What Is an ICO?
If you are looking for a cryptocurrency project that has a huge potential, a quick look at different Initial Coin Offerings (ICOs) is always a good way to start. The presale of tokens or cryptocurrencies has been used by companies and even by countries in order to raise funds for a new application. But before we discuss further, what is an ICO? What makes it unique that it has been able to raise over $1.3 billion for crypto startups worldwide?
For those who don’t understand the concept of ICOs, it is easy to call it a Ponzi scheme. Before you make a judgment regarding this topic, it is important to know more about how ICOs work and understand the concept surrounding this phenomenon.
What Are They Used For?
It is quite common for traditional companies to approach investors in order for them to secure funds. In exchange, companies provide a share of their equity with them. That’s similar to how ICOs work.
Initial Coin Offering, otherwise known as an ICO is designed as a method to raise funds for crypto projects. Companies sell their crypto tokens similar to how traditional companies sell shares of their company during an IPO or Initial Public Offering.
ICO is a hotly debated topic considering that it is a new phenomenon that is growing popularity within the blockchain community. For one, lawmakers are concerned about the reality that ICO projects are unregulated securities that enable companies to raise unjustified amounts. However, there are those who argue that this is simply an innovation like the traditional venture-funding model.
Because of the popularity and the success of Ethereum ICO, there are more developments in the crypto market following this model. And because of this, it has helped revolutionize not only how businesses operate but also how the entire financial system works.
Who Can Establish an ICO?
Given the reality that there are only a few regulations pertaining to ICOs, especially in America, it means that anyone can launch their own ICO. As long as you can have it set up, you can have the cryptocurrency funded. And since it is easy to set up, many have been victimized by scammers that used ICO as their tool to steal money from investors.
In order to avoid getting duped by scammers, it is imperative that you do your homework. You will have to know the history of its founders and ensure that the ICO is real and accountable. Do they have experience in blockchain technology? Is there a use to the token that they are actually selling?
Starting your own ICO is quite simple. But before starting, you will have to ask if your business will benefit from an ICO. Next, if you believe that blockchain technology can help expand the possibilities in your business, then you will need to make a white paper. The white paper should contain what your cryptocurrency offers to the table. It should be informative, engaging, and should answer all questions pertaining to your cryptocurrency.
You also need to advertise your ICO. Aside from having a website that investors could visit, it is imperative that your programmers answer questions both on Twitter and Reddit.
What Is a Token?
Tokens have become popular over the years especially with the popularity of Ethereum network. Ethereum is quite unique since it allows developers to create decentralized applications or DAPPS. Investors need tokens native to the environment of DAPPS in order for them to use these. Basically, there are two categories that tokens fall under.
- Usage Tokens
- Work Tokens
What makes Usage and Work Tokens different from each other? Usage Tokens are those that act as a native currency in a particular environment. It can also be exchanged for other tokens or it can even be exchanged for FIAT money. In short, a usage token is basically a digital currency.
On the other hand, you have the Work Tokens. Unlike Usage Tokens that function as a currency, this type of token provides various rights to its owner within the native environment. One example of a Work Token is the DAO. A DAO token holder has a right to vote on whether a particular DAO would fund particular DAPP or not.
Making Tokens
Making tokens is quite simple these days. First, developers need to determine the total supply of tokens available. Why not make a large number of tokens then? Following the simple rule of supply and demand, it is important to not have a large number of tokens since this could easily deflate the token’s value.
As for those making tokens using the Ethereum network, tokens that are made using an Ethereum contract will be registered on an open database. Here, everyone is going to see the initial supply and the balance. In the beginning, when all the tokens are created, the supply is going to be with the contract creator. The contract creator will then send the tokens to those who will be funding the project using ETH.
The initial value is going to be dictated by the one who made the contract. And once someone has bought the tokens with the agreed value of ETH, the same number of tokens will be deducted from the balance and added to the buyer’s balance.
How Did ICOs Start?
One of the very first ICOs is Ripple. This started in 2013 as Ripple Labs was able to sell tokens that allowed the company to raise funds for the Ripple platform. They were able to create around 100 billion XRP tokens and sold them to the public. Now, Ripple is among the largest cryptocurrencies based on market capitalization.
Also in 2013, Mastercoin promised to create a layer on top of the existing Bitcoin during that time. The goal is to execute smart contracts as well as to tokenize Bitcoin transactions. For this move, Mastercoin token was sold and received around $1 million.
