The following is a guest post by Gaurang Torvekar,the co-founder and CEO of the decentralized professional social network Indorse.
Blockchain technology has attracted some of the world’s brightest entrepreneurs to the task of building decentralized networks with game-changing applications. Amidst all of the excitement, the space has also attracted plenty of scam artists and people looking to make a quick buck…. or ether, or bitcoin. That’s why a report put out by RACIB (Russian Association of Cryptocurrency and Blockchain) indicating that half of the $300 billion raised by ICOs in Russia in 2017 went to scams, isn’t actually that surprising. But why exactly are scams running rampant in this space?
ICO stands for “initial coin offering” and is a fundraising mechanism for blockchain-based applications. Investors fund an early stage project in return for tokens that represent access to use of the application once completed. If the project is successful, the token will go up in value and early purchasers can sell their tokens on the open market, often for eye-popping returns. While ICOs have created many legitimate and promising projects, ICO scams are so prevalent because they’re not particularly difficult to put together. All you really need is a website and a white paper outlining how your project will work once it’s built and you can raise funds through an ICO. There is no legal guarantee made to an investor that the project will ever be completed, so it’s very easy for project leaders to disappear once the project is funded. There’s also little legal recourse investors can take once they realize that they’ve been defrauded – another plus for the scammers.
The ease of conducting an ICO explains why there are so many fraudulent projects but it doesn’t explain why so many scams are successfully funded. The RACIB report indicated that people invested $150 billion in scams in Russian alone throughout 2017. The success of these scams can largely be attributed to the thousands of people in search for the “next Ethereum” that can yield over a 200,000% return. Blockchain technology is complicated to understand so it’s difficult for the average person to differentiate the scams from the legitimate projects. All it really takes is some slick marketing promising the next big thing and people have shown a willingness to take a gamble.
To navigate the wild world of ICOs it is important to understand the risks and to do plenty of research before making any investments. Projects that are soliciting your investment and guaranteeing massive returns are best avoided. If something sounds too good to be true, it usually is.