12 min read

On Shitcoins and STOs

A breakdown of different types of cryptographic tokens and the controversies generated by their proponents.
On Shitcoins and STOs
(Photo courtesy of ZeroFucksCoin.com - you can buy it there!)

What is a shitcoin?

A few definitions I found around the internet:

  • A pejorative term used to describe an altcoin that has become worthless.
  • A cryptocurrency of little to no value, usually a late-comer to the Bitcoin craze, a copycat cryptocurrency.
  • A coin without a future. It can still be used for flipping and turning a profit.
  • A coin that has a small group of individuals in charge of consensus and who can change it at will like a board of directors at a central bank.
  • Any cryptocurrency that is disliked by the person talking about it.

Since there's no clear standard definition I'd offer this one:

"A shitcoin is a cryptographic asset that does a poor job achieving its declared purpose."

What is Bitcoin Maximalism?

In 2014 Ethereum founder Vitalik Buterin popularized the term as:

the idea that an environment of multiple competing cryptocurrencies is undesirable, that it is wrong to launch “yet another coin”, and that it is both righteous and inevitable that the Bitcoin currency comes to take a monopoly position in the cryptocurrency scene. It is a stance that building something on Bitcoin is the only correct way to do things, and that doing anything else is unethical.

I consider myself a Bitcoin Monetary Maximalist. I see no other options on the market that hold a candle to Bitcoin's sound money properties. However, I also believe that not every asset necessarily needs to have all of the properties that Bitcoin offers - there is room to make other risk/reward trade-offs in order to achieve different functionality at the expense of weaker security.

John Light penned a piece that I believe covers my perspective quite well. I would have no qualms being labeled a Bitcoin Pragmatist.

In defense of Bitcoin Pragmatism
Yesterday #BitcoinTwitter got up in arms about a group of prominent Bitcoiners promoting the sale of INX, a security token for a cryptocurrency exchange. The main gripe people seem to have has noth…

Bitcoin is hard money; other tokens are not. Many are not even trying to be money. In my opinion Bitcoin supporters need not be any more offended by INX than they are by BNB or LEO. I certainly understand defensiveness regarding competing cryptocurrencies, but lashing out at digital assets that are neither trying to be money nor blatant scams reeks of insecurity.

Shitcoins are everywhere. I suspect I have more experience than most Bitcoin developers when it comes to other protocols, as I built infrastructure on top of quite a few networks during the years I worked at BitGo. I'm well versed in the pitfalls of Ethereum.

The Challenges of Building Ethereum Infrastructure
Several of our engineers, myself included, have spent a substantial portion of the past year working on building low level Ethereum…

Many shitcoins are scams, though not all - I suppose you could also label me a "shitcoin minimalist." I have no qualms using a shitcoin to achieve a specific purpose that is otherwise not achievable with Bitcoin.

ICOs, IPOs, and STOs oh my!

  • ICO: Initial Coin Offering (typically unregulated, available to anyone)
  • IPO: Initial Public Offering (regulated, available to anyone)
  • STO: Security Token Offering (regulated, often only available to accredited investors)

The past week has surely shown itself to be a shitcoin shitstorm:

  • Bitcoin Maximalists hate INX because it uses Ethereum
  • Ethereans hate INX because it's not permissionless DeFi
  • Cypherpunks hate INX because it requires AML/KYC

Many people got triggered by the terms of INX's IPO and considered it to be an ICO, yet it was ICOs that took most of their attributes from traditional IPOs!

One issue at play, especially on social media, is that few folks are going to invest the time to RTFM. In this case we're talking about a 163 page prospectus. This results in a ton of ignorant takes being propagated.

Another issue is likely due to the wider audience that INX's IPO is reaching. I suspect most people in crypto have never participated in an IPO or read a prospectus before.

Why do I find regulated STOs interesting? One of the main differences is that with an IPO the investors have a clear contract that is legally enforceable. You have actual rights, not just an empty promise in a whitepaper. The offering is overseen by a regulator empowered by the US government for the sole purpose of protecting investors from scams and unnecessary risk. I believe these protections have value; history has shown us that ICOs offer no investor rights and due to lack of oversight & accountability they are more likely than not to be scams. Note that I am not claiming that all crypto token offerings should be regulated, just that it's good for issuers to have the option to take this path.

