In this article, I dive into some of the due diligence processes I go through when deciding to invest in an Initial Coin Offering (ICO) - the bare minimums to ensure the project is not fraudulent. Cryptocurrencies are extremely risky.
This post was originally published on my Medium blog and the link can be found here. I hope you enjoy and find this piece of content insightful!
Looking at the history of Initial Coin Offerings above from BlockchainHub, we can see that they have raised quite a bit of capital over time — specially in 2017. Since then, 100’s of ICO’s have popped up claiming to create innovative technology while many of them have turned out to be scams.
At the same time, there are hundreds of great projects that are not scamsand actually building new technology. In this example, I’ll use Blocklancer’s live ICO as an example of minimum, baseline Due Diligence for ICO investing.
This piece will quickly dive into the following steps in my minimum due diligence process — the process becomes more detailed with higher amounts of capital invested:
- Business Plan, White Paper and/or Strategic Outline (Industry/Market Problems with Proposed Solutions)
- Token utility, Blockchain Choice and Crowdsale Structure
- Leadership team
- ICO Listing Sites
- Github repository (code)
Business Plan, White Paper and/or Strategic Outline
To start the process, you must obviously choose a project that is currently raising capital via an Initial Coin Offering (ICO). To make this easier, I’ve chosen the live Blocklancer ICO to use to better explain my DD process. Disclaimer, I am also an investor in the project and this is absolutely not intended to be a substitute for your own due diligence process. If you don’t have a DD process yet, then use this as the ‘bare bones’ starting point to further develop your own process.
The business plan, white paper or strategic business outline explain the mission/vision of the business/project, problems they have identified and aim to fix; how they aim to fix it; and information on how the leadership team intends to sustain and grow the business. The business plan would likely be the most in-depth, but the white paper has nudged its way into essentially taking the place of the business plan usage in the blockchain world.
Looking at Blocklancer, we can see that they not only have a white paper, but they have a yellow paper, business plan and platform manual — they have clearly gone above and beyond to outline the project and how they intend to manage.
Look what pops up when you click ‘Download Whitepaper:’
Counting…that is 18 different languages their white paper has been translated in — actually not sure I’ve seen a project with this many WP translations! Below are links to the English version of these documents if you’d like to scan as an example:
At the minimum, the project should have one of the documents above, preferably a detailed, technical white paper that is longer than 10-pages with images, outlining what problems the leadership team has identified, developed solutions for and aims to solve with their product. This document should also explain the why a token is needed in their project ecosystem. Each step of this process you should be asking yourself, ‘Why?’
Blocklancer makes it clear in their WP they are aiming to solve problems freelancers currently face on existing freelancing platforms. These problems were easy to find and are:
- Receiving their earned payment
- Unfair dispute resolution by centralized power (corporation) behind the platform
- High-fees for the opportunity
- Censorship from the centralized power (corporation)behind the platform
Present-day freelancing platforms are run by corporations who have investors to provide returns to. This often times causes the platform to act in a way that very obviously favors the shareholders — not just in the freelancing market, but most markets currently operating with an intermediary at the center.
Token Utility, Blockchain Choice and Crowdsale Structure
Diving deeper into the ‘why’ behind the token. Why is the token needed? Does it give the project a competitive advantage? Why will it be valuable? Is there a benefit to holding the token? After finding why there will be demand for the token, it’s best to understand the number of tokens that will be circulating. Remember, market prices are heavily dictated by the laws of supply and demand.
First off, Blocklancer decentralizes the dispute resolution process, placing it in the hands of the tokenholders who are informed of the dispute to be voted on through The Tokenholder Tribunal (THT) — tokenholders vote on dispute resolution in order to receive platform revenues. Also, those holding a certain amount of LNC tokens will be granted premium membership on their freelancing platform, gaining access to new features.
Secondly, the crowdsale structure and blockchain choice must align with the goals of the project. In the WP, it is mentioned that there will be a maximum of 1,000,000,000 LNC minted in the smart contract with unsold tokens to be burned post-ICO. This is good to know because some projects will have different structure — I have seen projects include, ‘unsold tokens will be kept by the leadership team to stimulate project growth.’
