We're just back from Berlin, where this week we had the pleasure of speaking at Project A's portfolio day.

Aside from the usual introduction to tokens and cryptocurrencies, we focused our talk on describing what we've been telling people privately, and on here, for a while: we're not big fans of ICOs.

Fortunately we're seeing data that suggests the trend of anyone being able to raise whatever they wanted for any kind of projects is over, but the frothiness is still rampant.

The main points that make us be short on ICOs are:

1. Too many people participating

This is the most controversial, so just putting it up top as usual.

We're all for the democratization of both access to capital and deployment of capital, so a better phrasing would be: too many people participating in the same ICOs.

The more people participate then the less potential upside there will be for each single participant. Unless the upside is infinite, every new participant will push the price of an asset a bit higher, up to the point where it doesn't make any more sense compared with the risk.

The other issue is that there are many different types of people participating. In any given ICO you'll have short-term speculators, long-term holders and actual prospective users. This entangles the price of the token with many different variables, making it hard on the latter two categories.

2. Risk-reward is completely out of whack, as most projects are just vaporware

What I'm saying here is that I'm happy to invest in cool vaporware, but not at a 9 figure valuation.

With the influx of less sophisticated investors, risk is being greatly discounted and any potential gains will be dwarfed by the losses on the projects that don't work out.

Let's remember Ethereum had something like a ~$20M network val when it did its fundraise. That was still pretty steep compared to the state of the project, but also orders of magnitude less than what we're seeing today.

3. Setting in stone crypto-economic decisions

I've tweeted about this quite a lot. Cryptoeconomics is hard. It's new and no one really knows what they're doing.
Many projects are setting in stone their crypto designs in early whitepapers written by consultants just with the goal of raising money.
Building companies is hard, and building decentralized incentive ecosystems is even harder.
Just thinking that you can get something so complex right at such an early stage should make people run away.

4. Potential adverse selection of teams

We've seen this very clearly. The best teams we're talking with are pondering the ICO decision VERY, VERY deeply.
And if there's a way to avoid it, they will - at least until the software is ready, cryptoeco decisions are made and people can use it.

The market is attracting all sorts of participants that are following the bling of quick and massive non-dilutive raises - but nothing has changed: building something of value is still super hard.
Good teams and entrepreneurs understand this, and understand that an ICO could be more of a liability than an asset.

The main point here I think is that we like to see teams that *care* about other people's money.
Most teams who ICO treat the capital as their own war chest and "free money". We think the best entrepreneurs realize the moral and reputational responsibility of being entrusted with capital by other people and thus naturally try to get the least amount that they need.

But we also get the catch-22.
If everyone around you is raising tens of millions, who's the fool?

If you're not gonna do an ICO for your new Mars colony, then someone else will - and people will give them money.
So now you'll have to compete with someone that has a lot more cash than you.

I unfortunately don't have a great solution here.

We could add many more reasons to be fearful of ICOs, such as the need for more securitization infrastructure, governance oversight, investor communication, and such - but in any case, nothing here changes our deep belief that crypto tokens are here to stay.

Tokens are a fundamental shift in how value is assigned and transferred in ecosystems.

There are so many transactions today inside and between ecosystems that are simply not valued, or implicitly valued.
Having fixed-supply, immutable ledgers keep track of these transactions could be a game changer for some specific types of applications.

Being able to apply monetary policy and fiscal policy to an application and its users could give many more tools to developers compared to the minimal UX tools we have today.

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We're seeing this in action in thoughtful ways more and more.
One of the best examples of the past week is Refind, and its Relevance Coin.

Refind grasped the potential of tokens and decided to "give away" 1 billion tokens to its users, based on a few simple potential actions to start (eg. inviting users, sharing on social media etc.).
They then promised to issue the tokens as ERC20 or similar crypto tokens when they allocate the full 1 billion supply and then start to buy them back with a percentage of their revenue.

This is fascinating.
Developers figured this out early by giving away small rewards or even just worthless karma points or something, but now you can invest your time (and money potentially on futures markets) with the expectation of financial return in the future.

Refind's implementation is still massively flawed:
- you are trusting them to issue the tokens
- you are trusting them that they will actually buy them back, something they will have absolutely 0 incentive to do
- you are also wagering that they will actually get to 10m users

but it's a great experimentation to see.
The most interesting aspect to think about in my mind is the buy back mechanic.

