In a recent interview with Caixin, Jihan Wu, the co-founder of Beijing-based Bitmain Technologies, discussed in detail about pros and cons of ICO, tokens’ incentive mechanism and blockchain technology .

He believed that bitcoin, a decentralized monetary system, is intended to break the central banks’ monopoly to issue currency, and brings some anti-money laundering challenges at the same time. Plus, the technology behind bitcoin—-blockchain—- is more neutral, and that is why it becomes highly sought-after.

Wu is a widely-followed figure in the blockchain world. He is the first Chinese translator of Satoshi’s Bitcoin White Paper and is one of Bitcoin evangelists. The bitcoin-mining hardware maker Bitmain, which also controls the world’s largest bitcoin mining pool, antpool, made $ 3billion to $4 billion in profits last year, according to Bernstein’s analysis.

‘ ICO Violates Laws From the Very Beginning’

According to a Caixin’s previous report, an informed source closed to PBOC said researchers of China’s central bank reached a conclusion that many ICOs are covers for illicit activity. The report stated,

 “More than 90% ICO projects could be involved in illegal fund-raising or fraud. The percent of blockchain projects that are actually raising funds for investments is less than 1%.”

Wu shared the similar views, saying that ICO violates related laws from the very beginning.

“ In essence, ICO creates a virtual good for sale, and then such behavior is suspected of tax evasion. ICO issuers in most cases do not establish a business entity in China, but will run their business here.”

In his opinion, ICO has created the illusion of liquidity.

“As long as a blockchain product is traded through continuous auction, its value will exceed the original price. This is the source of ICO speculation.”

Controversies Over Tokens’ Incentive Mechanism

Wu told Caixin that in the foreseeable future, blockchain will fail to solve the problem of how to create the application-level user value. Tokens, however, have demonstrated their potential to serve as a unique financial tool, which may help commercialize the blockchain as soon as possible. The combination of outstanding product and tokens’ incentive mechanism will disrupt the traditional Internet industry and have an impact on its business logic.

Although traditional internet companies possess three important resources, Wu thought tokens’ incentive mechanism gain the upper hand in the following three sides:

First, user resources. Internet companies such as ride-hailing platforms and group-buying websites amass users through burning cash or a cash subsidy. The large group of early users internet companies have amassed are the lifeline for them. Different from the pattern of cash subsidy, tokens represent the issuers’ own credit and are able to subsidize the cost. An ICO is similar to an initial public offering or IPO because issuing tokens will not waste a blockchain company’s funds and is endorsed by staff.

Second, ecological resources. Compared with traditional Internet companies, tokens can be tightly tied to the blockchain startup ’s ecological environment for a long time. The problem of “subsidy war” now lies in the lack of user stickiness, while tokens can be designed to have a lock-up period. For example, an ICO project can give tokens back to users 12 months after the ICO is finished. Wu pointed out that in this sense, there may be no winner in the Internet competition, but the token mechanism itself is a winner.

Third,incentive mechanism. Token , a tool with monetary attribute, can be described as a cross between cash and equity. Traditional Internet companies leverage subsidies to offer users a definite value, and to bet on an uncertain future as well. But tokens tell a different story. Tokens will give users uncertain value which will bring them an uncertain future too. This incentive mechanism makes sense.

“Tokens will create value if the ecosystem achieve a success.” Wu said.

He added that some ICO issuers have brought some innovation on tokens such as redemption, burning, lock-up, to avoid some risks of early-launched ICOs.

But some analysts questioned the effectiveness of tokens’ incentive mechanism and take a dim view of ICO’s  legal compliance.

A Chinese legal scholar Zhao Yao said the inherent flaw of bitcoin’s governance mechanism is that investors only hold tokens, but do not have voting rights. The defect of the governance model will lead to the outcome of “bad money drives out good” because investors have weak governance rights over blockchain startups’ actions , and have to turn to the speculative trading of cryptocurrencies.

It is expected that a new round of ICO regulation is around the corner in China.

“ We have envisioned a lot of blockchain application scenarios, including supply chain, e-publish, and finance. But blockchain infrastructure is still not very solid. We are possible to see better projects coming out after the hyped bubble burst. ” said Wu Jinhan.