This is a red flag for sure because, well, you can imagine the ‘cash grab’ scenario that occurs if a project keeps 800 million unsold tokens and issues 200 million to ICO backers…the team can ‘drip’ unsold tokens into the market, taking potential price growth from the ICO backer.
Looking above, we can see how the ICO funds will be spent and the number of tokens to be issued to ICO backers — anything over 70% is a pretty solid figure. Blocklancer is at 78% of all tokens issued going to ICO backers — very fair amount considering the 20% going to the developer is for the long-term sustainability of the platform, almost a contingency fund if ICO funds run out. This also heavily depends on the business model of the project running the ICO - since the developer of Blocklancer is responsible for building a sustainable platform, the 20% of tokens going straight to him make sense.
Some may see the Developer holding 20% as a bad thing, but I see this as incentive for the Lead Developer to create revenue growth on the platform because this will go to him. Without revenue growth, tokens won’t appreciate much in value if at all because Tokenholders hodl in order to receive platform revenues. Also, we can see that this ICO isn’t a cash grab like most others — they’re raising a maximum of just $10m or roughly 10,000 Ethereum.
The LNC token is also being created on the Ethereum blockchain where smart contracts are currently employed on the network. This is important because some blockchains have not yet advanced far enough to operate with smart contracts. Blocklancer’s business model calls directly for smart contracts because this is how they take trust out of the process, ensuring fairness across the platform. One red flag I have with the Ethereum blockchain is that it currently is not scale-able, a problem nearly every project with a decentralized business model faces right now; but it’s good to know the project’s success does rely on the success of the Ethereum blockchain network from a risk tolerance standpoint.
Quite possibly the most important part of any project is the team behind it. After taking a look at what the project aims to solve along with the crowdsale structure and token utility, it’s always a great idea to make sure SOMEBODY on the team is a programmer or has the wherewithal to navigate the technical requirements of a blockchain project.
Blocklancer’s CEO/Co-founder makes it very easy to understand whether or not the project has team members who can navigate the space — he’s not only a computer scientist, but a university graduate on the topic. The project also has others who are technically versed, but a ‘Technical Founder’ is something, in my experience, Venture Capitalists and Angel Investors have really wanted to see in a tech startup they’re deciding to invest in or not.
ICO Listing Sites
You might be thinking, ‘why does it matter that they are on ICO listing sites or not?’ There are a lot of entrepreneurs in other fields that have heard about ICO’s and how much money ($3.7B+ in 2017) has been raised, migrating to our community to raise capital because they know it’s an ‘easy’ way to do it. Wrong.
Just because you cross your T’s and dot your i’s does not guarantee you raise your specified goal. Numerous scams along with ‘investor fatigue’has led to a pullback in the amount raised from ICO’s. This is now (Jan. 2018) compared to September when over $800m was raised. $600m was raised in October and less than $200m was raised between both November and December of 2017.
If you cannot find the project on any of these ICO listing sites, at all, that’s a major red flag because these websites are created to help us better research opportunities in the market. While Blocklancer has 8 ratings listed on their site, the project actually is listed on more than 13 rating sites after I have personally searched. Though, it’s obvious the team has consciously initiated the sites listed on their website.
Here are links if you’d like to take a look:
Github Repository (code) — Any Contributions?
Is the project already being worked on? Is there a track record of Github repository contributions from the developer(s) of the project? This is not always a red flag if it is missing; but if it is, I would highly recommend going into a project’s Discord or Telegram channel and asking their Community Manager or leadership team if there is a repository on Github or Developer profile you can take a look at.
Blocklancer’s CEO/Co-founder, Michael, includes a link to his Github repository right under his picture on the site:
Other Helpful Indicators
Other helpful indicators to scope out include, but are not limited to:
- Partnerships and Advisors — who’s advising the project? Does the project have partnerships in place yet? This can help give an idea of how ‘plugged-in’ the project is to the space.
