Abstract of the Decentralized Initial Coin Offering
There lies a great power in the idea that any person, regardless of nationality, creed, or background, can obtain funding to innovate and prosper. An integral tenet of blockchain technology is "decentralization." By decentralizing systems, we reduce the number of control points that can be compromised and manipulated. Decentral- ization plays a more common role in our new cryptocurrency economy, but there is one area of the market that remains centralized and vulnerable: the initial coin offering (ICO). The cryptocurrency industry needs a solution, and Komodo presents an answer with our decentralized initial coin offering (dICO).
In today’s common ICO model, the high level of centralization creates many problems. Third-parties can block or manipulate entrepreneurs’ efforts to innovate and prosper. The centralized location of releasing the ICO blockchain product is vulnerable, allowing whales, hackers, and human error to corrupt or destroy an entrepreneur’s efforts. The negative experience of users in these situations can also impact the perception and adoption of cryptocurrency. Furthermore, the traceable nature of an ICO prevents society from crowdsourcing and purchasing within our inherent right to barter in private.
The dICO model, as created by the Komodo project, overcomes these challenges. It provides the necessary technology to create and release a blockchain product to the world with the full power of decentralization.
Entrepreneurs building on our platform begin by creating an asset chain, and our technology simplifies this process. One need only install the necessary software, execute a few commands on a command prompt, and then establish a connection between two or more Komodo-enabled devices. Komodo’s core technology will do the rest of the work necessary to create a fully independent blockchain, empowered with an array of Komodo features.
Our dPoW technology is a key feature, as explained in Part I. dPoW provides the necessary security to protect the integrity of the blockchain. Use of dPoW is optional, and since asset chains in the Komodo ecosystem are independent by nature, entrepreneurs can discontinue dPoW services at will.
Having thus created the blockchain, the entrepreneur then uses our decentralized exchange to release the project to the world in a decentralized manner. Our decentralized exchange is called, BarterDEX, and it is thoroughly explained in [Part III](./chapter6.md of this paper. Because BarterDEX is a decentralized exchange, and through our atomic-swap technology (also explained in Part III, no third-party manipulators can prevent the entrepreneur from their crowdsourcing and innovative endeavors.
Through our privacy technology, Jumblr, dICO participants can purchase the product within their inherent right to barter in private. A detailed explanation of Jumblr and its method of providing privacy is provided in Part IV of this paper.
The Challenges in Current ICO Platforms
Specific Weaknesses in the Centralized ICO Model
There are many weaknesses present in today’s Initial Coin Offering (ICO) process. Several notable weaknesses include third-party discrimination, "whale" manipulation, the vulnerability to theft and human error, and a lack of privacy.
An entrepreneur seeking to serve their intended audience may experience adverse intervention from a third party. The antagonists may display personal and malicious intent, regardless of the value of the entrepreneur’s innovation.
Centralization of Technology: "Whale" Manipulation, Theft, and Human Error
During the initial stages of a blockchain’s release to the public, users who are wealthy and tech-savvy (often referred to as "whales") have an unequal advantage: they can rapidly purchase a majority of the coin supply while it is inexpensive. There-after, they can manipulate the market price at the expense of less established ICO participants.
Furthermore, today’s ICOs are generally conducted in escrow, where the purchasers must transfer money to one node for holding. This typically occurs through a single website, and the cryptocurrency funds are held on a single server. They must then wait while the ICO administrators first verify the transactions and distribute the coins. During this time the funding is centralized, and therefore vulnerable to thieves and human error.
Lack of Privacy
Because ICO transactions are highly traceable it is difficult, if not impossible, to perform ICOs within our right to barter in private.
Third-Party Discrimination via the Centralized ICO
One weakness of the ICO process is, paradoxically, rooted in a great strength of blockchain technology: its borderless nature. A key power of any blockchain is that any human capable of accessing the technology can activate the blockchain, regardless of their geographical location or social status. Thus, anyone can provide yet another verifiable record of the transaction history, and this decentralization provides a crucial element of security to the blockchain.
An ICO innovator, therefore, may prefer to use a blockchain platform that transcends man-made barriers, to protect their innovation. Circumventing man-made barriers could be integral to the blockchain’s survival, because the element of decentralization prevents malicious actors from creating subjective borders around the blockchain records and then using authority to falsify and manipulate.
