There are literally thousands of cryptocurrency projects which will most likely not exist a few years from now. The number of companies and their coins that were launched in the 2017 ICO craze is staggering, raising millions of dollars with not much more than a white paper and a story which played well to irrational exuberance.
Bitcoin maximalists remind us often how these companies printed “digital fiat” out of nothing when they minted their own tokens and sold a dream to speculators pretending to be investors. Statistically, it’s not wrong to say almost all of these tokens are shitcoins. Some go so far as to say anyone who works with or promotes a tokenized project that isn’t built on Bitcoin or a Bitcoin second layer solution like Lightning is a scammer. Just going by the numbers, they have a strong case.
They are also wrong.
Dripping with the black-or-white fallacy, the declaration all non-bitcoin projects are shitcoins doesn’t stand up to scrutiny. Yes, there are key points involved which we’ll explore here, some of which have been brought to congress’ attention as Michael Goldstein reminded us:
If even one project isn’t a shitcoin, then other non-Bitcoin projects can be real, valuable, and part of creating a world we all want to live in also. With a massive developer base, many applications including heavily used DeFi platforms, and over a $240B market cap, a strong argument can be made that Ethereum is not a shitcoin. Possibly easy to see now, but what about when the ETH token first came to market? How can we spot the next non-shitcoin, when, statistically-speaking, they are almost non-existent?
When you introduce yourself as working on a project that has its own token, some of your audience will rightfully assume, based on historical data so far, that your project will fail in time with very few people getting a return on their investment (read: speculation), usually at the cost of someone else who bought the hype.
They usually buy that hype with BTC gains which eventually turns into selling pressure as project teams liquidate their BTC earnings to pay employees and keep the lights on. It’s understandable and even reasonable for those who unshakably believe Bitcoin is the future (and the only future) to think everything else will eventually harm people and should be treated with ridicule.
They see themselves as protecting the uninformed from losing their value in a sea of innumerable scams. They take the shortcut of labeling anything that isn’t bitcoin a shitcoin because that shortcut is easy, and it continues to promote the value and supremacy of their holdings.
Just because a shortcut is easy doesn’t make it correct. Projects like ChainLink, Polkadot, Cardano, EOS, BitcoinCash, XRP, Stellar, and more are backed by billions of dollars of market cap with billions of dollars in liquidity. You can argue, to various degrees, they are innovating and providing solutions in ways investors (actual investors) believe bitcoin and second layer bitcoin solutions currently can not.
This fact doesn’t rely on your opinion, it’s demonstrated directly in how investment money is flowing. Will these projects be around in 10 years? That’s the real question. Another important question is how to spot these projects before they reach the top 20 or so in marketcap.
How do we acknowledge the innovators and pioneers working on new projects that are not bitcoin as being anything but scammers but to the contrary, providing a real need the marketplace is demanding and supporting financially? What categories of investment (layer 1, layer 2, utility token, security token, etc) include projects which should be looked at seriously and by what criteria?
How to spot a diamond in the rough:
1. Start with the team
Are they for real? What have they accomplished both in the cryptocurrency space and outside it? Have they run real companies before or is this their first start up? Be careful getting caught up hype, charisma, or a cult of personality. Having a strong Twitter following or YouTube presence doesn’t automatically mean they can build a company or lead a team.
2. Look at the code
Do they have an actual product or service solving a real problem people are willing to pay for or is it just an idea with a white paper? Did they start from scratch or use an existing, proven technology? Don’t get distracted by tribalistic critiques that aren’t based on the actual technology. If the person you’re listening to hasn’t written code professionally for a significant part of their career, it’s probable they don’t know what they are talking about and are simply repeating what they heard someone else say.
3. Evaluate the model
Does the token make sense in terms of how it helps solve a business pain point for the customer? Is it sustainable long term? Does it create a virtuous cycle where participation is permissionless and everyone who participates is rewarded? Does it create an ecosystem? This is where the magic happens, and it’s no easy task to evaluate effectively. Some things to look out for include token distribution, rewards incentives for participants, levels of token inflation, and if the demand upon success translates into value for everyone. If a single entity without industry oversight controls what happens to the token, you may be looking at a shitcoin.
4. Understand the governance
What’s the chain level consensus model (Proof of Work, Proof of Stake, Delegated Proof of Stake)? Have they taken innovative steps to improve on failures of other projects with similar consensus models? How are changes to the actual protocol decided by the community and in what ways are the token holders involved in the process?
If the token is used for governance, what does the distribution look like and how are those with skin in the game aligned with the long-term success of the project? This is another area where strong opinions can turn into arguments resembling religious crusades. Decentralization, as it pertains to networks and governance, is always on a spectrum and compromises are always made. Sometimes those compromises exist in mining pools or proxy votes or github pull request permissions and policies. Evaluate accordingly.
We may never convince maximalists there is real value outside of bitcoin, but if we’re right, we won’t have to. Investors and actual users whose lives are improved will make the case directly. As the Managing Director of a project in the mid-300’s in terms of token market cap ranking, I believe this is an important discussion because not all shitcoiners are scammers, and I’m not alone working to create real value.
Some of us actually want to fix real problems in the space such as the usability of cryptocurrency. We have a solid team, working code, a model that rewards everyone, and effective decentralized governance. Innovation requires risk and just as in the traditional investment space, most startups will not survive long-term. We do need to protect people from scams, but we also need to inspire, promote, and support innovation and true problem solving.
This industry is regulated by our tweets, our memes, and our reputations. In short, the value backing all of this comes down to long-term belief, not short-term speculation. Choose carefully what you believe in. You might get a diamond or you might get a bag of shit.
Luke Stokes is the Managing Director for the Foundation for Interwallet Operability working on the FIO Protocol, a usability layer ensuring cryptocurrency addresses are easy to read and use by the masses. He's passionate about voluntary systems of governance and has been involved in bitcoin since early 2013. He's been a consensus witness for the Hive (previously Steem) blockchain since early 2018 and a custodian for eosDAC, a community-owned EOSIO Block Producer and DAC Enabler, since its inception. He holds a computer science degree from the University of Pennsylvania and co-founded and co-ran the ecommerce start up FoxyCart for over ten years before going full-time into cryptocurrency.