July 10, 2018 Newsletter. If you’d like to receive analysis like this everyday. Subscribe here.
Today, Augur, announced in a Medium post that it was finally launching. Augur’s first version won’t have a web version. If you want to run it, you’ll need to access it through Github and then run it locally. Augur was one of the first teams to raise an ICO in the form of a “utility token.” I think the underlying idea behind Augur is a smart one. Augur allows anyone to wager on a prediction. The use cases are endless. For example, derivative markets, are mostly available only for institutional investors (think Big Short). Augur would allow retail investors to access these markets. For example, a shrimper in Louisiana might be worried about a hurricane. The shrimper can wager that a hurricane would occur and it would help offset the losses from his shrimping business. According to one economist, the derivative markets are valued at $1.2 quadtrillion. You can see how Augur can be very useful even if it just focuses on the derivative markets (which is unlikely).
Despite the multitude of potential use cases, Augur has a significant amount of barriers it needs to overcome to succeed. Brendan Bernstein .of Tetras. tweeted about many of the issues today (he is also one of my favorite people to follow on Twitter) which I summed up below:
- Augur doesn’t have a web-hosted version. You need to run your own node or rely on a centralized node to use Augur.
- Augur is slow to sync and will most likely get slower over time as more users join the platforms (Blockchains aren’t optimized for speed)
- How do we know the resolution methods are honest? (For example, if I bet on the Lakers winning, how do we know the source where they obtain the score is accurate. This problem is known as the Oracle problem.)
- Are the gas fees too high? One wager takes up 75% of a block (using Augur’s recommended gas fees)
As of 11:54 PM EST, there are ~$1,800 worth of predictions in 37 markets occurring on Augur. Most of the predictions are focused on either sports betting or cryptocurrency markets (which is to be expected). The launched version of Augur is disappointing. Peter McCormack summed it up well,
So an initial look turned into a very quick review of Augur, sorry but it is full of elementary UX mistakes. I am sure the Crypto elite will be congratulating them or making excuses about it being early, give it time etc…
This is not ready for release!
If this application didn’t launch on a blockchain, would observers be celebrating its launch? Most startups have one chance to impress a user. If the UX is poor, they will stop using it and not return. Augur holders are incentivized to promote Augur no matter how bad the application is because they want their REP (Augur’s cryptocurrency) to increase in value. This issue is one of the downsides of cryptocurrency investing. People will promote poor products for their own self-interest. It’s hard to know if a product is useful if the person recommending it is biased.
Two researchers from Boston College released a report that states 56% of ICOs fail within four months. 4,003 ICOs since January 2017 have raised over $12B. The average return between buying an ICO and the day’s opening market price is 179%. The study used Twitter to measure failure rates. If a company stopped tweeting after four months, it assumed the token failed.
The report confirms what many expected, a lot of ICOs are raising money and then disappearing into obscurity. This problem is occurring for a couple of reasons:
- There is little downside in failing. If you raise $50MM, management can pay themselves the money and shut down the company. Investors have little ability to recover their investment.
- ICOs have immediate liquidity so founders can sell their tokens immediately with little incentive to increase price (some ICOs have restrictions around this though.)
On the other hand, one can understand why the ICO markets have raised a lot of money over the past 12 months. Pretend you are a farmer from Iowa who dabbles in the stock market. You want to invest in the next “Bitcoin.” An ICO allows you to invest in an early stage “company” (some could argue protocol is the better word) and maybe find the next Bitcoin. While the logic might sound sensible, it’s flawed. Many ICO valuations are raising at absurd valuations so achieving the exponential returns that BTC or ETH returned is next to impossible. Ari Paul wrote about this phenomenon here.
Back to the study. There were three compelling graphs which I shared below:
t’s no surprise that the United States and Russia have the most ICOs. I expect that if this data includes ICOs after April 30, 2018, that Southeast Asia would have a higher amount of ICOs. The United States was an excellent breeding ground for ICOs because it allowed companies to raise from retail investors. ICOs were popular in Russia because it gave startups access to international capital that they previously didn’t have access to before. ICO returns for opening day-trading were scattered, but over the course of more than four months, ICOs significantly out returned Bitcoin. I expect that Bitcoin probably out-returned the cumulative returns of the ICO data set over 250 days.
ICOs are still in the early stages. “Popular” dApps like CryptoKitties have less than 250 DAU (this # is based on on-chain transactions so it could be flawed). Users are investing in ICOs to make money, not for utility purposes. The failure rate will remain high until users adopt tokens for their intended use.