A few CoinDesk employees gathered at Consensus to form a panel that reflected on the major crypto events. We polled our staff to determine the biggest moments in crypto history. The overwhelming majority chose the chaotic and fraud-filled “ICO mania”, which spanned from early 2017 until mid-2018.

It’s not a clear choice because “initial coins offerings” (ICOs), were not always a good thing. The downsides of ICOs, such as investment fraud and securities violation, have been a major problem for crypto. A retrospective study revealed that 80% all ICOs in the boom years were scams.

This article is part of the CoinDesk Turns 10 Series, which looks back at key stories in crypto history.

There was more to it than swindling and rug pulling. Some of the biggest projects in decentralized finance today, such as Aave and 0x, were launched during the ICO bubble. Investors who were well-informed, cautious and lucky could have made a lot of money by backing real, productive project.

The historical significance of the ICO boom extends far beyond the relatively small number of winners who were funded. If you were among the informed, cautious and lucky investors who were able profit from their insights, regardless of where you lived or your citizenship, then you are in a very fortunate position. ICOs delivered on crypto’s promise to cut out financial middlemen – in this case the venture capitalists, investment banks and other investors who dictate the terms for startup investing.

One prominent speculator, who began trading crypto in the ICO era before moving into crypto professionally, says: “Looking back at that period we were building infrastructure.” “You cannot build something and the [underlying] Infrastructure at the same. “I think of it all as a series of trials.”

What is an ICO (Initial Coin Offering)?

The ICO looked a lot like IPOs in the equities market at that time (and still does). The main difference from the buyer’s point of view is that anyone can access them if they have a digital wallet set up and are able to fund it using a smart contract like ETH or SOL.

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There are some major differences in what investors are buying with ICOs versus IPOs. A buyer of an IPO receives a legal claim to a part of a business. A buyer of an ICO gets tokens – and nothing else. Tokens don’t represent ownership in any company. ICO tokens are only worth more because people want them. This is the “utility-token” thesis, which was widely believed to be a way for some people to distinguish token sales from security offerings.

At the time, I and others felt that the designation ICO, so close to the “IPO,”, would obscure the uniqueness of ICOs and tokens, especially in regulators’ eyes. The nomenclature is now viewed as a mistake, five years after the Securities and Exchange Commission’s (SEC) ongoing crackdown.

It’s not that there isn’t a valid argument to the contrary, but that it has been abused in an almost unrecognizable way. ICO tokens are intended to increase in value based not on a claim of revenue from a common enterprise but on Joel Monegro’s “Fat Protocols” thesis. Monegro is a prominent VC at Union Square Ventures. The argument goes that tokens that are used to create a decentralized system will also be needed to access it, and that the value of the tokens will be determined by the demand. This demand is driven by the entire ecosystem, not just a single designer or administrator.

Interested ICO investors can read a whitepaper for a tokenized project and decide if the idea fits this model. The founders could also be screened for trustworthiness. Because public smart-contract platforms like Ethereum are accessible to everyone and uncensored, they allow buyers to invest in good deals without having to be wealthy accredited investor.

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While on-chain anonymity, universal access and other factors weakened the venture investment fortress, they also rendered some due diligence processes ineffective or impossible. Transparency during the ICO craze, more so than during the 2021 boom in cryptography, was lacking. Anonymous founders were able to steal funds from investors and hype overshadowed rational evaluation of proposed services.

The ICO name is now a foolhardy one, five years after the SEC’s crackdown.

According to most objective measures, the ICO era has been a disaster for crypto investors, and a waste of capital. It is still fascinating and not as bad as it may seem.

What sparked the ICO boom and why?

One of the earliest signs that the “ICO era” has begun is the failure of the $60 million The DAO project in 2016. The DAO was a decentralized organization that was designed to be a collectively-managed investment fund for Ethereum based projects. It had a power balance that favored major holders.

