Objectives

Initial coin offering (ICO) has opened a novel venue for venture financing to entrepreneurs. ICOs bypass the the search and matching costs of traditional venture capital rounds, and the legal barriers to and transaction costs of large-scale crowdfunding. Yet, only a few tokens emitted via ICOs to crypto markets have thus far been used as advertised or garnered at least fledgling early stage adopters within Dapp userbases on the Ethereum blockchain (productive); most serve merely as investment instruments prone to bubbles (speculative). In this work we investigate ways to classify productive and speculative tokens based on transaction dynamics, and token ownership and trading patterns on the Ethereum blockchain.

Method

We examine data from the Ethereum blockchain to uncover the history of transactions with sale smart contracts and token transfer; identify and classify wallets holding tokens, and analyze the way these wallets interact with smart contracts and other wallets. We trace the following aspects of token economics in particular:

* Are numbers reported by ICO teams verifiable? How many and which whales are buying tokens?

* How many tokens are distributed to hodlers?

* What are the trends in the user base, and use patterns for associated Dapp? Where do used tokens come from?

* What are competing tokens? In terms of function and portfolio allocation? Are they gaining or losing versus a given token?

We show the results of this exercise on dynamic transaction and counterparty networks. We also created other indicators by combining data on token prices and trade volumes with structural properties of transaction and counterparty networks highlighting node, edge and neighborhood characteristics of these networks.

Results

Statistical models combining token prices and trade volumes with the structural properties of token networks can classify productive and speculative tokens. Productive tokens are characterized by weak correlations between changes in prices and changes to Dapp use patterns and volumes; speculative tokens by unpredictable sell-offs driven by the price movement of the underlying cryptocurrency--Ether, against the U.S. dollar. From an investor's vantage point, these results make it impossible to reduce risk by diversifying between Ether and ERC20 tokens or devise an investment strategy based on token fundamentals.

Crashes and market outcomes divorced from fundamentals stem from shallow userbases of Ethereum Dapps, and low barriers to entry for both investors and token inventors. Unless investors require functioning Dapp prototypes with pre-existing customers, ICOs will remain the domain of speculators and scammers.