Introduction and the Bitcoin craze
This week I’m back to the original format in hunting for interesting ICO’s that are upcoming and will also spend some time reviewing an ICO that has been out for a little while. Before I do this, I’d like to ask you to indulge me for a moment, since I have to talk for a few moments about bitcoin – I mean, how can I not, right, given what is going on with this coin? So last week, as I was producing the podcast, I was eyeing the price for a single bitcoin as it crept up to $10,000 – I think it was at $9,800. There was no doubt in my mind that it was going pierce the $10K window, because with what traders refer to as a sort of parabolic pressure which almost always pushes through the natural ceiling of a trading lever. And so $10,000 for the first time – it would be almost impossible for it not to. But I didn’t expect it to smash through $10,000, sail right through $11,000 and then stay there, and in fact right now is marching toward $12,000. So this is a significant event that so many people are talking about and from so many positions that I want to spend some time on it this week.
First, let’s take a moment to step back and reflect on how incredible this is from a historical perspective, because yes, I recognize that in the 17th century the world went a little crazy for tulips, and less than twenty years ago we saw the Internet bubble swell and pop, but I would submit that this is something that is a bit different for a couple of reasons. First, it’s different, just by the mathematical scale alone. And the best way to express this, in my opinion, is with a true story that took place just a few years ago. This story takes place on the BitCoinTalk forum – yes, that’s the same one that we mention in every podcast episode, and is arguably the best resource if you are looking for hundreds and hundreds of crypto-currency experts – these early, early adopters. This story begins on May 17th, 2010. And there’s this guy named Lazlo Haynecz – a bitcoin programmer living at the time in Jacksonville, Florida – who announces that he is hungry willing to pay 10,000 bitcoins for a couple of pizzas. And he’s pretty specific about the toppings, and he also explains why he likes pizza – it was a charming sort of post in the early days of bitcoin and is was offered as little more than – hey, here’s a cool idea – let me buy some pizzas with bitcoin, which until that time wasn’t really being used for transactions like … pizza. And so, because no one had ever done anything like this before – that is, no one had really bought anything as tangible as a pizza before, it wasn’t as easy as you might think. Three days later, on May 21st, he posts “So nobody wants to buy me pizza? Is the bitcoin amount I’m offering too low?” And he takes a little flak – people are asking “Are you getting hungry or do you just really like pizza?” — because at that time it wasn’t even easy to construct such a transaction such as this. And Lazlo says, “I just think it would be interesting if I could say I paid for pizza with bitcoins.” And so about 10 hours later on May 22nd, 2010 he posts “I just want to report that I successfully traded 10,000 bitcoins for pizza.” And he posts a cute picture of his one year old daughter reaching up for the pizza. At that moment, the price of bitcoin was more or less established – or at least practically speaking. And that price, since the pizza was worth about $25, was ¼ of 1 cent. Now it’s true that Lazlo was a developer, and a very early miner, and he probably had many, many bitcoins and so he could afford 10,000 bitcoins for a couple of pizzas, but the math, any way you look at it, is irrefutable. This commodity, as it is referred to by the US Government, went from a value of ¼ of 1 cent to 11,000 , or 44,000 percent in 2741 days. Which if you do the math is something like 16% each and every day for all of those days in a straight linear graph with no compounding. So the math is one reason why it’s different., because even the infamous tulip mania saw rates of return of a few hundred percent. The Internet bubble as a whole, from January 1999 to March 2001, saw an increase of about 500%. Those two pizzas? At the time of this podcast now represent a value of $55,000,000 each.
What I’m finding interesting at the moment are the reactions we are seeing. Especially from the financial community. There was an interview on Bloomberg news last week when Bitcoin hit $10,000, and the host was talking with both Michael Bloomberg himself and Nobel Laureate Joseph Steiglitz. I’ll just say that it was simultaneously amusing and painful to watch these guys squirm their way through the interview. First of all they were seriously rattled – I would even say offended by this event. It was turning their world upside down – at one point Steiglitz just said “It ought to be outlawed” and kept reiterating how it was used primarily to circumvent – he didn’t say what precisely – he just used the infinitive of the verb – to circumvent I presume he was referring to the fact that the currency is sometimes used to make illicit transactions, but maybe he meant circumvent the entire financial infrastructure that exists to keep financial control – and incidentally to extract fees at every step of every transaction that passes through its sacred halls. In that case he would be absolutely right – yes, Mr. Steglist – this, in fact, is the point, not a reason to run the other way. And while I would certainly admit that the current fees for bitcoin make it impossible to buy things like coffee and even a t-shirt sensibly, I would also like to ask how much the international transaction fee would be to move the equivalent of 10,000 US dollars from let’s say, Los Angeles to Mexico City using the banking system and how much would it require using bitcoin? Well I can tell you the fees to the banking system – it’s about $500. Bitcoin? Well, bitcoin users are howling in protest when the transaction fee reaches is $15. And that $15 fee is the same if it’s a $16 transaction or $16 million transaction. So that’s where bitcoin – or rather I should say, blockchain – makes sense and that’s one reason why I believe bitcoin and its relatives are here to stay, no matter how uncomfortable it makes Nobel laureate economics professors and billionaires who made their money through maintaining centralized systems. And by the way, before I step off this soapbox this week, I just have to say to these two guys and others – spend some of that billionaire or Nobel Prize brainpower and read about the protocol. OK? That was, to me, the most embarrassing part of the interview. These people who are so outraged by this barely understand the most basic concepts of it. Just listen to that interview and you’ll see what I mean.
