What is an ICO?

An ICO is an Initial Coin Offering. The team behind an idea, project, or service pertaining to the ICO launches their own tokens and sells them to investors. ICO’s have a lot in common with IPO’s (Initial Public Offerings) as well as crowdfundings (when a lot of people get together to finance a project or idea and bring it to completion). In this blog, we will figure out what an ICO is exactly as well as what types of projects can receive financing with the help of an ICO.

Often times, many people get confused as to how the word ‘coin’ relates to ICO’s. After all when ICO’s launch their currency it is referred to as a ‘token’ instead of a coin. Well, the reason for that is because, initially, the plan for ICO’s was to release a cryptocurrency which was analogous to the Bitcoin. However, currently ICO coins are referred to as Altcoins, or alternate cryptocurrencies if you may. There are quite a few of them publicly available already such as Litecoin, Peercoin, Dash, Monero, and others. All of these Altcoins share a common characteristic – they are directly responsible for the creation of a new form of currency, which is meant to be used as a form of payment, similar to regular fiats like the dollar, euro, pound, ruble, and yen.

In 2014, a new Blockchain platform known as Ethereum was created. This new platform provides any person with the opportunity to easily create and release a ‘token’ which is based on ‘smart-contract’ technology. The tokens created on the Ethereum Blockchain platform are already being used in ways similar to regular fiats, but more frequently they act as stocks or ‘coupons’ that users can acquire from a Blockchain project. The exact function of specific tokens varies from platform to platform. It should be noted, that they are not all the same.

A smart-contract is a computer algorithm that is responsible for releasing tokens or other cryptocurrencies as soon as the pre-established conditions of the smart-contract have been met by all parties involved.

For example, one of the conditions of a smart-contract may state that once 10 ETH has been received from an investor, that investor will automatically be forwarded 1000 tokens. Therefore, smart-contracts eliminate the possibility of an ICO initiator running away with raised funds while not issuing any tokens to investors.

The most common platform through which smart-contracts are created is the Ethereum platform. Once a smart-contract has been coded and published on the Ethereum network it becomes fully autonomous and cannot be manipulated and altered by its creators or any other parties or individuals. The only thing that can be done with a smart-contract after it is introduced to the Ethereum network is for the owner to trigger certain pre-coded aspects of the smart contract.

During the time at which this article is being made, smart-contracts have rather limited uses due to the fact that smart-contracts cannot check on the authenticity of predetermined conditions being fulfilled in the ‘real world’. What this means is that it is currently impossible to draft up a smart-contract that would be responsible for shipping purposes as well as to check on real-world deliverables being received.

We can create a special smart-contract in which we can establish “tokenholders”, who will receive an allotted amount of tokens if pre-established conditions and rules are met.

For example, in a smart-contract we can set up a rule stating that any Ethereum wallet address that transfers 1 ETH to the smart contract will receive 1000 tokens in return on the wallet that was used to send the ETH. The tokens, will, for example, be golden coins that will be used in an online game that is under development.

Thus, a token is a unique form of cryptocurrency that is generated through smart-contracts on the Ethereum network. Tokens are distributed to investors in exchange for their investment in the Blockchain project during the projects ICO. Tokens may be used as stocks of the company or as a currency with special uses on the project’s platform.

Stemming from this information, it would certainly make more sense to refer to Initial Coin Offerings as Initial Token Offerings instead. However, the mass media has simply gotten used to the term, ICO, due to it being widely used.

So, if tokens can be considered to be a simple condition underlying a smart-contract, how can they be used on cryptocurrency exchanges?

The answer to that question lies within the ERC20 standard. This standard describes all of the functions and events that an Ethereum smart-contract must carry in order to allow the generated tokens to be exchangeable. The ERC20 standard can record transaction data, token balances, as well as token transfers.

So, after an investor receives tokens for his investment, he can then use those tokens on accepted exchanges and all of the information pertaining to the use of those tokens will be recorded in the ERC20 standard.

There are two types of projects that attempt to acquire financing through holding ICO’s.

