In the past years, most of the businesses and startups availed loans to enhance their project ideas. After the advent of Blockchain Technology, things slowly started emendating into the industry. One such crowdfunding strategy is Initial Coin Offering which has been responsible to bring in great benefits for these enterprises. This guide will be helpful if you are a newbie or an entrepreneur to get started to create an ICO.
What is an Initial Coin Offering (ICO)?
An Initial Coin Offering is a fundraising strategy through which enterprises raise their funds by selling their developed ICO Tokens/Coins to the investors in return for Cryptocurrencies or popular fiat currencies.
Since the inception of Blockchain Technology, most of the small and mid-scale industries of various domains became avid with ICOs. These currencies have made great revolutionary tasks such as:
- ICOs remain to be the easier path for DAPP Developers to get the needed funds for their projects.
- Anyone who is interested to invest in the ICO tokens with that particular DAPP and become the part of that project.
It was in July 2014 when Initial Coin Offerings came into existence. The first project was ICO Ethereum which managed to raise around $18.4 million and introduced to the cryptocurrency world.
Right from the year 2013, ICOs are acting as a tool for enhancing the funds in the development of new cryptocurrencies. Primarily created tokens are out for sale on the popular cryptocurrency exchanges to raise the revenues.
Once hearing the success story of Ethereum, ICOs became a constant factor to raise funds by implementing Blockchain Technology.
History of Initial Coin Offerings:
The first cryptocurrency distributed by the ICO was Ripple. In 2013, Ripple Labs started to create a payment system for them which managed to raise around 100 billion XRP token. The Ripple company started to sell these tokens to get funds for the development of the Ripple platform.
Next in the step was the Mastercoin which had a primary motto of creating a layer on the top of Bitcoin which will execute Smart Contracts and tokenize the transactions. Mastercoin started its ICO and managed to raise around $1million.
After this lengthy successful ICO stories, the crypto market experienced the advent of new cryptocurrencies. One such thing was the Lisk which sold its coins for $5million in 2016. However, Ethereum topped the field by raising nearly $20million in the mid of 2014. Thus, Ethereum emerged to be one of the top Blockchain networks among the industry. This contract is now popularly called the “ERC 20 Token Standard”.
ICO Success stories in 2017 & 2018:
When looking at the ICO statistics for the year 2017, the Initial Coin Offering industry managed to raise around $20million in the Blockchain market alone. While the total amount was around $6.2 billion in 2017. Coming to 2018, the ICOs raised around $7.8 billion surpassing the year 2017.
Image credits: Aapplicature
Finally to the previous year 2019, There were few ICO’s which managed to raise a great amount of funds for their project. Here is the list:
Endchain where 74,567,312 were sold.
ChainZilla where 5,000,000 were sold.
Proof of TOSS which managed to raise around $ 1,702,799 by selling out 550,000,000 tokens
So, What are these tokens here?
Tokens are the representation of a particular entity. They can be anything right from a value, stake, a voting right, a property, etc which is not limited to a particular role. It can fulfill a lot of roles in the ecosystem.
One needs to understand the difference between a coin and a token. Coins are the cryptocurrencies such as Bitcoin, Litecoin, Bitcoin Cash, etc. On the other hand, projects like OmiseGO and Golem are the tokens that are built on Ethereum Blockchain.
There are a couple of tokens which are available in the crypto market:
- Utility Tokens and
- Security Tokens
Utility Tokens are the ones which don’t pass the Howey Test and provide the users with a product or services. In utility tokens:
- Users will have rights to access the network
- Users will have rights to vote with the network
While on the other hand, Security Tokens are the compliant tokens that pass the Howey Test. A Howey Test is the one which passes the following conditions:
- Is the token investment of money?
- Is there any expectation of the profit from the promoters?
A token that satisfies these couple of queries will be termed as Security Tokens in the industry.
How does ICO crowdsale work?
In order to raise funds for the projects, the developer issues a limited set of tokens which can either be a security or a utility. Initially, it is important to sell the ICO token at a limited price. As the demand rises and the supply of the token is limited, it can be seen that the value of that particular token will go up.
Once the startups have a motto of raising the funds, they would draft their ideas and release them in the name of ICO Whitepaper. With an attractive Whitepaper, there are great ways that more investors would approach and buy ICO tokens.
The interested investors start investing in the developed tokens either with fiat currencies or popular cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc. Once, the startup has raised the desired funds for the project, they would end their ICO campaigns. While on the other hand, the investors will still gain profits with the uprise in the ICO Tokens.
Advantages of ICO
- The benefits of launching an ICO are obvious. One of the great advantages of Initial Coin Offerings is transparent and open to the public. Therefore, anyone from the cryptocurrency market can participate in ICOs and transfer funds.
- Since it is a decentralized manner, investors from various parts of the world can get started with participating in ICOs. This, in turn, provides an opportunity for a wide range of projects.
- Moreover, it is a well-known fact that the modern cryptocurrency market is evolving constantly. Thus, there is a great chance that bought currencies will be used to make popular payments in the crypto industry.
- A common thing which most of the people are looking for is the liquidity factor in the new investment projects. With ICOs, investors & secondary market will have an ample amount of liquidity.
Being so good, why ICOs aren’t popular yet?
Despite remaining to be a popular fundraising strategy for the business, ICOs have encountered a few challenges. Unlike Security Tokens, these utility tokens don’t have any regulatory constraints. Thus, the regulatory authorities have argued that there are chances that ICOs may be selling unregulated securities to the enterprises.
In July 2017, SEC published a report saying: “They can be applied to offers, sales, and commercialization of interests in virtual organizations.” With this, most of the investors gained hope with ICOs.
Without this, Initial Coin Offerings would be considered with doubtful interests from the investor’s view.
How to rate an ICO?
An ICO can be found reliable if it has valid answers the following set of queries from William Mougayar:
- Is the built ICO token tied to product usage? Does it has user access or provide user interaction rights to the product?
- Do these tokens grant any access such as Voting rights or any other decision-making factors?
- Does the token grant any ownership of the sorts?
- Can users create a new product or service with the token?
- Can the created token be used to pay for some services?
- Does the token bring in any real connection with the users?
- Is buying something a part of the business model?
- Is selling something a part of the business model?
- Are the tokens required to be taken as a security deposit for the blockchain’s operation?
- Is the token required to join any network or any other related entity?
What to look for in the future with ICOs?
Initial Coin Offerings has been a hot talk of the town from the past couple of years. We can believe that ICOs will still through some light on the upcoming fundraising projects. It will be interesting to see how future ICOs will eventuate in the upcoming years. There are chances that regulations to be imposed on ICOs. However, the future will have something interesting for us!