Okay, that’s enough passion out of me this week – look, I have no doubt that there will be a day of reckoning in terms of price of bitcoin, because there has to be a limit of some kind of limit as to who will continue to buy bitcoin at these rates, and human nature and the experience of trading any instrument dictates that the price will eventually begin to fall as people begin to take their profits. This is inevitable. But when you read these articles from outlets like Forbes – like the one written in August with the title of “A bitcoin is worth $4000 – why you should probably not own one” take into consideration the motives of the authors, editors and publishers. What is it they are defending and why. Oh, and to return to the pizza story – when Lazlo was asked a couple of years ago what happened to those bitcoins he didn’t express a lot of remorse and said more or less – those bitcoins went right back into the system, just like they should have to make the system work. And that’s the last difference. Because in this case there is this extremely dedicated, passionate and talented set of people who will make this work no matter what. It’s the blockchain community that is different than tulip traders – it isn’t just about money.
So, no, this is definitely not a blockchain token designed to review immigration status in the United States … this is about grocery. This is about the ability for consumers to purchase their groceries directly from the manufactures of groceries. The premise is pretty simple – the 7 trillion dollar worldwide grocery industry is dominated by retailers. The INS Ecosystem aims to eliminate those retailers (INS website). And the fundamental problem to solve is one of merger and acquisition, where fewer and fewer retailers exist as conglomerates step in and expand. The whitepaper uses the U.K. which is apparently no stranger to monopolistic tendencies , since according to the research done by INS, there are 7,000 grocery manufacturers serving 25,000,000 households – but how many retailers control the majority of the market share? 4. 4 retailers control over 75% of the grocery market. This is actually worse than the US, which I thought was pretty bad. When Alberton’s merged with Safeway back in 2015 they were fighting for survival against Walmart and Kroger. In the US, the top four grocers take on almost 40% of the grocery retail market – which is still an enormous percentage and speaks to the trend that is outlined in the INS whitepaper.
As you might guess if you listen to this podcast, the idea is to use the blockchain to decentralize the market and foster direct interaction between manufacturers and consumers. The fundamental argument that INS makes is that $50 billion is spent by retailers each year in marketing to push the products that provide the maximum profit for the retailer, and not necessarily what the consumer wants or needs. The current model is that the manufacturer doesn’t do any marketing, they just make the product, and send it to the retailer. INS is building a system that provides the ability for manufacturers to reward the customers directly using the INS token. They whitepaper describes a reward system similar to air miles – but they say that since it will be powered by smart contracts, the system should be easier to administer and maintain.
One of the important points they make in the whitepaper is that this will not help just the consumers with lower prices – it will help the manufacturers. The main reason is that retailers, as they have consolidated and reached monopolistic dimensions, have become bullies. This is well known. As reported by Bloomberg, Walmart has a program called “On-Time, In Full”. This program fines suppliers for shipping products early – as well as late. As well as not packed according to protocol – fined. And this has to happen 95% of the time to avoid a fine. As anyone knows who works in supply chain, there are so many factors that can cause a 5% variance – that it’s pretty much guaranteeing a fine. The whitepaper includes a lot of examples from European markets, where the problem is as bad or worse. In Portugal, 90% of the grocery market is controlled by 3 retailers. Those are the just the first three on the list. There are others from Harvard, there is a solid Rails developer – which by the way is a good thing, since Rails is pretty much the standard for enterprise front-end applications these days – and I think something that is often overlooked is that while blockchain needs to power the back-end of the system, the front-end will always be important. You have to have an application that people can use.
