A smart contract is a self-enforcing agreement embedded in computer code managed by a blockchain. The code contains a set of rules under which the parties of that smart contract agree to interact with each other. If and when the predefined rules are met, the agreement is automatically enforced. Smart contracts provide mechanisms for efficiently managing tokenized assets and access rights between two or more parties. One can think of it like a cryptographic box that unlocks value or access, if and when specific predefined conditions are met. The underlying values and access rights they manage are stored on a blockchain, which is a transparent, shared ledger, where they are protected from deletion, tampering, and revision. Smart contracts, therefore, provide a public and verifiable way to embed governance rules and business logic in a few lines of code, which can be audited and enforced by the majority consensus of a P2P network.
Token sales are generally conducted as an unregulated crowdfunding technique or unregulated exchange of values that are represented cryptographically. Nevertheless, regulation, laws and, interpretations may vary by jurisdiction. These sales include developing and using experimental technologies, business models, and software that may or may not achieve all the objectives listed in a Site’s promotional material.
TAG Protocol warns all of its visitors that investing in tokens involves risk.
These activities should be undertaken by only those who have substantial know-how on tokens, coins, and other crypto technologies. Plus, the buyers of the token should understand the specific network and the tokens it is offering. Careful due diligence must be taken while interacting with the projects or networks or teams dealing in token sales. The buyer should completely understand that her/his contribution may not result in a valuable or usable token, and the value of such contributions is subject to partial or complete loss of the investment.
- Contributor: A person exchanging a form of value — generally a cryptocurrency — for a token.
- Contributions: The payments made by contributors.
- Blockchain: This is generally a platform based on decentralized networking technology that streamlines the transactions involving tokens.
- Token: Also known as a crypto token, it is a form of value issued with regard to the network’s development. These tokens will be given in exchange for the contributions received.
- Token Issuer (TI): An Ethereum Smart Contract issuing the tokens.
Early stage technology
In general, the tokens are created for developing a network that is based on a blockchain or a distributed ledger technology. You should engage in token sales only if you completely understand and accept that using the tokenized stores of value is very experimental. Therefore, participating in a token sale and a blockchain project represents a high risk to the contributors.
A TI will generally invest in new blockchain-based technologies, software applications, and business models that will be in the initial development stages and will therefore be unproven. There is always the inherent risk that the technologies, software applications, or business models that the TI has invested in could be completely unfit for the intended purposes; or they could not have the expected value or utility.
Initially, most of the blockchain-based projects or tokens will work on the protocols followed by either Binance Smart Chain or Ethereum. Any form of breakdown, forking, abandonment, or malfunction of these protocols may have an adverse effect on the tokens and on their respective blockchains. Furthermore, the advances in cryptography and other technical advances — such as the growth of quantum computing — could pose a fundamental threat to such a protocol’s value.
The threat of software weaknesses
The tokens, the blockchain, and other related cryptographic technologies are still evolving. Their technological theories and concepts are still in the early development stages and are yet unproven. Normally, contributors won’t find any warranty for receiving, using, or owing the tokens. Generally, there is no guarantee that the tokens will work in an error-free, uninterrupted state — also, there is the inherent risk that the blockchain, tokens, and allied theories and technologies could have their own vulnerabilities, weakness, or bugs. The presence of such bugs, weaknesses, or vulnerabilities could lead to a complete or partial loss of the tokens.
The TI will wish to convert or simply store the cryptocurrency contributions into a single, or more, fiat currency or altcoin. However, during such times, the TI can face immense difficulties in making and managing funds and cryptocurrencies. These difficulties may be related to cryptocurrencies being easily converted into fiat currencies. Also, tokens and cryptocurrencies are difficult to exchange with assets through intermediaries and traditional market counterparties. In addition, if the value of the tokens fluctuates unfavorably during or after the presale event, the TI will be unable to fund the development, or it will be unable to manage the blockchain as intended.
Additionally, in the conventional market forces, there are a number of potential events that can exacerbate the risk that the crypto Token's value will experience unfavorable fluctuations. Due to the Ethereum blockchain’s volatility, it is predisposed to encountering a number of DAO–like attacks. The crypto Token's volatility is subject to market irregularities or significant security incidents that have happened on a major exchange.