  1. Projects in which the tokens that are created are necessary for the project to function organically. Meaning that the success of the project directly affects the cost of a token. The more successful a project, the higher the token price will be in the future as well as the demand.
    Example:

    • Filecoin ($245 million) – The first ICO project that only accredited USA based investors were allowed to participate in. Due to Filecoin complying with all of the rules and regulations provided by the SEC. The idea behind Filecoin, is to create a program that allows users to essentially rent out their computer hard drive space for the purpose of storing databases. In return for storing information on hard drives, users are rewarded with filecoins, which can then be exchanged for bitcoins, other cryptocurrencies, and fiats.
  2. Projects in which tokens don’t have any real uses on the project’s platform. Meaning, the project could run just as well with the tokens as it could without them. Therefore, tokens are only needed to acquire investor financing and act pretty much as generic stocks.
    Examples:

    • SandCoin – An online auction house for the acquisition of sand for construction purposes by using SandCoins. Investors gain SandCoins from the sale of sand.
    • BRAID (movie) – An independent art house movie project. Investors are rewarded with a share of the project when they purchase tokens. Investors can redeem their tokens anytime for a refund, or wait until they appreciate in value over time from future sales.

In order to avoid being scammed, investors always conduct their due diligence concerning a project and try to find out as much as possible about it. That’s why it is crucial that you have a professional approach not only towards the development of your projects website, smart contract and code but also towards the marketing of your project.

Here’s a short list of things that you will need in order to launch your ICO.

  1. First and foremost, you need to understand how your token will be used in your project. Will it pay out dividends or will the token be needed to access some of your services? Will it be a security or utility token? How will the tokens be dispersed during your ICO?
  2. An appealing site that will properly portray the business model of your project, its advantages over competitors, and the mechanism through which tokens will be given out and a few reasons as to why the token value will increase over time. It’s important to note that individuals from a variety of different countries invest in ICO’s. As a matter of fact, the USA has only a 25% cut of the total amount that has been invested in ICO’s to date. And this is exactly why you will need to translate your project’s website into at least 4 languages: French, German, Spanish, and Japanese.
  3. Whitepaper- Is essentially a document containing all of the details pertaining to an ICO’s business model. The whitepaper will generally contain important information for potential investors. Such as market analytics, the issue being solved, the business model, technical info, details about the token and a lot more.
  4. A smart-contract on the Ethereum platform that will regulate the distribution of tokens during your ICO.
  5. A short video that will briefly cover key points of your project and would appeal to investors.
  6. A company that has been registered in a jurisdiction in which you can safely hold your ICO, and then pull out funds to get fiats.
  7. A marketing campaign handling:
    1. The development and launch of a bounty campaign
    2. Media posts on leading crypto news outlets.
    3. Spread information pertaining to your ICO through relevant forums and Telegram channels.
    4. Work with opinion leaders
    5. SMM, and targeted advertisements on Facebook
    6. An advertisement campaign in the Google Display Network
    7. A promotional video on YouTube as well as an add.
    8. A corporate blog

At the time of this post (September 2017) ICO’s are not yet registered nor fully regulated in most nations. However, some countries have stepped forward with some regulations pertaining to ICO’s

USA

In July 2017, the Securities and Exchange Commission (SEC) published an official announcement, where it stated that it considers ICO investments to fall under the same category as securities. This decision by the SEC may be one of the first and most important steps towards legalizing and regulating the cryptocurrency industry of today. Many nations will most likely follow the SEC decision.

China

In the beginning of September, The Chinese Central Bank declared that ICO’s were an illegal operation and that all ongoing ICO’s must immediately freeze their operations. Its likely that Chinese authorities decided to halt ICO’s in order to better study the phenomenon of cryptocurrencies. China’s regulations may be toned down a bit in the future.

There are a ton of services out there that carry lists of ICO, some of which are currently active and ones that are upcoming. Here are some quality platforms that you can use in order to keep up with ICO’s.

tokenmarket.net
icotracker.net
cyber.fund/radar
icorating.com
icowatchlist.com
icoalert.com
bitcointalk.org – The most widely known and popular cryptocurrency forum. Users discuss and post all kinds of relevant information about new ICO’s.

ICO’s, or ITO’s, are quite the young phenomenon that sprung up as a result of the creation of Blockchain-technology. ICO’s still have a lot of modernizing and growing to do, however, they have already proven to be a great way through which a project or service can be financed.