The Company and the Team –
In this case, the company is a corporation registered in the British Virgin Islands, which is a common offshore jurisdiction for U.K. based corporations, since there is an established relationship between the UK and the BVI.
The team is primarily Russian, with solid credentials. The founder received his MBA from the Harvard Business School, teaches classes in retail in Stockholm and worked for Goldman Sachs. The co-founder has a PhD in in Finance. The lead programmer has four years in developing blockchain applications – which is a very solid credential in this space, and currently works for ICOBox as CTO. According to his LinkedIn Profile, he developed Equihash, which is used in the ZCash coin, when he was at the university of Luxembourg, where he received a PhD in Computer Science. There are ten people on this team and every one of them has an impressive history of experience and talent, There are no less than four graduates of Harvard Business School.
They also have an all-star cast of Advisors. There’s people from Bancor – by the way, Bancor is famous for raising $150 Million in 3 hours. There’s the co-founder of Wings – another successful ICO. We also see people advising from the Harvard Business School – so if you believe in that institution, you couldn’t ask for a more stellar team.
I feel like the first part of the whitepaper does a good job of stating the essential problems that the retail grocery industry faces, such as consolidation as we discussed earlier, as well the supply chain inefficiencies, where food is shipped halfway around the world which adds enormous costs and inefficiencies, not to mention an increase in carbon footprint and wastefulness – they cite a number of about 130 million pounds of food thrown away each year. They go on in the whitepaper to explain why the team has the experience to tackle the problem and then they describe the size of the market – which of course is enormous – I mean, we all have to eat, right? They also note that the ability for consumers to purchase their food online is about to explode, with China dwarfing all other countries combined with a projected spend of 178 B by 2020.
On page 18 they finally arrive at the point at which they begin to explain how the decentralized blockchain that is INS will facilitate better direct engagement between manufacturers and consumers. There are four major actors in this:
- The Platform – that’s the INS blockchain and related distributed applications, smart contracts, etc.
- Manufacturers – those that grow or process the food
- Consumers – those that buy it
This last one, to me, is the lynch pin – because if you think about it, that’s the role that the retailer actually plays in the current model. Or, if you are thinking of something like Amazon Fresh – it’s all about fulfillment. So remove Amazon Fresh and you remove the ability to get the food from the manufacturer to the consumer – so, fulfillment becomes critical. And this might be the one weakness that we can elaborate on when we discuss the gotchas.
The whitepaper also goes on to illustrate and describe the web applications that will be necessary in order for consumers to use the system, as well as a fulfillment application.
The Road Map
The concept was started in the first quarter of 2017, and the company was formed in May. In the last quarter of 2017, which is now, the token sale is happening – and in fact it has started. In the first quarter they plan to develop the INS platform. The second quarter of 2018 they plan to develop the consumer and fulfillment applications.
Then In the fall of 2018 they will be undertaking the development of the supplier software development kit. And they plan to launch the entire ecosystem about 1 year from now.
The Network / Technology
The authors of this whitepaper acknowledge the limitations of the present state of the Ethereum platform as a high-load network. Because they ultimately believe that there will be as many as billions of people using the network, they believe, correctly in my opinion, that the dozen or so transactions per second on the Ethereum platform will not work. Thus, they say they plan to develop a more privatized blockchain, where nodes are selected from a trusted set of supporters. This is a type of consortium, permissioned blockchain. In this type of blockchain, all members of the public can use the blockchain for transactions, but only trusted nodes can validate blocks. The authors mention the HoneyBadgerBFT project, which is largely an academic project at the moment, where researchers have been able to support tens of thousands of transactions per second on a permissioned blockchain using a form of Byzantine Fault Tolerance. According to an academic paper jointly published by researchers from three universities, these scientists set up a total of 344 instances of nodes running on Amazon’s EC2 platform – which is a virtualized server platform for cloud-based instances of servers – they did this across 5 continents and ran these nodes in ascending groups. So the first group was 31, then 40, then 48, 56, 64 and then 104 servers at a time. Then they threw varying transaction loads on these nodes so that nodes proposed anywhere between 256 transactions upwards of more than 131,000 transactions. What they found was that in networks with about 40 nodes, they were able to achieve throughput exceeding 20,000 transactions per second. For a network consisting of 104 nodes they were able to achieve 1,500 transactions per second. Compare this with the 12 that are possible with Ethereum, or the 7 of 8 that are possible with Bitcoin.
You might ask how this is achieved – mainly through an asynchronous protocol, as opposed to the prevailing partially-synchronous protocol named the “Practical Byzantine Fault Protocol” of consensus. In an asynchronous protocol, a great deal of the work is done through batch processes, and not in any type of attempt at synchronicity. The fact that the authors recognize this academic work is a plus in my mind – although it would have been great if they had actually done these types of experiments themselves and then reported it in the whitepaper.
