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More Than Half of ICOs Fail Within 4 Months, Study Suggests

While over 4,000 ICO projects have managed to raise a combined total of around $12 billion to date – and most since January 2017 – a majority of them fail within four months of their token sales, a new study suggests.

The research, conducted by a small team at Boston College in Massachusetts, found that a mere 44.2 percent of token projects are active into the fifth month or beyond, using their social footprint via Twitter as a barometer of health.

While the figures are perhaps shocking, they should maybe be taken with a pinch of salt, as the methodology of the study leaves some wiggle-room for ICOs to exist beyond that 120-day time-frame and not be indicated so in the data.

In determining the lifespan of an ICO, the Boston College team – Hugo Benedetti and Leonard Kostovetsky – chose to use the intensity of Twitter posts to analyze the lifecycle of projects and assumed that no tweets in the fifth month meant that the project had died.

The paper further analyzes the data, suggesting that the safest bet would be for those ICOs that manage to list on exchanges after the token launch:

“Breaking it down by category, 83% of the 694 ICOs that don’t report capital and don’t list on an exchange are inactive after 120 days. For the 420 ICOs that raise some capital but don’t list, this figure falls to 52%, and for the 440 ICOs that list on an exchange, only 16% are inactive in the fifth month.”

Token returns

The study also looked at the value of ICOs as investments and the average returns over different time-frames, after adjusting for the overall moves in the value of the cryptocurrency markets.

Benedetti and Kostovetsky found that “in contrast to IPOs, crypto-tokens continue to generate abnormal positive average returns after the ICO,” with token values continuing to climb for six months after launching.

The paper states:

“We find evidence of significant ICO underpricing, with average returns of 179% from the ICO price to the first day’s opening market price, over a holding period that averages just 16 days. Even after imputing returns of -100% to ICOs that don’t list their tokens within 60 days and adjusting for the returns of the asset class, the representative ICO investor earns 82%.”

Once trading has got underway, tokens continue to grow in price, the paper continues, “generating average buy-and-hold abnormal returns of 48% in the first 30 trading days.”

Further, the researchers say: “Startups sell their tokens during the ICO at a significant discount to the opening market price, generating an average return for ICO investors of 179%, accrued over an average holding period of 16 days from the ICO end date to the listing date.”

While the figures may be hard to parse for the non-academic reader, Kostovetsky told Bloomberg that “once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies.”

“The strongest return is actually in the first month,” he added.

The paper concluded that, though the figures could indicate bubbles around token launches, they also indicate that there can be high rewards for those that accept the risk of investing in “unproven pre-revenue platforms through unregulated offerings.”

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Ripple Pumps $50 Million Into Academic Research on Blockchain

Ripple has announced it is setting aside millions of dollars to fund university-based research into blockchain and cryptocurrencies.

According to a news announcement published Monday, the University Blockchain Research Initiative (UBRI) will see the distributed ledger payments startup collaborate with 17 universities from across the globe to boost academic research within the industry.

Ripple says it will put over $50 million, as well as its own expertise and “technical resources,” into funding the initiative’s first group of university partners. The institutions will be able to set their research topics independently, according to the announcement.

The payments firm, which offers several blockchain-based products that are seeing growing adoption within the banking and money transfer industries, aims as part of the effort to collaborate on R&D that will “stimulate understanding and innovation” around blockchain, and also to help set up new curriculums to open up the technology to students.

The initiative is already getting off the ground at some universities, with the Center for Information Technology Policy at Princeton creating a program to study the policy impact of cryptocurrencies and blockchain in the U.S. and globally.

And, among others, UBRI is also participating in a fintech initiative at MIT’s Computer Science and Artificial Intelligence Lab to work with researchers on topics including blockchain, cryptocurrencies, cybersecurity and international payments.

Outside the U.S., the project’s 17 universities include institutions in Australia, Brazil, Canada, Europe, India and South Korea.

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Major Blockchains Are Pretty Much Still Centralized

At the beach, they say, all your troubles melt away.

But that’s not entirely the case for researchers who spent part of this week at the Financial Crypto 2018 conference on the Caribbean island of Curacao, discussing the decentralization of the two largest crypto protocols, bitcoin and ethereum – or where they’re lacking in this regard.

Presented on March 2, a new paper, titled “Egalitarian Society or Benevolent Dictatorship: The State of Cryptocurrency Governance” by University College London researchers, delved into the topic further by measuring how many developers are contributing to and commenting on cryptocurrency codebases.

For one, the researchers looked at “commits” – bundles of changes a developer proposes to make to the codebase. According to the paper, 7 percent of all the files in the Bitcoin Core software were written by one developer, while about 20 percent to ethereum were written by a single coder.

As such, this signals that ethereum is “a little” more centralized than bitcoin is in this regard, said Sarah Azouvi, a UCL computer science PhD student and co-author of the paper.

It’s an interesting take as it relates to the fierce debates happening within the ethereum community right now, as two sides go head-to-head on an ethereum improvement proposal (EIP) 867.

EIP 867 looks to establish an easier process for recovering lost funds via software changes – a controversial topic that stems back to The DAO hack in 2016, when ethereum developers decided to reverse transactions in order to give victims their funds back.

Yet, even though many similar discussions regularly take place on GitHub, the overall pool of users involved was more limited than Azouvi, and many others, expected.

She told CoinDesk:

“It’s still not a lot of people. Most of them are making just a couple comments here and there. A few people are doing most of the discussion.”

The decision-makers

But ethereum’s debate over lost funds wasn’t the only reason for attendees in Curacao to discuss the network. Another reason highlighted by the paper was governance, as most of the major code changes are still written by ethereum creator Vitalik Buterin himself.

“He stands out from the rest,” said Azouvi.

