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"50 Shades" of scam within the cryptocurrency markets

Jun 8, 2018

In his editorial column, Alexey Voronin, founder of SmartValley decentralized scoring, points out various red flags indicating that any given ICO-project might be a scam.

When it comes to ICO, scams usually imply theft of investors' funds given to a project. That said people also might refer to an ICO-project as a scam if it isn't of a good quality or is potentially dangerous in its likelihood to result in backer's investments lost or other issues as a consequence.

In this light, a scammer is an investment agent that has stopped fulfilling their financial obligations for any reason. The term "Scam" is most popularly used by investors  for various hype-projects and pyramid schemes. Going forward we will look into this matter specifically as it applies to the crypto industry.

To better understand this phenomena first we must specify criteria that separates this negative effect into three big different groups.

  • Premeditated Scams
  • Spontaneous Scams
  • Manipulative Scams 

Premeditated Scams

The most primitive example of it is a purposeful criminal intent of people conducting an ICO seeking to steal the funds and disappear somewhere in the vastness of the internet.

Let's try and figure out how to spot such projects on our own. Below is a list of surface level red flags that should make any potential investor suspicious.

  • Anonymous participants are not accepted.
  • "Random people" instead of specialized professionals in their fields on board.
  • Lack of advisors with any authority.
  • Lack of an escrow agent or an escrow plan.
  • Presence of additional token issuing schemes with no noticeable limits to issuing tokens.
  • Lack of any soft-cap or a hard-cap.
  • Lack of MVP.
  • Lack of communication from the founders on conferences and no possibility of direct contact with project leaders.
  • Edits of important moments in whitepaper after the fact, after falling behind on updates.
  • Usage of foreign media-content, copying (thievery) written texts, concepts of someone else, plagiarism.

A typical historical example of this is Confido. After successfully conducting ICO all official accounts and websites of the project were shut down. Project founders disappeared and all their personal information turned out to be false.

SPONTANEOUS SCAMS

Usually in this type of ICO the founders themselves tend to be victims of their own ambition or unrealistic expectations and ideas. This is the most popular group for potentially scammy projects.

Let's learn to identify projects of the second category. Here's a list of surface level red flags for this type.

  • Lack of even the minimal testing of the new revolutionary model on its users, no MVP.
  • Absolute dismissal of any constructive criticism, stubborn fanaticism, threats and arguing as response.
  • Overly complicated project, hard to digest concepts that require multiple reading passes to comprehend.
  • Lack of independent expertise or ignoring it in case it does exist.
  • Presence of some sort of a unique and unprecedented idea-fix for its branch of the market, "Perpetual motion engine".
  • Lack of a detailed project development map.
  • Unrealistically small budget without any good reasoning behind estimated numbers.

It's very important to have a thought-through detailed plan, financial model and realization time-frames, especially for big and complicated projects. An example of a typical problematic project of this nature would be COMSA's ICO (2017) that raised $92.6 million. Its official development plan looked like this



At this point with ICO completed, the projects plan is limited to 1 step. Is this roadmap worthy of raised $92 millions? If we look through red flags mentioned above here's what we could see within COMSA:

  • No development plan whatsoever.
  • Anonymous people in the team.
  • 45% of the tokens are used for personal needs of the team.
  • No prototype or even a logical scheme of the future project.
  • Technical absurdity: attempt to use 3 blockchain at the same time Mijin, NEM, Ethereum (and maybe more).
  • Cynical content copypasted in its whitepaper from foreign sources.

Another example of ignoring independent experts is IOTA, creating its own completely thrown together cryptography.
MIT Digital currencies lab published their audit on IOTA's code, concluding the following: many weaknesses in self-made cryptography and principal mistakes within the code. The project had to perform emergency hardfork quickly fixing all revealed fundamental issues. The critique from Ethereum Foundation followed next. There were a number of additional research with the one notable incident being the London University college pleading the crypto-community to boycott IOTA after continuously being threatened with legal action (in response to publication revealing weaknesses of Curl that poses a potential funds theft threat). Threats to researches according to publicly published communication were sent from IOTA fund leader Sergey Ivancheglo.

IOTA is a case of the second type of scam, related to stubborn ignoring of independent research and scientific opinions on their own chronic issues within their own technology.

Other characteristic of the second category scam projects is "feature-ism": overloading the project with unnecessary complications with the goal of impressing investors that makes it unrealistic in the end.

Read the full article on DeCenter.org (russian): https://decenter.org/blockchai...

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