Initial Coin Offering (ICO) Risk, Value and Cost in Blockchain Trustless Crypto Markets

Abstract

On July 25th 2017 the SEC published guidance indicating that US securities laws may apply to token sales, effectively recognizing crypto coins associated with entities such as the DAO as a new asset class. In Mutual Distributed Ledgers, or Blockchains, trust is embedded and no explicit chain of trust is necessary. Smart contracts running on a Blockchain allow to create objects with various degrees of liquidity and to automate the operations of a fund, enabling trustless crypto markets. Despite great promise, the sources of uncertainty and risk in such trustless settings are not yet well understood; for instance “The DAO” (Decentralised Autonomous Organisation), which was the world’s first decentralised investment fund, went from being the largest crowdfunding event in history to get about a third of its assets compromised due to an attack from a shareholder. The dual nature of money shared by a Blockchain calls for a novel approach: a DAO is a listed entity by default, and its projects might be financial instruments as well, so we use network correlations to study portfolio risk diversification. Furthermore, automated corporations are essentially about decentralized intelligence, so we need to consider the strategic nature of the social world; for this we map the vector field and use signal processing to investigate volatility in traffic flows. The primary objective of the study is to determine factors that affect cash flows in decentralized applications, to enhance the understanding on whether decentralized organizations are perceived as truly “trustless entities”, or, if investors are rather forced to “trust in the design”. The target audiences of this paper are Government regulatory authorities, Banking sector and Stock markets.

Keywords: Blockchain, Smart Contracts, Econophysics, Behavioral Finance, Fields Finance, Statistical Finance, Ethereum

JEL Classification: G02, G32, G18, G21, G23