Say we believe Refind will use 10% of its revenue to buy it back.
The easy thing to do would be calculate their revenues and see how much money would go to "shareholders". But here it's not a dividend. They will actually buy the tokens on the market AND burn them.
So this would mean that every month or so, there would be a growing price pressure on the token from them, but *also* from other market participants that want to gain from the gaining popularity of the platform and their (hopefully) growing pressure on the price.
And, a constantly decreasing supply.

So essentially, a Berkshire-like constant stock buy-back.

I'd need to spend a bit more time thinking what the decision tree for a token holder would look like, but I think those are some early signs of the cool things that crypto will enable.

Take note everyone: you can use tokens in smart(er) ways without selling them.

The talk of the town the past week has been Basecoin.

We are glad that the Basecoin project gets finally unveiled and people can comment, as we have spoken to the founder in early September and couldn't come to a massive enthusiasm about the project. Something other famous and reputable investors were able to do.
This has left us with the doubt of being stupid, or others being overly-excitable. Nothing new in venture land.

I'll preface this by saying that I've never really felt a need for a stable coin. In the US there's Venmo, in Europe we have free SEPA transfers with just an IBAN as well as many Venmo-like startups - so the p2p payment problem isn't that major.
But I've slowly come to change my mind, and have recently developed the thesis of the need of moving money "into" fiat, but without having to interact with the traditional banking system.

The idea that Basecoin proposes is that of a coin peggable to any asset or basket of goods, whose price is adjusted by the algorithmic expansion or contraction of the monetary supply on the blockchain. Kind of an algorithmic Central Bank.

The algorithmic execution of the peg involves the existence two other coins, Base Shares and Base Bonds, according to the need of contracting or expanding supply. If you want to dig deeper you can have a go at the whitepaper yourself.

The questions we asked during our chat were mostly around what would happen in systemic, exceptional price movements. I don't think we were either able to receive great answers or either understand them.
But the feeling has always been that this is a very nice model in somewhat stable conditions but that there was no core, structural mechanism to prevent collapse in an exceptional event.

The whitepaper doesn't do a great job at this, delegating all the discussions about robustness to a subsequent paper. What they do is create an artificial bottom price of 0.10 Basecoins for 1 future Basecoin, and they say their simulations never hit that.

For all the reasons why this will never work it's worth reading Preston Byrne's post on the subject.
He seems to have the same doubts we had, but with much more conviction and bitterness at yet another doomed stablecoin project.

For a more positive take read Coindesk piece (who are owned by an investor in Basecoin).

In any case, we do find the effort fascinating. It's a clear sign of the scale of innovation that is going on in the crypto currency space, and that's the reason we're excited about being here.

They are preparing for a pre-sale and potentially an ICO soon.
As with many projects, we would have hoped the funds raised in this round lasted for a bit longer to get to market with much more progress.

The usual sequence of central banks and regulators issuing statements regarding crypto currencies and ICOs. It's typically a little bit dry, so unless it is something worth commenting on, we'll just post the links for the record:

🇱🇹 Bank of Lithuania announces its position on virtual currencies and ICO

🇺🇦 Ukraine to Regulate Bitcoin Exchanges Under Proposed Law

🇫🇷 France Is Close to Issuing a Position on ICOs: interview with AMF President. We are hearing from the grapevine that their approach will be "balanced and smart"...

🇷🇺 Russia turns cold on crypto-currencies: Putin changed his mind again, now Russia’s central bank will ban websites selling crypto currencies...

🇦🇪 Abu Dhabi Markets Regulator Publishes ICO Guidance: tokens are either securities or commodities. Go to the last page for a summary of the proposed regulatory framework.

🇸🇮 Slovenia Aims to Become "the most recognised blockchain destination in the European Union": speech by the Prime Minister Miro Cerar as he aims for its country to emulate Estonia, with a dedicated Think Tank and everything. Plus a warning from the Financial Stability Board on the risks involved in crypto currencies and ICOs. It will be good to have multiple blockchain friendly jurisdictions across Europe.

Token Economy is written and curated by Stefano Bernardi and Yannick Roux.

If you're building a new fundamental piece of technology for the future, please reach out 🤙