Why have I continued to advise this project for several years despite the fact that the token is being launched on Ethereum? While I certainly would have preferred to launch on a different network, the decision had already been locked in for pragmatic regulatory reasons when I joined. Though I was skeptical and still believe Ethereum is a suboptimal choice from a technical standpoint, I've come to see that the desired properties for the INX token make it platform agnostic, similar to Tether.

The ownership of tokens is ultimately decided by INX Limited. Per the prospectus:

The Company will maintain private keys that control certain administrative functions of the INX Token smart contract, including the ability to unilaterally transfer INX Tokens, add or delete wallet addresses, and add, delete or decrypt personal information recorded on the Whitelist Database.

The ability to protect users from losing access to their tokens was actually a regulatory requirement that Tokensoft had to overcome.

As such, it doesn't need to run on a highly secure, immutable, censorship resistant platform - though of course that's preferable! I do still consider Ethereum to be a dumpster fire kitchen sink protocol and will certainly push for INX to upgrade to a superior platform. Though I do not expect such a migration to occur unless there's either a catastrophic Ethereum failure or INX raises sufficient funds that resources can be prioritized for it, both on the development and regulatory side.

The INX launch is groundbreaking in the sense that it proved it can be done - you can tokenize parts of a business while following the most aggressive regulatory standards, thus avoiding the threat of being penalized and shut down by enforcement agencies. It legitimizes the crypto ecosystem because regulators are admitting that not all cryptographic tokens are scams. But it certainly is not the easier path to follow...

Could the INX token be considered a shitcoin? Sure, just like similarly tokenized cash flow for Apple could also be a shitcoin. It's certainly not censorship resistant and it is controlled by a single entity. I believe, however, that the token will fulfill its stated purpose; the fact that some people don't believe its purpose has value need not classify it as a shitcoin. Do I believe INX is a scam? Certainly not. The terms of token ownership are clear and INX Limited is built upon a proven business model - likely the most profitable business model we've seen in the crypto ecosystem - an exchange.

Common INX Objections

"It's still hypocritical to use Ethereum!"

In a somewhat ironic twist, Ethereum was the best option from a regulatory perspective because the regulators were already familiar with how it operates. Why were they familiar with it? Due to all the Ethereum ICOs! Could INX have waited for other platforms to mature or built their own? Sure - at much greater expense and regulatory delay. Just getting through the regulatory gauntlet with an already-understood platform took INX 953 days. It was a bitter pill for all involved, but it was more important to get something launched and then iterate on it later.

"You received tokens at 1/90th the price and are going to dump them on retail!"

This is a kneejerk reaction that makes it sound like advisors got something for nothing and are fleecing the public. Yet this is how options work for startups that have no capital - they grant options of future capital to people in order to get them to provide labor when there is a capital shortage. When the advisory process began years ago, there was a good chance that INX token options would never be exercisable for any value. Given that this was breaking new regulatory ground, success was far from guaranteed.

The "90X gains" narrative is some fun math because the option strike price is based upon the valuation of the company at the time the options are granted, which was quite low because it was merely an idea. Why not a strike price of 0? As far as I know, companies tend not to be valued at $0, even if they are pre-product and pre-revenue.

Options are actually quite risky and often can never be liquidated. I have received options from several companies throughout my career and have only been able to liquidate one of them due to an acquisition. It was not a huge payday; it allowed me to pay off my car loan. As for my INX options, there is even today still no guarantee I'll be able to sell them at any given price. In fact, there is a lock-up period during which advisors are unable to exercise options for either 6 months or 2 years. It's also worth noting that the tokens allocated to advisors only amount to 1.3% of the total supply.

At time of writing there is still no guarantee that I'll ever own INX tokens. In 6 months time I'll have to evaluate whether or not it makes sense to exercise my options. There will be tax ramifications to doing so, and further ramifications if I choose to sell the tokens or if I choose to hold them with the hope of receiving "dividend" payments if INX becomes successful enough to reach profitability.