- Mainstream Media Mentions — this isn’t required and not always a good thing, but can be helpful knowing that larger outlets are covering the project for after you’ve got your tokens and are awaiting a return.
- Bounty Program — this is almost a must in any project raising via ICO because it helps make the marketing/exposure process a lot easier once the ICO launches. You can also earn free tokens for helping the project gain exposure.
- Exchange Listings Post-ICO — any mention of this anywhere on the project? Not necessary, but a good sign.
- Social Media Accounts & Followers — do they have a decent amount? Twitter, Facebook, LinkedIn, Reddit, Telegram, Discord?
For instance, Blocklancer has some pretty interesting partnerships that you may have heard about:
Knowing that Blocklancer is a freelancing platform aiming to make freelancing more dependable by solving market problems, a partnership with Starbase creates a pipeline of ICO/blockchain projects raising fundswho will need to hire developers after their crowdsale period — Blocklancer becomes the perfect platform partnership to provide Starbase business owners with skilled freelancers to hire, paying them in cryptocurrency. This is a potentially powerful partner to be working with given both of the projects’ goals.
Have Questions? Blocklancer ICO Resources:
Wrapping It Up
This took a lot of effort to put together so I sincerely hope it helps you create your own baseline due diligence program for finding prospective ICO’s to contribute to. I am a freelancer and investor in the Blocklancer platform — have also been in touch with the leadership team via their Telegram Channel, answering whatever questions or address any concerns that come to my mind. Again, this is not investment advice and I do not recommend you invest anything more than you can afford to completely lose into any ICO/Token Sale project.
Please share this article if you found it helpful in order to encourage other community members to develop their own due diligence process for investing in ICO’s or really anything — seems most newcomers don’t understand the level of research involved in investing. I’m not claiming to be a professional/expert, but these are some principles in my own personal DD process that have helped me avoid scams.
Below are some resources for beginning cryptocurrency enthusiasts or others interested in something new:
- History of Cryptocurrency Exchanges — insightful look into the token-based exchange model and how exchanges have evolved.
- Cryptoversity by Chris Coney — The Online School That Pays You To Learn About Bitcoin, Crypto-currencies and Blockchains
- HitBTC Exchange — major exchange, access ICOs and multi-currencies.
- CoinTracking — Your personal Profit / Loss Portfolio Monitor and Tax Tracker for all Digital Coins
- Changelly — as easy as purchasing cryptocurrency gets — watch the exchange rate.
- CoinMate.io — Bitcoin arbitrage made easy.
- CEX.io — Buy Bitcoin w/ credit card, ACH bank transfer, SEPA transfer, cash, or AstroPay. Credit purchases are instant.
- CoinPayments — Receive payment via 70+ different cryptocurrencies — the crypto-PayPal.
- CoinMama — purchase Bitcoin and Ethereum w/ credit/debit cards & using cash through WesternUnion on their platform. Best for Euro purchases.
- Bit-Z — Newer Top 20 cryptocurrency exchange adding new, ICO coins all the time.
- Exmo Exchange — just launched their own coin and adding robust features to the trading platform.
- Gate.io — Cryptocurrency exchange listing new coins — get 10% off trading fees if you register with this link.
- CryptoPay — Spend your crypto. Can order a Euro, US Dollar or Pound crypto-debit card. Get 25% off using this link.
- LinkCoin — Your ticket to using LinkCoin, Bibox, and Bibox365 exchange products and ICO’s — mainly Asian cryptocurrencies that are not available on other exchanges.
- Cryptocurrency Resource Telegram Channel — acts as an ICO/blockchain news/resource channel for crypto beginners.
- Ledger Nano S — multi-cryptocurrency cold hardware wallet supporting Bitcoin forks. Keep your coins safe and offline. Cold storage.
- Kucoin — new exchange with its own token used to split exchange fees with holders, daily. Only exchange with NEO trading pairs too.
- Binance — 150+ cryptocurrencies with its own token used to pay exchange fees on the platform and give perks to traders on their platform.