The Emperor is Naked
We all know the story. In the childhood tale “The Emperor’s New Clothes” by Hans Christian Andersen, swindlers posing as expert weavers promise the emperor a set of clothes that they say is the finest in all the land. In fact, so extraordinarily beautiful is this new cloth that it is invisible to those who are unfit for their position or unusually stupid. They convince the emperor to hand over the best raw materials and money in order to weave this cloth.
They set up shop on empty looms, pretending to toil away at this magical cloth. The emperor sends his ministers to check on the progress of the cloth, but everyone afraid of appearing foolish or incompetent, pretend to admire the swindler’s non-existent work. They continue to hand over more gold and treasure for the swindlers to continue their “operations”.
In reality, they make no clothes at all, but no one calls them out for fear of seeming to be the lone fool. When the emperor finally parades before his subjects in his new “clothes”, still no one dares to point out the obvious for fear that they will be seen as stupid. At last a child cries out, “But he isn’t wearing anything at all!”.
- Promises based on revolutionary new technology? ✅
- Complicated jargon designed to deter inquiry? ✅
- Appeals to authoritative name-dropping? ✅
- Outlandish raises without tangible products? ✅
Hans Christian Andersen might have as well have been describing the state of Initial Coin Offerings (ICO) today.
I’ve worked in the blockchain industry for nearly a year now, serving in various capacities for a variety of blockchain projects. Whether its writing White Papers, service strategy and planning, or coordinating ICO marketing efforts. I’m by no means an expert, but I’ve been behind the scenes long enough to make informed comments on the industry.
So let me be the child to call out what a vast majority of “utility tokens” being sold in ICOs really are — e-coupons. Yes, they are digital versions of food stamps, gift cards, and store-discount vouchers — for a business that doesn’t yet exist.
In fact, I can show you, right now.
The Future of Food — Biotech x Fintech
✅ Promises based on revolutionary new technology. We’ve developed groundbreaking technology that allows us to consistently produce and cook Michelin-starred food — at the same rate that McDonald’s serves burgers and fries. Fast food meets fancy food. Gas station meets gourmet. Perfection every time, down to the last bite.
For $15 a pop, every man, woman and child can dine like kings and investment bankers. Truffles and caviar will become as common as chicken nuggets and curry sauce. Imagine the possibilities — we could revolutionize the food business as we know it.
I tell you that together we can build the next food empire. Restaurants in every corner of the globe churning out award-winning recipes from Michelin-star chefs faster than Elon Musk can build Hyperloops.
✅ Complicated jargon designed to deter inquiry. How is it possible? Our team of molecular gastronomists and food scientists used GCMS to isolate the critical compounds present in these foods, harnessing deep-learning neural network algorithms to perform analyses on big data sets from foods taken from Michelin-starred restaurants from around the world. We leverage the power of proven CRISPR-Cas9 genome editing to isolate and splice the genes responsible for the phenotypical characteristics of these foodstuffs, and then use somatic cell nuclear transfer to produce optimized genetic versions of these foods into donor embryos to produce top-grade caviar, perfectly marbled beef, and durable truffles. We then use advanced Laser-assisted Bio-Printing (LaBP) tissue engineering techniques common in regenerative medicine to grow foodstuffs under controlled laboratory conditions.
✅ Appeals to authoritative name-dropping. Didn’t understand half of that? Well that’s because the technology we’ve been developing is led by our team of leading food scientists and geneticists with PhDs at (insert prestigious-sounding university — preferably Chinese and Japanese — here). Trust me — I’m an expert. All of us are. Except you.
✅ Outlandish raises without tangible products. Market research from leading consultancy companies indicate that the total available market for fast food globally is worth $668bn in revenue, with an annual growth rate of 3.5% annually in the last 3 years. Imagine if we combined that with Michelin-star quality. Just a quarter of that market would make us more valuable than Uber.
Token Sale
In order to raise money to build all this very wonderful and expensive tech, we’ll be holding a public sale of our e-coupons (ticker symbol: “FFCO”). The FFCO you buy today can be used to purchase menu items at all of our stores when we roll out across the country, and the world.
But we’re holding an initial private sale to early investors at a discounted rate. Each dollar you put in today buys you 30% more FFCO tokens. Later private sale rounds will have reduced discount rates of 20% and 10%. There’s a limited quantity of these tokens available.
As you can imagine, when our restaurants open across the world, demand will skyrocket. You can sell off your discounted tokens for a handsome profit, the same way ticket scalpers buy up stadium tickets off the market, and resell them to ardent fans.
Sound familiar?
It should. It’s practically the template for most ICOs touting utility tokens.
Treating these utility tokens as e-coupons is a handy way for you to look past the skyrocketing valuations of tokens, and question the business fundamentals of the project. It helps you to start seeing what’s underlying the demand for utility tokens, which will determine the long run price.
The crypto market crashed in late 2018 — and it makes perfect sense if you think about these projects using the analogy of the e-coupons. A vast majority of these projects barely have a business or a product whose goods or services exist, or will have sufficiently high demand that the demand for those tokens, and hence their token prices will rise sustainably. If no one can use the e-coupons for purchasing real goods and services, what do you think people will do? That’s right — mass sell.
In fact, even if the business did succeed, you would still have to ask if the demand relative to the circulating supply would be sufficiently high for the token price to appreciate to provide you with the capital gains enough to justify your investment.
Zero-utility = zero value. In fact, most e-coupons, gift cards and discount vouchers issued by real businesses today have far more value than 99% of all utility tokens sold through ICOs — ever.
Those who know me also know I enjoy poring and agonizing over complex ideas in economics, law and technology. That penchant for the profound enabled me to write 10 undergraduate dissertations by the fourth year in university. But I also have come to realize that con-men (and women) are fond of deploying dense jargon designed to scare off common-sense questioning — precisely because like the fraudsters in The Emperor’s New Clothes, they know how terrified people are of seeming foolish. Especially grown adults whose image is everything.
I hope that thinking about utility tokens as e-coupons will help investors see past the smoke and mirrors of ICO projects. There are nuances to other projects that are certainly beyond the scope of this article. However, for well over 99.99% of projects out there touting their “utility” tokens — this framework can help you call out when the Emperor is naked.
