Value propositions exist on several levels. The team in charge of the initial coin offering (ICO) or Token Generation Event (TGE) has to explain why a prospective customer would buy their particular product. Second, they need to explain why a prospective customer would buy that product from the ICO’s team. Third, they need to explain why their ideal customer would buy that product from another company. When most people talk about “value propositions” they are referring to the third answer. However, all three are vital to successful product/market fit.
A great product in a tiny market is bound to have problems. The company behind the world’s best “Build Your Own Quantum Computer” kit will still end up bankrupt by Christmas. Similarly, a terrible product will fail in the great market due to competition. A great product for dog-owners will likely fail if sold to parakeet-owners.
Building a product without taking product/market fit into consideration is like building an igloo without taking the local temperature into consideration. Teams involved in a successful blockchain project should be able to explain how their business model can achieve a good product-market fit.
When entering a market full of corporate giants, it is not enough to have a better product and better prices. The product must overcome the “network effect.”
A benefit of Facebook is that friends and family can be contacted on their platform. As more people joined Facebook, those benefits grow. The growth of Facebook’s network increases Facebook’s advantage over competitors. A product claiming to be “the next Facebook” lacks that benefit.
When Facebook went up against Friendster, Friendster benefited from the network effect. The difference is that Facebook had a clear-cut plan to supplant Friendster.
Feasibility is a tricky concept. For instance, “heavier than air flight” was considered infeasible for most of human history. Countless people were scammed with promises of investing in flying machines. Similarly, 80% of the ICOs in 2017 were scams.
On the other side of the feasibility spectrum, “Jesus Coin” claims it will decentralize Jesus. While this may be a joke coin, many whitepapers are just as ridiculous. A scam might be called HospitalCoin which claims to decentralize hospitals through immutable block time hashes and the convergence of distributed ledger innovations without a shared relational database.
The difference between Jesus Coin and HospitalCoin is that HospitalCoin uses complexity to hide ridiculousness. Investors without extensive blockchain knowledge might be conned into believing HospitalCoin is more feasible than Jesus Coin.
It is impossible to say beforehand whether even the largest ICOs will succeed or fail.
However, if the team cannot explain their project in a way that makes sense to knowledgeable investors, the chances of feasibility drops drastically. Feasibility drops further if the team cannot name a real use case.
If a whitepaper has a clear use case and makes sense (at least to experts), then only paid pundits and fortune tellers can say with certainty whether the technology will fail.
A feasible project may be profitable in the short run, but what happens once there is growth? A single representative answering every customer complaint can be profitable. However, growth in the number of customers will soon overwhelm the representative. This leads to unforeseen, costly solutions like outsourced call centers. These extra costs can turn a profitable project into a loss.
This question is crucial to the survival of a blockchain project. Blockchain technology that does not have a real-world use will not be used. If a blockchain project is not used, it may as well not exist.
Some blockchain projects may have no real use case but fit niche markets such as “early adopters for fancy gadgets” or “existing users of blockchain technology.” This product/market fit may ensure short-term profits, but the lack of a real use case limits the size of the market to enthusiasts.
Many companies use coins and tokens launches and coin offerings as an excuse to decorate an old product with the words “blockchain technology.”
A quick way to know whether blockchain is necessary is to ask “If we replaced the word ‘blockchain’ with ‘database’ would the concept still make sense?”
If the answer is “yes,” then blockchain is almost certainly not necessary.
Token creators can boast about getting rid of intermediaries, enabling trustless transactions, and distributed ledgers. But are these advantages different from the advantages of existing blockchains? If asking this question flusters ICO representatives, then there are likely conceptual issues.
Airdrop claims, telegram channel sizes, and Twitter followers do not predict the eventual userbase.
Hundreds of blockchain-based projects have gained hundreds of thousands of followers over the past few years.
Yet as of August 27, 2018, only 5 dApps on the Ethereum blockchain have over 300 daily users.
This is not necessarily a scalability issue; adoption can also be stalled by a complicated user interface and markets.
Successful ICOs always lay out their plans for the future. Even bad and scam ICOs will have roadmaps. The difference between a “bad roadmap” and a “scam roadmap” is that a bad roadmap makes unrealistic predictions in the short term while a scam roadmap makes unspecific, unmeasurable predictions in the short term.
Scams can use measurable predictions as long as the measurement takes place long after the scammers have left. That’s why it is important to look for measurability in short-term predictions.
Raising money from an ICOs and TGEs is not a business model. It is a means to an end. The product or project must be able to compete in an open marketplace. How will the product make money when it is sold, shared, traded, or used as a platform? No legitimate ICO would hesitate when asked to demonstrate how they will maintain profit margins.
An escrow service provider ensures that a financial transaction only occurs when the conditions set by both the buyer and seller are satisfied. In the case of ICOs and TGEs, the escrow provider holds onto one of several cryptographic keys. Without the escrow provider’s key, neither the buyer nor seller can access the money.
Articles commonly recommend that ICOs find a respectable and well-known escrow service.
This is like saying that investors won’t be scammed if they just find a respectable ICO.
Escrow service scams are just as prevalent as ICO scams.
At the moment, respectability boils down to online reputation (which can be altered through paid reviews). This massively favors service providers who have a positive online presence in forums such as bitcointalk.org.
Whitepapers cost $200 on Fiverr. A great idea can be found in most college dorm rooms. Real projects build prototypes.
The existence of a working alpha version or minimum viable product also proves the team has handled technical issues with the product.
The quickest ways to spot a scam is to do a Google “Reverse Image Search” on ICO team members.
If a core team member pops up on a website for stock photos, the ICO is either run by scammers or famous models.
Even if the photo matches a social media account, it may still be fraudulent. Was the account created more than a few months ago? Do they talk about anything other than their ICO?I
LinkedIn is especially useful since many job claims by team members can be cross-checked with other sources.
ICOs can also protect investors by coding vesting periods into their contracts. A vesting process locks tokens in a smart contract swhich are distributed at a fixed rate. This ensures founders won’t immediately sell their tokens and abandon the project.
Even if ICOs promise to code a vesting process, they rarely follow through. According to a University of Pennsylvania law review, the majority of ICOs that claimed they would code a vesting period failed to do so.
However, the overwhelming majority of ICOs with whitepapers that do not mention vesting periods failed to code a vesting period into their ICO.