Life is strange in the boom and bust ICO bubble
In October 3, 2017, a cloudy, muggy day, 700,000 people took to the streets of Barcelona to protest against Spain’s government. Two days earlier, Madrid had reacted harshly when Catalonia had held a referendum on independence, despite Spanish courts deeming the vote illegal. The police prevented Catalans from voting; violence had broken out. Barcelona was now on general strike – shops shuttered, taxis ignored exasperated potential customers. The flag-draped multitude snaking through the tree-lined Avinguda del Paral·lel had a Victor Hugo vibe. A country might be dismembered, history might be in the making. But Irfon Watkins and his team were thinking about tokens.
“We’re going through a riot,” Watkins said. “Oh, the joy of running a global technology company.” For 53-year-old Watkins, this was supposed to be their big day. A bespectacled Welshman with floppy grey hair, light stubble and thick-rimmed glasses, Watkins is the CEO of DOVU, a UK startup that aims to create an online market for mobility data using the blockchain – the peer-to-peer decentralised ledger technology that underpins cryptocurrencies such as Bitcoin and Ether.
The nine-person company had already secured an undisclosed investment from Jaguar Land Rover and government-backed fund Creative England. But most of the money to build DOVU would come from another source: the online sale of 300 million digital tokens – or “coins” – to whoever would pay for them using the cryptocurrency Ether.
The tokens (in fact, strings of code representing units of value) would become a mini-currency for buying data on DOVU’s blockchain, when it was created. Some prospective buyers were fans eager to get the tokens and use them on DOVU in the future; others were speculators, planning to stockpile them and resell them on cryptocurrency exchanges if DOVU’s success made them appreciate. Online, potential buyers were doing the same with tens, if not hundreds, of tokens from other projects, with the expectation of getting rich.
Watkins and his co-founders, Arwen Smit and Krasina Mileva, were walking from the Barcelona Fair, where they had pitched at a blockchain conference, to their hotel in the city centre. There, they would join their head of product Alex Morris and kick-start the sale, scheduled for 7pm. It was 6.35pm, and we were weaving through the crowd as gaggles of bereted gendarmes glowered from the sidewalks. The protesters chanted, “Asesinos” (murderers).
“We have to support these guys,” said Smit, a Dutch 26-year-old with blue eyes and a smattering of freckles, looking at her nearly-dead phone. “The Catalans?” asked Watkins, raising an eyebrow. “I mean the investors,” replied Smit. “They’re asking questions.”
Since announcing their plans to mint and sell their tokens in a 25-page PDF document uploaded online in September, DOVU had been in touch with prospective buyers through Telegram, a messaging app loved by cryptocurrency fans. Questions ranged from enquiries about DOVU’s technology and how the tokens would be delivered after the sale, to quizzing over whether and when DOVU’s tokens (official name: DOV) would be tradeable on online cryptocurrency exchanges. People in the Telegram group were already reporting being privately messaged by scammers posing as members of the DOVU team, offering tokens at discounted rates.
“There are a few things that can go wrong,” said Watkins as the team cut through the narrow medieval alleys off Las Ramblas. “The website being hacked; someone breaking into the wallet where we are collecting the payments; and phishing – fake Telegram accounts or doppelganger token-sale websites defrauding buyers. But, in general, I am calm.”
The trio barged into the hotel at 7.03pm. Morris, an ex-lifestyle journalist with a wave of umber hair, was waiting for them by the rooftop pool. “Sale has started,” announced Morris, eyes on his laptop. His voice was muffled by the whir of a police chopper in the dusking sky. In the streets below, demonstrators began banging on pans – a traditional form of protest called cacerolada. The hotel manager responded by raising the muzak’s volume.
“OK, champagne,” ordered Watkins. As Moët & Chandon flowed into flutes, payments from token-buyers started flowing into DOVU’s crypto wallet. It was going well, at a pace of two purchases a minute. The DOV token sale was due to run for two weeks: if it managed to sell all its tokens, DOVU would eventually be £30 million richer. (Cryptocurrency can be traded for fiat money – a currency without an intrinsic value or physical commodity, but which can be declared legal tender – on exchanges such as Coinbase.) “It’s like throwing a party thinking no one will come – then everyone comes. That’s what an ICO feels like,” Watkins explained.
Imagine you want to open a casino. The trouble is you have no money. Investors are not keen on the plan. Banks stonewall you; friends and family can only help so much. But what if you fabricated a finite number of chips to be used in your soon-to-be-built casino and sold them to the public, in order to raise the money? People who like your idea would be both helping bring the casino into existence and getting a bunch of chips to play with once the place is up and running. And – since there is only a limited number of them around – chip-buyers could resell their tokens at a higher price if the enthusiasm around the future casino grows.
The metaphor is not watertight (casino chips have a fixed value) but it helps explain the crypto-craze that portended this year’s great Bitcoin bubble: token sales, popularly known as Initial Coin Offerings or ICOs.
In 2016, entrepreneurs began to realise that blockchain technology enabled them to mint their own money and crowdfund their immaterial supermarkets. And what made it really easy was a second-wave blockchain called Ethereum (powered by Ether). Ethereum allows developers to run open-source applications on top of it, and to mint digital tokens to be used in-app. Importantly, the tokens would also be tradeable on online exchanges, making room for speculators.
What triggered the craze was The DAO, an Ethereum-based venture fund that raised $150 million (£112m) in Ether by selling tokens that conferred the right to vote on investment decisions. Weeks after its launch in May 2016, The DAO was hacked and robbed of $50 million; but, although a failure, it had proved there were people out there ready to pay huge sums for tokens.
Things moved quickly. Every day, self-styled founders armed with an idea asked millions for their tokens – and regularly received them. In April 2017, blockchain prediction market Gnosis raised $12.5m in 12 minutes; in June, a company called Bancor raised $147m in three hours; in July, a project for a novel blockchain called Tezos raised $232m in Ether and Bitcoin. Even a parody ICO, “Useless Ethereum Token” (its logo is a middle finger), raised $40,000.
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