"You're shilling vaporware, just like ICOs! A real IPO doesn't happen until a company has been running successfully for years!"

INX Limited has already received millions of dollars in investment in order to operate for the past several years and build the platform; it's not vaporware. The biggest remaining hurdle to launching the exchange is to get money transmission licenses in as many jurisdictions as possible.

Because this is a regulated offering, it also incurred substantial expenses that ICOs do not:

It's also worth noting that traditional IPOs are extremely late stage investments. As such, they tend to be low risk and low reward. It's a common complaint that late stage IPOs prevent retail investors from exposing themselves to higher risk/reward opportunities. INX has positioned itself to meet that demand.

"This doesn't even need a blockchain!"

Could INX simply keep the ownership records on an internal database? Sure. But by being on a public ledger they are now more easily auditable by the public and other wallets and services can interact with this ledger using tech that follows common standards. It really sucks to own assets that are stuck with a single custodian - I've experienced this pain personally when the only way I could liquidate an asset was to move it to an overseas exchange. Not your stock certificates, not your stock!

How the SEC Nearly Destroyed my Retirement Account
Not your keys, not your coins.Not your certificates, not your stocks.

Using a public ledger allows for more efficient movement of assets between entities. By using a common standard such as ERC-1404 (which is ERC-20 compatible,) software and services that already support the thousands of other ERC-20 tokens will be able to add support for INX with a handful of lines of code. Hopefully other platforms will eventually have the same level of widespread support.

"You didn't disclose your financial interest!"
The media actually disclosed it over a year ago when the first F-1 draft to be made public by the SEC was discovered by reporters.

Crypto and Security Token Exchange INX to Raise $130 Million in Landmark IPO - CoinDesk
INX, a crypto and security token exchange, plans to raise up to $130 million through an IPO in the U.S., an industry first.

There was a similar outcry on social media at the time both about advisor compensation and the technology used, but we were in a quiet period and unable to talk about it publicly. Before the IPO I updated both my web site and Twitter profile to note that I'm an advisor. And, of course, I'm listed on inx.co.

"You're telling people to trade their bitcoin for a shitcoin!"

While INX token holders are guaranteed to receive a portion of cumulative net positive cash flow (also known as "profit") there is of course no guarantee that INX Limited will become profitable. I've made no investment recommendations about INX; people on social media tend to generate controversy in order to gain clout. Anyone considering investment should do their own research! In fact, if folks had done their research then they'd have seen that the prospectus states that during the initial phase of the sale only USD is accepted:

After the potential investor executes the INX Token Purchase Agreement, the potential investor will be prompted to submit payment either by (i) wire transfer of U.S. Dollars or (ii) transfer of bitcoin or ether. Payment in bitcoin or ether will only become available after the proceeds from this offering exceed the Company’s minimum offering requirement of $7,500,000.

I receive similar flak whenever I mention any project other than Bitcoin. Notably, the flak only tends to happen when there is value involved. I received very little pushback when I spoke about Grin technical development in the years before it launched.

However, as soon as it launched it put certain people on the defensive because they assumed that Grin was competing with Bitcoin as money.

Even though, once again, I made no recommendations, this tweet received a great deal of flak. Funnily enough, I've never invested in grin - I donated a few thousand dollars to its developers and have spent a few hundred dollars running a grin node. But from an economic standpoint, grin has such a high rate of inflation that it seems pretty silly to use as a store of value.

It seems that I'm doomed to be deemed a shitcoiner (by some.) Despite my Bitcoin monetary maximalism I am shitcoin-curious about the digitization of other assets and non-financial functionality that can be enabled by cryptographically secured technology.


It doesn't matter what kind of Bitcoiner you are. You can be a maximalist, a pragmatist, a toximalist, a shitcoiner, or a multicoiner.

I'm no stranger to criticism, attacks, and even threats on social media. I have no interest in engaging in self censorship simply to meet purity tests of specific subsets of my followers. I suggest taking online interactions you see with a grain of salt.