Vitalik Buterin Explains Flaws in ICOs and Scaling Issues in Ethereum

During an interview with Korea JoongAng Daily and JoongAng Ilbo, two largest news publications in South Korea, Ethereum co-founder Vitalik Buterin discussed the potential of his creation, merits and flaws of initial coin offerings (ICOs) and his personal thoughts on whether cryptocurrencies such as Bitcoin will be able to replace fiat currencies.

ICOs: merits and flaws

Since the beginning of 2017, ICOs have evolved into a popular method of crowdfunding for Blockchain startups. WIthin less than a year, ICOs have raised over $1.5 bln, with several successful ICO projects such as EOS and Bancor raising hundreds of millions of dollars.

Structurally, ICOs are a phenomenal method of raising money in a decentralized manner, from a distributed ecosystem of investors. ICOs enable startups to gather money within a short period of time and also publicly demonstrate their valuations through the market cap of their tokens.

But, Buterin explained, there are flaws in ICOs. According to Buterin, many of the flaws in ICOs arise from the centralization problem of ICO projects. While ICOs are launched on top of a purely decentralized and peer-to-peer Blockchain protocol in Ethereum, ICOs are often run by companies or single development teams with large funding.

Buterin explained:

“However, they also have their flaws, and I think many of these flaws arise from the fact that even though the ICOs are happening on a decentralized platform, the ICOs themselves are hardly centralized; they inherently involve many people trusting a single development team with potentially over $200 mln of funding. There are also not very good incentives for people to produce information to help people determine which projects are worth participating in. I think in the medium term, getting funds with ICOs will get harder, regardless of whether or not regulation is implemented.”

Unfortunately, the vast majority of investors in the ICO market have shown that they are not likely to conduct thorough analysis and evaluation on the technical intricacies of the ICO projects and Blockchain networks. Because of that, many analysts and experts have called for regulations within the ICO market. But, contrary beliefs are that regulation of the ICO market would defeat the purpose of utilizing decentralized methods of crowdfunding. More importantly, it will be inefficient for startups to rely on government agencies and officials to declare ICO projects either legitimate or fraudulent.

Two to five years for Ethereum to solve most scaling issues

Buterin further emphasized that it would take two to five years to solve the majority of scaling issues in Ethereum. In contrast to other Blockchain networks that are designed to handle specific tasks, the Ethereum protocol was developed to operate as a framework and infrastructure for decentralized applications.

Hence, it is far more difficult and complicated to solve the underlying scaling issues with Ethereum. But, the Ethereum Foundation and developers in the open source Ethereum development community have been working on numerous solutions to effectively scale the network.

Vitalik Buterin, Ethereum co-founder comments:

“I would say two to five, with early prototypes in one year. The various scaling solutions, including sharding, plasma and various state channel systems such as Raiden and Perun, are already quite well thought out, and development has already started. Raiden is the earliest, and its developer preview release is out already.”

Recently, Buterin openly criticized Raiden and its development team for running an ICO for a project that does not need ICO tokens. In response, Buterin announced that he will personally develop a private fund to provide capital to open-source and non-profit scaling projects in Ethereum.

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