The credentials are at risk
If the contributor owns a crypto wallet, she/he will have credentials. These credentials should not be stolen or lost. If, however, they are lost or stolen, the tokens bought by a contributor during the sale will be unrecoverable. A simple private key, or a unique combination of these keys, is essential for controlling or disposing of the tokens present in the wallet. Accordingly, the loss of the private keys of a crypto wallet will result in the loss of the stored tokens. Furthermore, any form of third party that has access to a wallet’s private keys will have access to its login credentials too.
As a result, in the case of web-based wallets or third-party crypto wallets, the stored tokens can be misappropriated. The malfunctions or errors within the crypto wallet may result in the stored tokens’ loss. Also, the contributors should carefully follow the set of procedures that are established by a token’s sale documentation for receiving or buying tokens. For instance, if a contributor provides an incorrect wallet address or an address that is not compatible with ERC20 standards, then that may result in the loss of the purchased tokens.
Factoring in cybercrime
Acquiring and managing cryptocurrencies and tokens are subject to the risk of cybercrime. The cybercrime phenomenon is difficult to mitigate or manage. Cybercrimes may also result in a number of concerted attempts to hack the entire blockchain, token sale, and the software the Site uses for managing the contributions. The contributors need to ensure that the software and technologies used during the token sale and in the TI’s blockchain will not be subject to unauthorized access. The TI will never insure the assets or tokens and may find it difficult to do so, given the existing conditions of commercial insurances. Any cybercrime or unauthorized access may simply result in the loss, theft or inability to get an access to the contributions. Such instances will have an adverse impact on the ability to issue tokens, on the token’s value or on the ability to launch or develop the ecosystem.
Abandonment or failure
The blockchain-based project or the token sale event itself may be partially or fully abandoned, or the project or token may need to be restructured for a variety of reasons. These reasons generally result in the project being commercially or technologically unsuccessful or shutting down the project due to different factors; these factors consist of the lack of industry buzz or changes in the regulatory issues or law.
In addition, there is absolutely no assurance for the TI that a token will be bought by the contributors. The contributors should completely understand that holding the tokens or speculating in a crypto project comes with its fair share of risks; the most significant risk is that whenever a piece of information or value or service is exchanged in the ecosystem, it becomes unredeemable.
There is a fundamental threat that the offer or the use of the issued tokens could be prohibited as per the applicable securities law. The blockchain technology and DLT allow innovative forms of interaction — it is even a possibility that specific jurisdictions will apply the existing regulations on the blockchain-based apps and token sale or will introduce a fresh set of regulations altogether. The new regulations or the altered ones can degrade the token or the network’s utility. The TI can cease the operations for a jurisdiction if the regulatory actions are detrimental to its token value or are commercially undesirable.
Lacking statutory protection
The tokens do not represent deposits and are not subject to any form of statutory guarantees or insurance. If the TI has declared itself insolvent, the network, and its respective token value will incur heavy losses. Therefore, the money invested in such systems or tokens will be unredeemable.
The risk of governance failures
Generally, the tokens do not confer the contributors any governance rights on the network or the TI. All the decisions related to the TI’s services or products will be made only by the TI and all the associated parties. No consultation or engagement with the contributors will be solicited in any case by the TI. However, governance failures on the part of TI can liquidate the issuer. Such decisions could have a bad effect on the tokens and the underlying blockchain’s utilities. Furthermore, the TIs are subject to general accounting, tax, and legal standards; they can even be operated by people with limited business experience.
A legal dispute may arise for any of the following reasons.
- Whether the contributions are appropriately used for meeting a legally binding representation made in the Document.
- Whether the ecosystem or token is developed within the full scope of legally binding functions or representations.
- If the terms and conditions of the token exchange or the ICO sale are breached.
- Whether there is a potential legal claim made against associated third parties or TIE (Respondents).
At such times, it will become extremely costly and/or difficult for contributors to have access to legal rights within the home jurisdiction or within the respondents’ area. For this reason, many contributors are dissuaded from asserting their respective contractual and statutory rights. Additionally, if a claim is brought, it may become very difficult to distinguish between enforceable contractual representations, legally binding warranties, and other terms and conditions. Generally, the terms and conditions of the token sales will exercise great care to warn the contributors about the different risks associated with tokens and their sales.