Top 3 ICO Fails of 2018

ICOs, or initial coin offerings, became hugely popular during the 2017 crypto bull run, when many investors saw them as a path to easy financial gain. According to data from Coinschedule, over a thousand ICOs raised more than $21 billion in 2018. However, the majority of projects did not survive the bear market, which underline the highly risky nature of these investments. In fact, the majority of tokens lost most of their value. Some of them proved vulnerable to security breaches, while others turned out to be outright scams. Nowadays, the reputation of ICOs as investment tools is heavily damaged. We decided to look at three examples of last year's failed ICOs and ask the people behind the projects, as well as ICO experts, what exactly went wrong. Launched by Harvard dropouts Rory and Kieran O'Reilly, Gems was designed to be a human task crowdsourcing protocol in which users could hire workers to perform micro tasks. Micro tasks are small tasks that require human judgment to be performed online, such as filling surveys or tagging pictures.

We started kind of, I started kind.

Of talking to them about jams probably in the fall of 2017. They're interested in kind of basically building like a more peer to peer version of what kind of Amazon Mechanical Turk is, which seemed interesting to me because the fees on Mechanical Turk are pretty high.

Gems aim to challenge the leading platform in the field, Amazon Mechanical Turk, notorious for charging users with high fees and offering low wages. According to the white paper, the competitive advantage of GEMS consists of a mechanism that guarantees task completion and incentivize workers integrity with minimal transaction fees.

I just kind of started talking to them about like, well how would you actually build this on Ethereum in a way where you know it was scalable and you could actually have people do lots of tasks without running into the kind of throughput limitations of Ethereum?

In order to enter the GEMS whitelist, investors were asked to perform a proof of care, which consisted of promoting the project on social media. Just prior to the ico, the amount of hype surrounding it was huge, with JAMS Telegram channel counting over 50,000 subscribers. However, things started going wrong when the company tried to maximize profits by conducting the ICO according to the Dutch auction model, with no fixed hard cap and bonuses given to investors who buy first. This triggered a negative reaction among the community, with many accusing the ICO of being a money grab. Eventually, Gems decided to cancel the public sale, opted to conduct a private one instead of and keeping 75% of the tokens for the team. As a result of the poorly conducted sale. In the following weeks, all the hype fizzled out and most of the community abandoned the project.

On the marketing side, yeah, I mean, initially they did a really good job of building a huge community. And then I think kind of as both, like, as like excitement about ICOs kind of went away as the market went down, and then also the fact that the community couldn't participate in the sale of both those things kind of made a lot of the interest go away.

Later on, Gems was sued by allegedly infringing trademark rights, and it eventually had to change its name into Expand. The Token lost almost 100% of its value in the following months. The BE token was launched by BNest, a peer to peer home sharing platform based on the Ethereum blockchain that aims at becoming Airbnb's direct competitor. Its team was composed of people with experience at reputable tech companies such as Uber, Facebook and Google. BNest aimed to eliminate the middleman in the home sharing market. It promised no transaction fees on bookings through their site, while sustaining itself solely on the rising value of the bit token supply. Supported by a passionate community, the Bit Token was among the most oversubscribed ICOs of the year, with over 100,000 applying to the whitelist. The token price for the ICO was fixed at 0.14 US dollar. However, the enthusiasm completely faded away when some hackers stole $400,000 from investors through a phishing scam.

The phishing scam really killed our momentum, and I think that that really shows that security is number one. So after, you know, you get enough funds or you get enough hype or you're on the uptrend, you should definitely focus on security. It was a third party that was compromised, not us. But you can imagine, like, just the amount of reputational damage that we took for even giving our information to third parties.

Right after the phishing scam. Many criticized the Bitoken team for underplaying the incident and not communicating properly with the audience.

It's very dangerous to communicate after any type of compromise, whether it's our fault or someone else's fault, because we don't want to really be admitting guilt per se in a public, in a public way. Like, our lawyers are very worried about, like the fact that if we say, like, oh, you know, a hack happened, it's like saying we got hacked when actually it was a third party that got hacked and we would incur a lot more legal liability. But I think, I think so, you know, they really warned us to just make sure we do one or two vague messages. But in retrospect, I think we really could have and should have probably taken a little bit of a legal risk there in order to protect our users better.

Despite the ICO hard cap was reached with a total 5,000 ether, or $4.5 million, as the sale closed. The token value quickly dropped in the following months, and today is worth only a tiny fraction of its original value. As a consequence of the bear market, Bitoken recently announced it will start charging small fees to its customers, thus losing its main competitive advantage over Airbnb.

We were on the uptrend, and then the hack kind of, like, flattened us, and then the bear market kind of killed us.

And then the bear market kind of killed us.

We realized that we really need to build a sustainable revenue model to survive this type of winter season, as opposed to just like, hey, we're in Airbnb with no fees and we do charge a fee. Instead of charging zero, we charge like, half of Airbnb's fee, which is like, you know, 8% compared to 15, 20%. So in terms of the security, we've definitely locked things down. We've realized not to really assume trust in any of our third parties. So we have a ton of different, like, filters and checks going through any of our, you know, Google domain names. So basically, like, back then we had like, one or two or three parties that could post on our behalf, essentially because, you know, they send automated emails from our servers. Now all of them are like limited.

Texas based Aris Bank Project dubbed itself the first decentralized banking platform. The white paper had promised traditional banking services such as VDIC insured bank accounts, Visa linked debit and credit cards. Just a month after the public sale started, the US securities and Exchange Commission halted the ICO amidst fraud allegations. Eventually, it came out that the company had no partnership with Visa, nor the authorization to offer FDIC insured accounts. In fact, it even lacked a proper license to conduct banking activity in Texas. The ICO turned out to be an outright scam, which resulted in the theft of over $4 million in December. Last year, Ares bank executive Jared Rice was arrested by the FBI and then fined together with his associate Stanley Ford, for a total of $2.7 million. The two were also banned from participating in digital security offerings. We asked Ali Madhavi, ICO advisor and partner at Blockchain Founders Fund, to comment.

On the ICO Aries Coin or Ares.

Bank.

Was, I think, one of the projects that really put, you know, put real challenges to this industry and really help really damaged the space There was no real probing into, you know, was this information legitimate? No one really asked for contracts or really pushed for contracts. The community didn't push for, you know, evidence on whether or not this insurance was real, whether or not it was possible to get SEC insurance on this sort of thing, whether they had any sorts of licenses. As potential investors into the project, you do have to do your due diligence. You do have to ask those questions. And if a company is not willing to listen to even a small investor putting in, let's say, 100 bucks and they want to ask questions, and if the community's not answering that through, say, like ask me anythings or through Telegram or any other sort of venue, like, I think that already shows some red flags that it's not worth putting your hard earned money into a project like this.

What did we learn from the 2018 ICO experience? The speculative hype surrounding crypto was the main factor that led both investors and startups astray. Projects that focused solely on profits, without paying attention to real world application security and communication were bound to fail. However, the crypto community seemed to have so much sobered up since then. Since most speculators were burned by the market and weak hands shaken out, 2019 could spell a new beginning for ICOs.

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