What’s not clear in this whitepaper, and in fact in very few whitepapers is that precisely how the issue of interoperability will be handled between the ERC-20 token named INS running on the public Ethereum blockchain and the INS token that is running on the somewhat privatized, consortium based, permissioned blockchain. Interoperability is a big issue, which is, incidentally, the basis for the project and token that we will be discussing in the second part of this podcast.
The Token and the Sale
There was a presale on November 27th that lasted until December 4th, but I can’t find information as to how much was collected. According to the website, the token sale started 8 hours ago and they have already raised over 50% of their hard cap, which means they have raised about $14M so far.
The soft cap is 20,000 ETHers, the hard cap is 60,000 ETHers – at the present exchange rate that’s about 28M in USD. For each Eth contributed you get 300 INS tokens, which comes in around $1.60 per INS, but there all kinds of ways to get bonuses, all described on the website. You can pay a lot of ways – BTC, ETH, LiteCoin, Dash and even Bank Transfer. US Citizens are closed to this ICO, and they are using KYC, so it might be tricky to buy them if you are a US citizen. The sale ends when the hard cap is reached or in two weeks, whichever comes first.
I’m a little confused about the numbers, to be honest, because when you go to Etherscan you don’t see evidence of the blockchain accepting orders – however, over at the Telegram channel, which has about 10,000 users and is in a bit of frenzy right now, people are pointing out that the Ethereum blockchain is backed up severely right now and they are right – there are about 15,000 pending transactions – and about 12 percent of them are because of a game that was launched about a week ago named CryptoKitties. For .015 Ethereum (that’s about $7) you can breed a virtual kitten – but the crazy thing is you can then turn around and sell them, and some of these kitties are going for $50,000 and up. So this game is consuming anywhere between 10 and 15 % of the Ethereum blockchain. So that’s one reason. One INS person on Telegram said that the orders are in a queue that will be applied later. So it’s not really possible right now to verify that over 50% of the hard cap is raised, but if it is, there’s a good chance it won’t last the two weeks.
If you think about this in terms of the token, the value and the road map together – since the token has no chance of being used in the near future, and since the tokens will end up on exchanges long before the network is running to use them, I’m not sure I see a reason for this token to rise in the near future in value.
SEC Compliance and the US Question
Again, this is an ICO that is denied to US participants, but the team has announced that there will be exchanges picking up the coin within weeks of the sale end. I believe them – although at $1.60 and with a 1-year road map launch, I think it might be a fair bet that this coin will not rise meteorically in the near future. I would not be surprised if this value went down before it went up.
With respect to SEC compliance – if we decide to put weight into the argument made by the attorneys who filed the Tezos class action lawsuit – and if we also add weight provided by the article recently written by an attorney with over 20 years of securities litigation who basically said that if you are raising money to build something that is not already built – your token sale is a security – well, then it wouldn’t look great for this coin from that standpoint, because they have no system. There is nothing in beta, and their Github repository has just a smart contract in solidity with 400 lines of code. So if you believe that the Howey Test prong is met with “relying on the efforts of others” , then this project might be considered a security by the SEC. I will continue to research this area and will report any actions by the SEC that would lead us one way or another. With bitcoin going to $10,000 there has been a renewed interest in regulation. I’m sure the SEC is feeling some pressure to act. So we should hopefully get some guidance here soon.
Business Viability and Possible Gotchas
My feeling is that there is so much obvious consolidation and abuse by large retailers, and so much room for efficiency if you parse out the fulfillment to smaller actors – and by the way, even though the whitepaper didn’t mention it, the FAQ on the website did – that couriers will be attracted in a way that Uber drivers were – then I could see the concept of removing the retailer from the equation could result in great savings and improvements for the consumer.
The slight issue here is that there may not be thousands of small fulfillment centers out there waiting for new work. The courier part of it I can see – after all, now Uber drivers are delivering groceries – and they not necessarily loyal to Uber – but fulfillment centers require a lot of overhead. Attracting them, or even finding them, may be a challenge.
My final takeaway is that if you can believe the numbers on the website, this is clearly a successful ICO. They have a solid team, and a good idea that can provide real benefit to the world. And it’s possible to believe that this team could pull this off. While strictly speaking a token is not absolutely necessary for the ecosystem to function, if it facilitates the ability for them to carry on with the idea, and if they do build a distributed network to connect consumers directly with manufacturers, then yes, this will be a successful project that has done well in the world.