What is ICO and How does it work?

ICO

ICO, an acronym for Initial Coin Offering is a concept of crowdfunding projects in the cryptocurrency and blockchain industries. It is a tokenization method where startups raise digital funds or coins are issued. ICO is regulated via smart contract.

ICO is a Fundraising mechanism where the company releases its own cryptocurrency with the exchange for Bitcoin or Ether. The concept of ICO resembles Initial Public Offering popularly known as IPO. It is an alternative crowdfunding technique emerged as an alternate of the traditional financial system. This model has helped a lot of companies and project to raise the funds successfully.

If you are well known about cryptocurrency and blockchain, you might have surely heard about Initial coin Offering (ICO).

History of ICO:

The first ICO started with a White Paper titled “The Second Bitcoin White Paper” held by Mastercoin in July 2013. The project was built on the bitcoin blockchain and was used for the creation of Bitcoin exchange and platform. Surprisingly, the first ICO managed to raise over $5 million USD.

Then in 2014,  Ethereum burst into the scene from where ICO started gaining the limelight.  It raised over $18 million, making it the biggest ICO of that time. The development of Smart Contract and Decentralized Autonomous Organization (DAO) made it easier for other platforms launch their own digital tokens on the Ethereum Blockchain.

In 2013, over $5.1 billion were raised via ICO worldwide, which increased to $16 billion in 2014 and over US$34 billion in 2015. In 2016, 54 major ICOs raised about $103 million dollars, with ICONOMI and SIngularDTV being the front-runners raised $10 million and $7.5 million respectively.

The market bloomed tremendously in 2017 where million dollars could be raised in a matter of seconds. About 18 websites tracked ICOs until mid-year. By the end of 2017, ICOs raised almost 40 times as much as capital as they raised in 2016 which was only 2% less than that of IPO. Blockchain capital was the first venture to launch an ICO for security.

Despite the failure of about 46% ICOs of 2017 in 2018, ICOs have already surpassed the early stage Venture Capital funding in August 2018. Although China and South Korea have banned ICO, Switzerland, Singapore, Gibraltar are quite positive about the huge potential of business opportunities.

Here is a list of the Biggest ICOs of all time :

  • Filecoin [Futures] - $257 million
  • Tezos- $ 232 million
  • EOS- $180 million
  • SIRIN LABS token- $157.9 million
  • Bancor - $ 153 million
  • Status- $108 million
  • QASH- $105 million
  • Aragon-$73 million
  • Bankex- $70.6 million
  • TRON- $ 70 million

Are they legal?

One of the most important concerns of investors regarding ICO is its legal status.

Since cryptos are unregulated digital currency, any argument can be made regarding its legal conditions. The best solution to find out is by doing some research before investing as it does not have any centralized authority for controlling its regulations.

How does an ICO work?

All ICO begins with an idea. Previously, ICO was only used for a cryptocurrency based platform, but these days a startup comes up with an idea related to Blockchain and then proposes it to the community. If the project finds the track and is able to impress the community, the developers and the company formally draft a white paper which gives the detailed insight into the project.

A White Paper is a document that gives all the information regarding the product in depth. It also describes the problem statement that the project aims to solve along with the possible solution. Furthermore, it presents a business plan along with the roadmap for the development of the project. The structure of the white paper is not pre-determined, each company creates its white paper according to their needs and preferred approach.

After the white paper has been circulated, the company gets the sense of investor’s interest. By addressing the concerns and risk, a final business model and final version of the white paper is prepared. Then, terms and contracts are finalized covering all the benefits of the investors in the final version of the white paper.

Afterward, other particulars are decided including the number of tokens to be distributed, the price of each token and how will this token help in building a project's ecosystem. The dates are scheduled for token sale. Usually, a defined time period is allocated to raise the required funds and after the time ends, sale closes.

After this process, the tokens are created and bought as an exchange for Bitcoin or Ethereum of Fiat money. The developers decide the number of tokens and the amount they want to charge for each token. Usually, according to the law of supply and demand, a limited number of tokens are supplied.

In addition, marketing campaigns are launched after this step. Different marketing mediums are used to attract investors to create an interest as much as possible. Mediums such as social media sites, Reddit and cryptocurrency related websites are used to attract investors.

After the marketing campaign, the buying and selling of tokens start, where the company establishes an exchange for acquiring the tokens and plans are made for a live exchange.

What are the Pros and Cons of ICOs?

Pros of ICO:

ICOs offer a number of advantages for both the entrepreneurs and investors:

  • It is one of the best platforms for startups to raise funds compared to conventional fundraising mechanisms. Raising money is much easier with this approach.
  • Investors get easy access to the profitable venture. For instance, Ether was offered at 35 to 40 cents at the launch and now it priced at second largest cryptocurrency after Bitcoin.
  • ICO works on the concepts of white paper which define the functionality of the coin, therefore in majority cases, the working product is not necessary for ICO.
  • A lot of documentation is required by IPO, this unnecessary paperwork is reduced in case of ICO.   
  • ICO surely helps in the exposure of the project by creating a certain hype through which more number of people will get to know about the project.
  • The added incentive of ICO motivates the developers to innovate and develop a lot more exciting projects.
  • It helps the entrepreneur to build a strong community based on their project. A strong community surely attracts investors by improving credibility.

Cons of ICO

  • Having less paperwork in ICO also attracts a lot of scammers. There have been numerous cases of scams in history.
  • It is purely based on speculation. We never know if the project is going to work or not. There is little reliance on whether the project will succeed.
  • There is no guarantee that the developers will work hard enough to finish the project that they have started.
  • The project can always fall apart because of possible hacks and attacks. For instance, a DAO.
  • The huge activity during ICOs might result in backlog in the network where the transactions could fail.
  • Storage of tokens can be complicated as well.
  • If Government starts to regulate the rules because of the increased number of scams, the whole idea of cryptocurrency fails.

Conclusion:

Although it has been exploited for selfish needs, ICO has contributed a lot to the innovative technologies of blockchain and cryptocurrencies and let's hope it will continue to do so in the nearby future.



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