The findings aren’t exactly surprising, as this has been a point of contention for some time, whereby many believe Buterin has too much power over the network for it to truly be called a decentralized blockchain.

Even developer Jason Teutsch, who created ethereum scaling protocol TrueBit, joked that Buterin can be counted on to take care of everything when asked about governance. Although, on a more serious note, he argued the recent debates just showcase how hard governance can be in general, saying there’s often no way to make everyone happy.

Teutsch told CoinDesk:

“It’s a hard problem. It happens in every governance system. Every time something changes, someone is unhappy.”

Not that unusual

Yet, even though governance seems more centralized than people might expect from projects that cherish decentralization, the UCL researchers note this isn’t so unusual.

For instance, ethereum and bitcoin development have similar levels of participation as other open-source projects, such as programming languages Clojure and Rust.

“It’s not that different, though, even though the community is focused on decentralization. They all behave quite similarly,” she said.

Plus, the paper concedes that “measuring levels of centralization by looking at the code or by looking at specific sources” is inherently limited.

Along these lines, researchers from IC3 argued during the conference that there are also technical ways to measure how decentralized a cryptocurrency project is.

In particular, they looked at how long it takes blocks to propagate across the network how and geographically distributed nodes are, determining that ethereum outperforms bitcoin on both these fronts.

And one audience member added yet another angle, noting that decentralization of the cryptocurrency’s economy is also an important factor that was being missed in the research presented at the conference.

The right to vote

But with interest in the decentralization of cryptocurrency networks on the rise, one might think solutions were also being considered.

Yet, researchers and developers at the conference were largely neutral on issues facing ethereum and bitcoin, saying they wanted to steer clear of the politics surrounding the decision-making on the protocols.

“I don’t want to take a political position. I’m interested in technical solutions, but I’m not going to take sides,” Teutsch said about ethereum’s recent debates in particular, then pointing to better voting mechanisms as a possible way to deal with contentious debates.

Azouvi seemed to shy away from taking a position also, saying, “We don’t propose a new system. We count how many people are doing what.”

Although, she continued, echoing what Teutsch said: “[Ethereum] could benefit from having a more formal governance model. It’s difficult because even if you want to have a more formal way of decision-making, it’s hard to decide who writes it. Then there’s the question of who gets to vote.”

“They could try to make sure everyone who’s able to is able to have their vote,” she suggested.

Still, Azouvi noted voting opens up a whole new can of worms:

“Voting itself is a hard problem. It’s non-trivial.”

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Institutional Cryptoeconomics: A New Model for a New Century

Chris Berg, Sinclair Davidson and Jason Potts are with the RMIT Blockchain Innovation Hub in Melbourne, Australia.

In this opinion piece, the authors discuss why blockchain may be more disruptive than the so-called ‘general purpose technologies’ that transformed society in recent centuries. 

While cryptoeconomics is already a vibrant research field, the study of the blockchain must not be left solely to computer scientists and game theorists.

The rollout of blockchain technology raises complex questions in economics, public policy, law, sociology and political economy. What we call “institutional cryptoeconomics” starts from a simple premise – the blockchain is not just a new general purpose technology, it is a new institutional technology.

This may sound like a pedantic distinction, but the difference between these two conceptions is
profound. General purpose technologies allow us to do what we already do better, faster and cheaper. Economists understand general purpose technologies (like steam power or the semi-conductor) as great engines of economic growth.

There is no doubt that the blockchain is a general purpose technology, but it is much more.

Rather, the blockchain is a new mechanism to coordinate economic activity and to facilitate cooperation between individuals. It opens up new opportunities for exchange, for collaboration and for building communities that were previously closed off due to high information costs and transactions costs.

Old thinking

As a new institutional technology, we expect that blockchains will disrupt and transform both economic activity and social organization. Institutional cryptoeconomics is a new analytic framework to study that evolutionary process.

In the very first instance, we believe that the transaction costs approach of Oliver Williamson – who won the Nobel in economics in 2009 – is the ideal theoretical framework to understand the blockchain. Williamson was primarily interested in understanding the ‘make’ or ‘buy’ decisions that firms have to resolve.

Is it better the buy inputs on the open market or produce them in-house?

That choice defined the limits of the firm, which in turn determined the incentive structures that decision makers faced.

A key determinant of the limits of the firm is “opportunism” or “self-interest seeking with guile” as Williamson described human behavior.

The combination of opportunism and asset specificity (which refers to how easily an investment can be resold or repurposed for another use) meant that complex economic behavior had to take place in large corporations. This in turn implied the need for substantial financial capital investment.

Thus, we saw the dominance of shareholder capitalism in the 19th and 20th centuries.

New paradigm

The blockchain breaks this relationship between size, opportunism and asset specificity.

By substantially eliminating opportunism (that is, being a ‘trustless’ technology), the blockchain allows specific assets to be deployed in small businesses supported not by large amounts of financial capital but by large amounts of human capital. It allows market incentives to deeper penetrate into firm structures resolving problems of team production.

For many industries, the blockchain will radically redefine the boundaries of the firm, allowing individuals to trade their talents and skills in an environment devoid of big business.

The eclipse of the large public firm has been predicted before, of course, but this time we believe those predictions will eventuate for many, if not most, industries.

The decline of shareholder capitalism will have ricochet effects across the economy and society itself. It will put new pressures on employment, inequality, political power and the regulatory state. And it opens up vast new opportunities. The Williamson framework can also help us understand how the blockchain changes – and enhances – the provision of insurance, the provision of public goods, and the provision and protection of identity.

It is often said that we are at the start of a “blockchain revolution.” Institutional cryptoeconomics offers an exciting way to understand what features of the ancien régime we’re about to lose, and what might take its place.

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