The project’s investment model balanced the input from experienced large investors and that of less-experienced funders. Cristoph Jentzch, The DAO’s co-founder, told me recently that this model could have influenced the entire ecosystem to a more thorough, expert vetting. It could still be a good way to balance traditional venture capitalists’ expertise with DeFi’s openness.

The DAO, however, was hacked catastrophically before it could be launched. This resulted in a prolonged state of emergency across Ethereum. Projects that were expecting to receive funding from The DAO are now searching for alternative models.

Also in this series : 2016 – How the DAO hack changed Ethereum and Crypto

This model was not far away, for better or for worse. Ethereum’s 2014 token presale was a very powerful tool (it raised $2 million in just 12 hours). Ethereum’s token presale, conducted in 2014, was a powerful vehicle (it raised a href=”https://www.coindesk.com/markets/2020/07/11/sale-of-the century-the inside story of Ethereum’s 2014 premine/”>$2.2 million in 12 hours/a>).

The true madness would not be unleashed in the ICO era until the ERC-20 standard was introduced. The standard defines specific features to ensure that tokens work uniformly throughout the Ethereum ecosystem. This includes external tools such as wallets and APIs for exchanges. The standard was introduced in 2015 but not formalized until September 2017.

Despite the galaxy-brain promises, it is difficult to defend the results of the ICO Free-for-all

ERC-20s were and remain far less challenging to create, both technically and socially, than launching an entirely new “layer 1”, blockchain. A project can rely on Ethereum’s security to avoid having to hire its own validators or miners. ERC-20s are far easier to integrate than standalone blockchains into exchanges, wallets, and other services. During the ICO boom, the benefits of interoperability became apparent.

Our anonymous trader says that people began to [adopt] a shipping container-based worldview. “This is because, if all these things can fit into the same [ERC-20] shipping container, then it’s more efficient.”

The best ICOs

The ICO era was unquestionably a huge success. Aave (AAVE), Filecoin(FIL)and Cosmos(ATOM) are near the top of this list. They are all a significant part of the blockchain eco-system, six years after they raised their funds. And investors have seen huge returns.

Brendan Eich’s Brave Browser is another project that has emerged from an ICO and produced a successful product. It raised $35 million in ETH during its ICO in 2017 and continues to grow since. The BAT token, which provides services via the browser, has not been a huge success. However it has held its value compared to other crypto indices.

These positive examples are cherry-picked out of a bleaker picture that is dominated by theft, fraud and failure. It seems that ICOs, when used by founders who are honest and have good intentions, can be very successful fundraising tools. However, they also invite massive fraud.

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In what was probably the largest controlled economic test in modern history, the libertarian idea of an unregulated financial markets did not deliver on its promise.

Why did ICOs not work as an investment?

Investors themselves did not understand the new financial and technical theory which made tokens investable. The “fat protocol” thesis is only valid if the token’s or protocol’s functionality is tightly integrated or native. As examples, ether can be used as “gas” to power Ethereum transactions or filecoins can be used to pay for verified on-network storage. These use cases are logical because they take advantage of the three pillars that make up blockchain: decentralization (open access), trustlessness and openness.

This model is more likely to fail the further off-chain you go with any distributed ledger feature, and this is for at least two different reasons. There is less and less verification on-chain that the goods or services being offered are in fact real, which invites fraud. In scam ICOs, entrepreneurs would claim that their tokens are “backed” by diamonds or real estate, but this could not be verified on-chain, let alone redeemed.

Similar to “fat protocols”, they can’t work when there is no exclusivity in the relationship between tokens and services. Because you can only use ETH for smart contracts, ETH has an economic value. Dentacoin, a “blockchain-based solution for the global dentistry industry”, doesn’t have any economic value because you can pay your dentist with any currency.

Investors who missed these fundamentals allowed for a large amount of fraud and low-IQ investment. We’ve seen this trend continue to the present, as we see with “exchange tokens” like Binance Coin or FTX’s FTX. There is no rational investing thesis for a nominally-decentralized token attached to a centralized exchange.