There are many other cryptocurrency projects that have been funded via ICO. Lisk in 2016 was able to sell its tokens and raised over $5 million in bitcoins. However, one of the most successful ICOs in recent years is Ethereum. Ethereum Foundation initially sold ETH at 0.0005 BTC. With the use of ICO, Ethereum was able to raise $20 million. It was one of the largest crowdfunding during that time. And after Ethereum provided smart contracts, it has changed how the crypto market view ICOs.
DAO was the very first token that was used in order to raise funds on the Ethereum blockchain. In terms of raising funds, DAO was successful, being able to raise over $150 million. Unfortunately, a cyber-attack was able to drain millions from the organization all because of their technical vulnerabilities.
Despite the failure to fund a token safely on Ethereum, developers were able to develop improvements that allowed easier and safer funding. Specifically, Ethereum made use of ERC20, a protocol that allowed developers to make their tokens on the Ethereum blockchain.
To date, there are a number of interesting ICOs. For instance, Aragon was able to raise $25 million in just 15 minutes. Also, you have Basic Attention Token that managed to come up with $35 million in only 30 seconds.
ERC20 Standard
The ERC20 protocol is a great addition to Ethereum, providing a standard that can be followed by developers. DAPP developers are encouraged to follow the ERC20 standards despite the fact that it is not something that is enforced.
This standard allowed developers to have an insight about the expectations of the crypto market and how future tokens should behave. To simplify what ERC20 protocol brings to the table, it is basically a set of six basic functions that would carry out the following the 4 activities:
- Get the token supply
- Get the account balance
- Transfer the token
- Approve the token to be used as a monetary asset
Ethereum’s Smart Contract and the Rise of ICOs
Ethereum’s smart contract system has allowed the proliferation of different tokens that can be transacted within the Ethereum blockchain other than just Ether. With a standard such as ERC20, it allowed Ethereum to host a number of ICOs adapted to current and future expectations of the blockchain market.
Ethereum allowed the process of creating blockchain applications easier and more efficient. Without Ethereum, developers will be developing each new application from scratch. With its smart contract system, however, different applications can be found in just one platform.
Are ICOs Legal?
Given the popularity of ICOs, it isn’t surprising that regulatory bodies are now getting involved. In fact, there are countries such as China that already banned ICOs within the country. One of the biggest concerns for many regulators today is the lack of regulation in the crypto space. And considering that it is a gray area, investors are at risk that they are actually dealing with founders who only want their money.
ICOs can be quite tricky legally speaking. First, one of the most common questions raised by investors is if tokens are securities under US federal law? Then if tokens are securities, they should be registered with the SEC, not to mention an applicable exception to registration.
But does an ICO really need to be registered? The Securities and Exchange Act of 1933 says that if you bought an unregistered security you can still sue the seller on your own in order to get your money back. This only means that SEC and the Department of Justice aren’t the only ones that can say if ICO is a securities offering or not. This means that if an investor decides to sue, a judge can actually decide if an ICO is considered securities offering or not.
However, the legal state of ICO is quite different from one place to the next. As mentioned earlier, China already banned ICOs in their country. In a number of places, ICO is in a gray area. It is ideal that a token is not considered as a financial asset, but rather as a digital good.
So, what awaits the future of ICOs in terms of legality? Despite the reality that it is still not yet legally defined at this point, it is possible that ICOs will be regulated in the near future considering the popularity of cryptocurrencies worldwide. The popularity of DAO, for instance, stirred enough attention from regulators.
Are ICOs Profitable?
Should you be investing in a token in order to get some profits after some time? Before you even buy a token, keep in mind that there is a growing number of ICOs out there. Is it possible to earn a good amount of money in ICOs? To be quite frank, yes it has good potential to provide great returns.
Ethereum, for instance, started at 0.0005 BTC. Today, Ethereum costs around 0.05 BTC. Just looking at the numbers, you could’ve gotten a profit of 10,000%.
But of course, not all ICOs have a success story, there are ICOs that end up with losses instead. There are even some instances wherein ICOs are used by scammers. After building a professional looking website and leaving a promise of the best cryptocurrency, founders leave with investors’ money.
Future of ICOs
In December of 2017, SEC classified tokens as securities. SEC chairman Jay Clayton mentioned that “a token constituted an investment contract and therefore was a security under our federal securities laws. Specifically, we concluded that the token offering represented an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others”.
What this simply means is that ICOs are getting attention from regulators. SEC halted Munchee from attempting to raise money by creating a cryptocurrency that could be used to order food within the app. This is the first time that the SEC issued a cease and desist for an ICO mainly because it is an unregistered security.
It could mean that regulators are already tightening up laws that pertain to ICOs. Though ICOs can come up with tokens that have practical applications in our daily lives, buyers should be aware that there is a risk when buying tokens. Especially now that it is still in a grey area, investors should exercise caution.