ICOs and Smart Contracts Often Do Not Match – University of Pennsylvania Reportbr>
Researchers at the University of Pennsylvania have issued a report that finds initial coin offering (ICO) code and ICO smart contracts often do not match.
Of the 50 ICOs from 2017, only about 20 percent had code which matched their promises 100 percent of the time, while nearly 60 percent made a least one governance promise that was missing from the code, and 20 percent had two or more mismatches.
“Surprisingly, in a community known for espousing a technolibertarian belief in the power of ‘trustless trust’ built with carefully designed code, a significant fraction of issuers retained centralized control through previously undisclosed code permitting modification of the entities’ governing structures,” the authors write.
Led by Penn Law professor David Hoffman, the team examined the ICOs surveyed based on three qualities that economic theory suggests should be salient to investors.
First, they looked at whether ICO promoters made any promises (with those assurances encoded into the currency and blockchain) to restrict the supply of their cryptoassets, as a limited supply of a virtual currency is assumed to drive up its value. Second, they examined if ICO promoters pledged to restrict or prevent insider self-dealing. And third, they examined if ICO promoters retained the power to modify the smart-contract code governing the tokens they sold, and if so, whether these firms disclosed to investors that they had allocated themselves that power.
“My co-authors and I found some of these tokens have code which is not disclosed in the soft law promises, which permits the firms to modify the rights the tokens give you at the will of the originator of the currency,” Hoffman said. “That does not mean ventures are going to exploit investors or commit fraud, but it does give firms that power to change the rights investors have bought at the firms’ will.”
The authors recommend regulators and scholars spend more time looking at the buy-side of the ICO market, and learn more about the actual drivers of demand in this burgeoning space. “Are buyers relatively unsophisticated individual investors” who are buyers in a bubble, Hoffman asked. “Or, is this an illicit market driven by money launders or tax evaders – or is ICO demand driven by legitimately smart money? How this market should regulated, or not, depends on how scholars and regulators answer these questions.”
The study, “Coin Operated Capitalism,” is available as a working paper.