This creates a conundrum, however. As a human race, we also find strength and empowerment in subjectively defining our own demographics for various reasons, whether they be to form companies, cultures, communities, etc. While we find the ability to create subjective demographics useful, it contrasts with the borderless nature of blockchain technology. Members of one demographic may desire to participate in a specific ICO, but another demographic may find this unfavorable. Therefore, the second party might try to forestall progress. The paradox lies in the fact that for the underlying blockchain product to maintain its integrity, it must serve both communities without regard to any man- made barrier between them.
The problem compounds even further as we observe that on a decentralized blockchain platform, a new ICO product is capable of functioning anywhere there is access to the underlying technology. Therefore, on a decentralized platform, once a new blockchain product is released any person from either demographic is now able to utilize it regardless of the overall sentiment of either demographic. The problem becomes most pronounced if members of a competing group attempt to even maliciously prevent an innovation out of selfish reasons. Thus, it is imperative that the innovator have the option of protection against would-be malicious competitors.
The overall centralized nature of today’s ICO process, therefore, presents a problem. Entrepreneurs who are not able to navigate the adverse effects of an inhibiting third party may be unable to realize their creative potential.
Centralization of ICO Technology: Whales, Hackers, and Human Error
Yet another issue plaguing ICOs is that the technology upon which an ICO is released is also centralized. This presents a vulnerability to human foibles.
The Manipulative Behavior of Whales
The centralization of the point of purchase creates an unequal playing field in favor of wealthy, tech- savvy users (referred to as "whales" in the cryptocurrency community). To understand this problem, one must comprehend that "nodes" (computer devices which compute the buying and selling of cryptocurrencies) take orders from ICO purchasers one-by-one. Presently, ICOs are released on only one node — for example, the purchase could take place through a single website, wherein the gathered funds are held on a single server.
Because the node can only process one transaction at a time, the person whose order arrives first will receive an advantage over the coin’s future value. If the initial purchaser is both wealthy and able to program sophisticated "bots" (custom-designed programs that automate the trading of cryptocurrencies), the whale can buy a controlling interest in the supply before less wealthy or less technologically savvy people have a chance to participate.
In our current market, often the people who would most benefit from an ICO are unable to participate before the supply evaporates. Meanwhile, this whale now has sufficient control on the overall supply to act as a centralized market manipulator. Buying and selling in large quantities forces fluctuations in the whale’s favor.
Hackers and Human Error
Because all coins of an ICO typically process through one node during the pur- chasing period, the entire supply is vulnerable to any person with access to the node. Therefore, both malicious and clumsy human agents can destroy an ICO. The data holding the cryptocurrency can be damaged, stolen, or simply lost through incompetence.
An entrepreneur can also consider that in today’s ICO model both the funding provided by the purchasers, as well as the actual ICO coins that the entrepreneur intends to sell, remain on the centralized node for a long period of time. It is not just one side of the crowdsourcing endeavor that is at risk, but both.
This central point of failure can be catastrophic for all participants.
The Right to Barter in Private
Finally, the lack of current privacy options in the ICO process inhibits blockchain participants from purchasing within our right to barter in private. This right to privately exchange goods and servicesextends further into history than the written word. We have, as a species, utilized this right to organize into communities, institutions, and even nations.
Many of humanity’s most meaningful advancements in art, technology, and other human endeavors began in situations where the creator had the security of privacy in which to explore, to discover, to make mistakes, and to learn thereby.
The right to barter in private, however, is under modern threat as the recent monumental and historical phenomenon, "The Internet of Information," permits many kinds of people to quietly and without inhibition; monitor other people’s shopping and bartering behavior. This is a dangerous development, as it destroys the privacy that empowers much of humanity’s personal growth. We must reserve our right to barter in private, for we observe that there are myriad ways in which a common person may explore personal growth in an economic environment.
Yet, the highly traceable nature of today’s centralized ICO model is in direct contradiction to this human need.
The Blockchain Industry Needs a Solution, and Komodo Presents an Answer
Together, these issues show that the current state of the ICO market is plagued with limitations that inhibit freedom, security, entrepreneurship, and even human growth. The cryptocurrency industry needs a solution to these problems, and Komodo presents an answer.