As mentioned in Part I of this series, unlike bitcoin, ether is more than just a store of value. It has been described as "crypto-law" and "programmable money" because when it is turned into gas it can be used to perform the following actions: Allocate resources, facilitate transactions between accounts using smart contracts, compensate participant nodes for computations performed on the network, and act as an internal transaction pricing mechanism. These powerful functionalities have made an entirely new kind of self-regulating governance possible in the form of distributed autonomous organisations (DAOs).
Futurists have postulated that within a decade, DAOs will be used as a way to control and operate interconnecting networks of autonomous machines. They envisage driverless taxis and trucks that operate independently, making a living by earning cryptocurrency from transporting passengers and cargo. They can then use their earnings to pay tax, or cover operating costs such as power, insurance, repair and maintenance.
They will also be able to interact with other autonomous machines in a co-ordinated fashion. For example drones will be able to recruit other drones to form swarms to assemble structures, help with emergency response, or clean up toxic waste. This will lead to what many are calling the Machine Economy. Well before that day arrives, it is the Human Economy that will become disrupted by the introduction of blockchain-enabled DAOs. One example is the burgeoning of Initial Coin Offerings (ICOs), which is an unregulated means of crowdfunding.
ICOs enable companies to issue coins or tokens in exchange for cryptocurrency that can later be converted to fiat currency. Token holders are given a kind of digital stock certificate, but unlike Initial Public Offerings (IPOs), the process isn't regulated. This means that all the onerous and costly pre-IPO kerfuffle associated with taking a company public such as document preparation, legal and filing fees that can cost millions can be avoided. Awesome for companies, but potentially disastrous for unwary investors who don't undertake sufficient due diligence (most don't).
Those particularly in support of ICOs are a fringe group of fanatics called crypto-anarchists who aspire to do away with the concept of law based on sovereignty and geographic jurisdiction. They believe that a trustless, smart contract-powered, peer-to-peer, self-organised legal and financial system should transcend government legislation and enforcement. Because all trades and transactions can be encrypted, they believe that all global commerce should be undertaken far away from the prying eyes and interference of state entities. One of the most contentious issues with this approach is that if it were to become a reality, governments will have a hard time preventing crime and terrorism, collecting taxes, and regulating the behaviour of corporations and individuals. This future world could be described as either a capitalist libertarian utopia, or a dystopic wild west, depending on one's perspective!
We are already seeing some signs of this play out as governments around the world begin to respond to the rapid adoption of crypto-currency and ICO mania. Some governments have been very hands-off, others have issued stern warning and guidelines, but more recently China took the draconian step of banning them entirely. What the Chinese government are particularly concerned about and why they took such a drastic measure is that investing money into companies that have nothing other than vapourware; no customers, no market traction, no prototype - nada is extremely risky. Add the toxic mix of Ponzi schemes and scams to the mix and you have a veritable Wild West scenario that could have led to political instability, had officials not stepping in. If left unchecked Chinese citizens would have continued risking everything by acquiring tokens with money they can ill afford to lose resulting in widespread financial hardship.
The mania has been driven by stories of early adopter who have made mega bucks from shaking the crypto money tree. If you had purchased or mined bitcoin or ether early, you'd undoubtedly be a multi-millionaire today! One of the primary reasons why ether has risen by more than 3,000% year-to-date is that it is the most popular cryptocurrency used by speculators to buy ICO tokens. The stampede has been driven by a collective FOMO among get-rich-quick speculators who congregate on crypto chat forums to discuss everything from price predictions, and investment strategies to pump and dump schemes.
Token sales that are attracting the most attention have been projects that aim to create an "Ethereum killer". Some of the hottest contenders include ventures like NEO, EOS, IOTA, Tezos, and NEM. Although still highly speculative, what sets them apart is the quality of their prospectuses (referred to as white papers). In addition, these top-tier ventures also boast backing, or executive involvement, from superstar coders who possess deep domain expertise and industry knowledge. The same cannot be said for the majority of teams touting potentially worthless tokens, yet they still mange to obtain funding from retail investors willing to throw caution to the wind.
In order to protect them it’s widely predicted that, unlike China's zero-tolerance approach, most countries will allow ICO’s to continue with the caveat that if tokens are issued that claim to offer investors dividends, voting rights, ownership, or a stake, they may risk prosecution. There are however, a growing number of jurisdictions such as Mauritius, that want to offer a safe harbour to blockchain innovators...
Read More: ICOs are funding the creation of a new decentralised web (Part III)
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