What is an ICO (Initial Coin Offering)?
The term Initial Coin Offering (ICO) derives from the more well-known expression IPO (Initial Public Offering) to designate fundraising in crypto money.
It can be to finance a new blockchain but in most cases, it is to issue a token (digital value token) or to create a decentralized application based on an existing blockchain such as Bitcoin, Ethereum or NXT.
Unlike IPOs, which are regulated and where the issuing company is bound by several legal obligations, in the wonderful world of crypto money, startups can adopt a multitude of legal structures and set up via ICOs inexpensive, accessible to all, faster and more efficient participatory fundraising campaigns (crowd sales) than financing via banks or venture capital funds. This unregulated environment is both an advantage and a risk for both the entrepreneur and the investor.
Fundraising is done online. In most cases, the organization communicates around its project, notably by providing its whitepaper (the roadmap outlining the goal and the different stages of the project), by presenting the team that develops the token, its source code, the terms of issue, etc…
An ICO is therefore an alternative means of financing a company: in this new business model, the approach to the blockchain startup market is centered on the circular economy and the needs of a well-defined ecosystem. ICO usually starts before the project is completed, so investors are dependent on its eventual success. The participants are therefore often sympathizers (who through this direct involvement will have a natural tendency to defend the project and become involved in it) and speculators motivated by the profit that may be generated if the value of the tokens purchased exceeds the ICO price. Thanks to crypto money, anyone can therefore bet the amount he wants on the project he wants.
The issued tokens can confer to the holder dividends on the profits possibly generated by the startup, or voting rights, etc… We distinguish by convention two main categories of tokens of value:
- Tokens with a specific function in the business model of the issuing company (utility tokens). For example, they can be the only means of payment for certain services offered by the company.
- Securities tokens: Tokens that give the right to dividends related to the profits generated by the issuing company (securities tokens). They are very similar to financial securities, so the legislation governing them will probably be more restrictive.
The ICO is therefore a means, a beginning and not an end.
How are ICO Terms Determined?
In order to raise funds for the project, the generated cryptocurrencies are put up for sale, but the person or institutions that will invest in the project will want to know all the details of the project. For this reason, perhaps one of the key documents of an ICO, Whitepaper, the document that shares the problems solved by the project, the solutions it offers, the advantages and technical details is easily accessible by everyone (on the project’s website, social media accounts, forums, etc.) is published. How the collected cryptocurrency fund will be shared (project team share, project development share, advertising marketing share, business partners share, etc.) is explained in the technical document (whitepaper) published by the project team before the fundraising process begins.
How those who want to participate can be included in the ICO, for which cryptocurrencies the generated cryptocurrency assets will be sold (generally Bitcoin or Ethereum), the minimum and maximum amount of funds to be collected, how long the ICO will last, what are the crypto assets produced for the ICO in return for the paid cryptocurrencies. The project team determines important information such as time and how to deliver.
Some ICOs may impose conditions such as a per-user quantity limit, an authentication requirement (KYC). The purchasing and fundraising process can be limited to a few hours or can be determined to cover longer periods. While project teams can pay crypto assets immediately in return for the collected funds (for example Ethereum-based ERC20 tokens), in some projects, the blockchain of that project may be expected to go live (for example, Tezos).
How an ICO works:
- Presentation of the project: whitepaper, objectives, roadmap, team and previous experience of its members,
- The dynamics of the ICO is set up by the team: duration of the crowd sale, a setting of an upper limit (cap) or not, allocation of tokens,
- Announcement of the fundraising via the media and social networks,
- Fundraising in cryptography (typically via Bitcoin or Ether),
- End of the ICO and launch of the project: the token is listed on the exchange platforms that accept it.
Caveats:
- ICOs are risky and unregulated fundraising, generally, there is no guarantee for the investor.
- It is much more difficult for an investor to get an idea of the relevance and quality of a startup rather than an existing company that has already marketed several products. The reliability of the team around the project under consideration is therefore a very important parameter.
- The real usefulness of a new token is not always up to the promises made.
- Many hackers use all possible and unimaginable phishing techniques such as identity theft to mislead the investor and steal his private keys during ICOs. Paranoia is the order of the day.
- This type of investment is therefore reserved for seasoned, risk-averse, responsible investors, investing funds they can afford to lose.
Some examples of ICOs:
Early readers may remember Gold Fever 2.0 and the series of articles devoted to NXT and its incredible fundraising!
The first project that was funded through an ICO was Mastercoin, now Omni. The crowd sale of the Scottish startup attracted 2013 about 5000 bitcoins in investment. As for the MaidSafe project developed via their platform, the ICO raised over $7 million in funding.
The Ethereum project is a typical example of a successful ICO: with the equivalent of more than $18 million invested at the base, Ethereum’s total capitalization represents nearly $4 billion to date.
The most infamous ICO to date remains the DAO: after an extraordinary fundraising (more than $150M, the absolute record), a hacker detected a flaw in the source code and ended the adventure by siphoning off part of the ethers invested. The Ethereum community then decided on a controversial hard fork to reimburse the investors; this decision was controversial and divided the blockchain in two. The DAO case should serve as a warning to both the team organizing an ICO and the investor who subscribes to it!
Does Every ICO Reveal a New Blockchain?
In the ICO, the project teams will be working on a token or asset created with a smart contract on a blockchain such as Ethereum, NEO, Waves, EOS, or a working on their own blockchain, in exchange for Bitcoin, Ethereum or other cryptocurrencies accepted by the project team. offers cryptocurrency.
Crypto assets generated on community-adopted blockchains allow project teams to focus on developing the project, rather than spending effort and time to generate, manage and popularize a new blockchain. However, in this case, the cryptocurrency of the project is limited by the capacity of the platform where it is produced. For example, the transfer times of ERC20 smart contracts generated on the Ethereum blockchain depend on the transfer process of the Ethereum network, and transaction fees are paid with ETH.
These tokens or crypto assets purchased for Bitcoin, Ethereum or other cryptocurrencies can be stored in the wallets belonging to the blockchain from which they are produced or in the wallets belonging to their own blockchain. Tokens distributed to participants in exchange for paid cryptocurrencies can be traded between users or on supporting cryptocurrency trading platforms.
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