide a sort of token based service. Can you walk us through what that historical parallel was right.

So in yearly two thousand's uh, there was a company called mojoor Nation, and I mean the intention of no mojor Nation wasn't really to create a token for people to trade, but to incentivize people to share their extra computational resources. The tokens were designed to incentivize this sharing, but they ended up adding unnecessary complexity and um, it was a distraction from the underlying service, which was offering

extra storage space or CPU cycles. So people in theory, mojo Nation was supposed to encourage people to share their extra CPU cycles and then they would get paid in this token, but it didn't work and as you say, the token added extra complexity. But then what came out of mojo Nation or sort of the successor organization, was

actually a huge success. To explain that when you create a transferable resource like a token, then people who have the tokens want the tokens to be scarce, and in order for a service to be widely adopted, I mean, you don't want the token holders too also want the tokens to be scarce. The reason why Bittorn was so much more successful than emog nation was well, not just the simplicity, but also they didn't try to introduce artificial

scarcity with these tokens. The earliest version, people were who uploaded files were given priority in downloading the same or downloading other files, so it was sort of a tip for tat um protocol rather than actual like accounting and

trying to transfer resources that they had gained. So this really gets to the heart of the question I think, which is that the theory behind all these tokens is that if you create a monetary incentive to join a specific network, then people will give up their you know, computer resources or something, and then the network will form.

But history shows us that at least maybe not every time it works like this, but sometimes the monetary aspect of it can create a level of confusion and difficulty and um and friction that actually impedes the creation of the network and undermines the goal. Right you can see

this happening with bitcoin right now. Bitcoin is a payment system, although there are far more people hoarding bitcoin than actually using it for payments, and I mean that that's okay, people see it as a store of value as well, but um, it's also something that makes bitcoin less usable that the fact that people are hoarding it rather than

spending it. Are there anyways for people running I c O s now to kind of overcome that fundamental tension between you know, early adopters who want tokens to be scarce and the needs of creating a large network relatively quickly. I mean, the incentives are basically at odds with each other.

Part of having the initial token sale is that you distribute the tokens to people who will be evangelists for the service, but then it sort of turns into a pump and dump because these evangelists try to drive up the price and then they sell off their tokens. Right. This seems to be sort of the heart of why like people think that there's a bubble, because what you have is the theory. Okay, the tokens facilitate the networks, but when you look at it, it doesn't look like

any real networks are being formed. But you do have a massive amount of speculation and trading and as you say, pump and dump, so it looks like you know that it's really it appears from my side, and that the as they the card is coming before the horse. There's no real they're there with any of this stuff. Yeah, and it's unfortunate because there are people trying to develop legitimate technology, but the legitimate ones are going to get lost in the noise and be seen as a scam

just like the other ones. Are there specific applications or like uses for i c O s that you think are better suited to the format than others, Like for instance, I met Yobi Benjamin randomly in Abu Dhabi last week. He used to be uh CTO for city and he's running an i c O that provides services or exchanges basically video game services and something like that. I can see, you know, playing video games is kind of a fun thing that people do. Uh, it's not necessarily critical to

your everyday life, at least for some people. So maybe something like that a token makes sense. Well, ultimately a token is going to If a token is widely adopted, it becomes like a currency. And I mean the reason why we have um things like the US dollar or currencies in general is to solve for the coincidence of wants problem. And if something has or actually has a token or native token that has value, like you might

as well just pay in bitcoin or either. So is this essentially us going back to a bartering system, but I guess a blockchain bartering system. It sounds like basically, yeah, when you hear people talk about a bubble or a new gold rush, let's say, yeah, yeah, there's a lot of speculation. It's a big bubble right now, and it's probably gonna burst, but something good will come out of this. And they pointed to the Internet, the dot comswood and

say yeah, that I'll burst. But then we got the broadband network and now of course, and and of course many of the companies from the late nineties ended up being huge deals, like Amazon being the most obvious example. When you look at this space, do you think it's going to follow the similar trajectory? Is it safe to be that confident that something of value will come from all the speculative activity that we're seeing. Well, most of the things that these um tokens proposed to build involve

open source software. So there's that aspect in that people are building open source software that could in theory be used by future applications, even if the tokens themselves don't succeed. I mean a lot of them are not building anything at all, so that's probably less valuable. It seems like an understatement. Joe alluded to this in our intro. How do you think the UM the I c O story ends? Ultimately? Then do all of these things proved to be you know,

if not outright frauds, then kind of useless endeavors. And while we're at it, how do you think bitcoin ends? Because to your point, it's supposed to be a payment system UM with a big network effect, and instead we have people who are keeping the coins because they assume they're going to rise and value. It's two big questions. Sorry, yeah,

I think the token sales will eventually run their course. UM. Even today, Uh, I think we have passed the peak, and new tokens that are being launched these days, UM aren't seeing the massive influx of capital that the earlier ones saw. As for bitcoin, what one of the biggest complaints about bitcoin in recent months was that the transaction

fees are really, really are getting too high. And the part of the reason for that is because transaction fees are denominated in bitcoin, and the price of bitcoin has gone up like five percent this year, so it looks like transaction fees have gone up a lot. Whend non need in US dollars. But then in terms of Bitcoin,

I mean they've stayed fairly constant. One recent change in bitcoin was they did a software upgrade that now allows for Layer two transactions that don't actually happen on chain, but can people can make Bitcoin transactions with lower fees off chain and then do netting and batching on chain later on. So just to be clear that you think that the software is in theory going to be enabling

it might become more conducive to payments in the future. Yeah, I think they will get around that, even though, um, I mean bitcoin did see I guess a couple of years of complaints where people felt that it was not that usable. Right, all right, well, Atlanta, thank you very much for joining us. I think that no doubt this is going to be a very widely listened to episode because I know there's just tons of interest in this

topic and appreciate your perspective on it. Lano Software Engineered Global Finance, Jill Access and a Bloomberg View contributor, Thank you very much. Thanks Joe and Tracy. So Joe I managed to escape I c O S briefly at least on the Odd Loots podcast, but we cannot escape them in our day to day markets coverage, and I can't

even escape them from my personal email accounts. So just last week I got an invite for a pre sale in a I C O. I'm not going to say the name of it, but I will tell you that the private pre sale password to participate in this offering is participate in success. That gives you an idea of the marketing. I don't think we need to say anything more than that. That more than anything else, that in your private email you got a offer for pre sale and that was the password. I kind of think that

sums it up, doesn't it? Yeah? Should we just leave it there? Are we done? Let's leave it there. This has been another edition of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway, and I'm Joe wisn't Thal. You can follow me on Twitter at the Stalwart. And you can follow our guests Elane Oh on Twitter at Elaine except the Ellen. Elane is an eye, so it's like Ei so and and you can follow our producer on Twitter, Sarah Patterson at

Sarah Pett With two teas. Thanks for listening.