High valued ICOs are a common sight on the ethereum network these days. Adaption of the technology is a huge step forward but it is not without issues. Greed, conflicts of interest and damaged reputation are some of the consequences of the way ICOs work today.
How does an ICO work today?
In order to participate in an initial coin offering, you have to send ether to a designated address in a certain time-period. The time-frame, limit and total number of tokens issued varies from ICO to ICO. This opens up for a conflict of interest. The developers do not care about how the ICO affects the ethereum network or the community as a whole. They care about making as much money as possible. This gives a small group of developers a large amount of power to negatively affect ethereum.
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The Status ICO may have been the worst so far. During previous ICOs users have set high gas limits and paid huge fees in order to get their transactions in front of the line. Status claimed that they wanted to avoid this, and set a limit on how much gas their contract would accept. If a sender set the gas limit too high, the contract would return the ether and invalidate the investment. Despite this, the ICO received tons of transactions with invalid gas limits set. All of the invalid transactions clogged up the network and created a huge backlog. This severely slowed down the ethereum network. It appears that users have to manually cancel their transactions as they will keep re-sending and charging gas if you do not, which is why the network still has a large backlog.
ICOs are new and the community is still figuring out the best way to do them. We can expect instances like this to occur. The real bad part is how Status prioritised certain users.
The Status developers set a whitelist for certain groups of users. This allowed them to ignore the gas limit set and cut in line. This goes against everything that ethereum and cryptocurrencies stand. Ethereum is supposed to be a decentralised entity where every user is treated equal. This is a prime example of centralisation and greed from the developers of the Status ICO.
Take caution with ICOs
The developers greed will damage ethereums reputation even further if we see more ICOs like this. Start ups without an MVP manages to raise hundreds of millions of dollars, then immediately cash it out and the ethereum community will pay the price. I urge the community to think twice before investing in an ICO and not blindly throw money everything related to cryptocurrencies.
What happened last night on GDAX is still unclear. I want to stress that it was not a failure in anything related to ethereums code. Either someone posted a huge sell order or there was a software bug on GDAX end, but the ethereum price fell to as low as 0.1$. This liquidated tons of margin trading positions and a lot of money was lost.
Some people may ask themselves, what is margin trading and should I do it?
Margin trading is increasing the leverage on your position. Effectively you borrow money from the exchange to increase your position by a certain amount, 100%, 200%, 500% or whatever is offered. In order to make sure you do not lose more money than you can afford, the exchange will set a margin call.
Margin call is when your total assets on the exchange minus the amount of your loan reaches 0. The exchange will then close all of your positions in order to repay the loan.
This kind of trading increases risk and is common practice in other markets, such as the stock market. However, cryptocurrencies are not yet ready for this. The extremely high volatility and the flash crashes of cryptocurrencies makes margin trading extremely riskful to the point where I would never recommend anyone using it at this point.