App coins and Initial Coin Offerings have become a rising trend in the cryptocurrency market. However, Counterparty Foundation’s Community Director Chris DeRose equals them to Ponzi schemes.
From the beginning of 2016, a growing number of cryptocurrency enthusiasts have begun to invest in app coins, or local blockchain-based tokens, hoping to secure some short-term profits on cryptocurrency exchanges.
To boil down the arguments, the fundamental issue with the rise of app coins was that investors or buyers of these assets were generally not quite aware of the technical aspects and limitations of the local tokens. In other words, many buyers of app coins like Steem did not bother looking into the basics and fundamentals of the platform before investing in it.
That led to a massive return on app coins, which placed market caps of hundreds of millions of dollars despite obvious vulnerabilities of some of app coins.
The reason behind the popularity of app coins is users’ and investors’ misinterpretation of the importance and necessity of app coins in general.
Creating an app coin means that a new blockchain network is deployed. A long series of technical and financial issues surface, including pre-mining, circulation of tokens, and, most importantly, the security or hashrate of the blockchain network.
ICOs are methods that blockchain-based platforms often use to gain funds to operate the network. As the name suggests, coins are initially offered to users interested in the network to circulate the token before the platform even launches.
So, if the platform has not been launched yet, how are tokens valued? Randomly. The value of the tokens in the ICO is not based on any real market value. Take Ethereum and Waves for instance. Although they happened to be successful examples of ICOs, the price tag of the tokens were not based on any actual market values or numbers.
Thus, ICOs, in theory, are scams, as they place a value on an asset or a form of money that do not even exist in the market. The concept of an ICO is identical to a merchant selling a piece of an unknown item for a disclosed amount, hoping that it could be worth something in the future.
Joseph Young