CoinDesk - Unknown An image from ICO Tracker displaying the biggest ICOs during the ICO boom.

Even those who had the best intentions and full understanding of ICOs still faced major disadvantages. Its biggest drawback is the capital structure. This often resulted in startups receiving large amounts of cash upfront. You may not be motivated to build a project if you have raised several hundred millions of dollars to launch it.

Our ICO veteran says, “If you were a developer then, you had a decision to make.” You could make quick money with bananacoin or you could start a project like Maker or ENS, and work hard over many years to earn a lot of money.

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The need for high-stakes Treasury management was also detrimental. The majority of ICOs were raised using ETH which, after the ICO boom had subsided, crashed in dollar terms. When it was time to start operating, the U.S. dollar amount available to pay developers and rent offices was far less than the headline fundraising figure might have suggested.

Founders were also tempted to speculate with ICO funds. In 2018, a project named Substratum, which had a full-time employee on staff and a treasury active trading was discovered to be . Substratum may not be active anymore, but at least it seems to have been an honest project. The token is now worth almost zero. It was acquired by Epik in 2021, a domain registry.

Even the happy stories hide this dark underbelly. For example, a successful startup named Monolith managed to turn $16 million raised into $25 million by using -based leverage and hedging strategy . Even if you ignore the hidden risks, this is a problem.

We can see how 2017 ICOs distorted interests. ICO tokens are not governed by any legal framework and therefore do not give investors direct access to the potential upside of treasury speculating. Holders gain if the project is completed and real users are found (or investors find a “greater idiot” to buy their tokens in between). It’s obvious that 50% more money will make it easier to build, but this does not obligate the investor to spend these funds.

A major loss of treasury is almost certain to hurt investors, as it will slow or stop development. These are more likely to occur if the project gambles with its own money.

The ICO era is over

are still happening, even though they are less visible now in the U.S. One way to mark the end of the ICO era is when existing large companies attempted to join in the fun and ran into a brick wall.

The SEC’s pressure in 2019 forced Telegram to cancel its plan to tokenize their network. also sued Kik in 2019 for its token sale from 2017. The SEC eventually settled the case with a $5,000,000 settlement.

I’d nominate a 2019 event that is less obvious as marking the end of ICO Era. Facebook’s proposal for the Libra stablecoin. Libra would have not been sold or issued as an ICO. As the U.S.’s highest legal and regulatory bodies scrutinized the case, they showed their hostility in a way that was clear. They were appalled by Facebook’s adoption and practice of crypto norms. Five years on, the regulatory backlash that we are facing seems to be fueled by this incredulous outrage.

Can we do better?

Someday, there may be a regulatory framework that can successfully impose good transparency and control on ICOs without compromising their accessibility. This is likely to be many years or decades away. Is there any way, in the meantime, to change the moral arc towards honesty and rationality?

It is hard not to look at those who have lost money in ICOs with cynicism. It’s hard to feel sorry for those who are scammed by ICOs. This is especially true since so many token investors are self-described gamblers and degens.

The free market theory does see a long-term benefit. The ICO scene is a wild west, and every failure can be viewed as a learning process. This is the exact opposite of the endless-bailout mindset that people fear within the mainstream banking environment. Theoretically, over time, the program should make participants much better investors. This will ultimately lead to a safer market than any regulatory measures could impose.

At least, that’s the theory. ICOs are a financial version of Darwinian Evolution, gradually weeding both uninformed speculators and fraudulent founders out. The carnage caused by the ICO era may have made traders more savvy. Over time, perhaps this radical free transnational market for investment will be a positive global force for humanity.

The persistence of ignorance and degeneracy among crypto-speculators, even five years after the first boom, can overwhelm that optimism. Real-world results are difficult to ignore, regardless of what the theory is. And as of now, despite their galaxy-brain promises, the actual outcomes of the ICO-free-for-all cannot be easily defended.

Ben Schiller is the editor.