What is Initial Coin Offerings (ICO)?
Initial coin offerings or ICO is a financing mechanism that allows a project or company to raise capital in cryptomonads highly liquid, such as Bitcoin or Ethereum, and coins fiat, like the dollar or euro, through the massive sale of a new crypto asset.
It is a use case of crowdfunding, which is a method of financing a project or company by raising many small amounts of money from a large number of people, typically over the Internet. The term can be analogous to “massive sale” or crowd sale.
How an Initial Coin Offerings (ICO) Works?
- In an ICO, the project searching for money issues a certain amount of crypto assets or tokens on top of a previously existing blockchain platform, such as Bitcoin, Ethereum, or Waves.
- It delivers them to investors in exchange for cryptocurrencies or, in rare cases, fiat money such as the dollar or the euro.
- The entire operation carries out using smart contracts that are in charge of automating the token distribution process based on the ICO owner’s requirements.
- Thus, when the payment condition meets, the contract automatically assigns and sends corresponding tokens to the investor’s portfolio.
- The company or project receives cryptocurrencies, highly liquid, and in return, the investor gets crypto assets usable on the platform and exchangeable for others.
- These contracts are audited or developed by specialized companies ( Zepellin Solutions, for example).
- It used industry-level security standards and best practices to guarantee that the code works as expected, eliminating errors and enhancing security.
- The participation procedure can vary from including the participant’s previous registration.
- An estimate of his investment or merely taking him to the website to purchase the crypto active.
- The first ICOs, such as Mastercoin or Ethereum, consisted of a single-phase or period of execution.
- It offered a bonus to investors for their early participation, accessible to anyone.
- The most recent ICOs usually execute a first pre-ICO call, pre-sale or private placement in two phases.
- Its objective is to raise as much money as possible from private investors during this non-“public” period, offering them a discount or bonus.
- More significant than those who participate in the second phase of ICO are willing to risk giving a large amount of money to an immature project.
Characteristics of Initial Coin Offerings (ICO)
The main characteristics of ICOs as a source of financing for projects and startups are, among others:
- Using the Internet as an income of access to mass sales, any part of the world can invest with no limitations other than those established in the ICO.
- Investors can deal directly on the platform without the need for brokers or brokers as mediators at any time throughout the ICO.
3. Unlimited Investment
- Investors can make large or small acquisitions of the offered tokens, limited only by the ICO owners’ conditions.
- Large savers can even buy in the pre-ICO, thus safeguarding better discounts or promotions.
4. Little Regulation
- Another big difference between ICOs and IPOs is that there is little regulation globally. So the protection of the investing public is minimal or non-existent.
- The IPO regulation obliges the IPO promoters to initially and periodically disclose a set of relevant information about the business, its commercial operations, financial situation, operating results, risk factors, and management.
- The ICO is banned in China and Korea South and regulated in the United States as securities ( securities ).
Types of Initial Coin Offerings(ICO) Sale Models
Since the ICO of MasterCoin (today Omni Layer) in 2013, the first ICO in history raised $ 500,000 in BTC. Other different token sale mechanisms have emerged that seek to correct the deficiencies of the first models.
These mechanisms include limited selling, unlimited selling, little hybrid selling, reverse Dutch auction, Vickrey auction, proportional refunds, and many other tools.
Some of these mechanisms are labeled below, according to an analysis by Vitalik Buterin, creator of Ethereum.
1. ICO of Limited Sale ( Capped Sales )
- A fixed amount of tokens are sold at a secure price and, therefore, at a fixed valuation.
- This scheme uses the massive sales of crypto assets of MasterCoin, MaidSafe, WeTrust, and others, with different levels of success.
- We are using one or more cryptocurrencies as a form of payment. It generated economic losses for some of the investors due to exchange rate fluctuations between the payment currencies.
- During 2016 and early 2017, the preliminary sale design was the most popular.
- Limited sales have the propensity to be oversubscribed by interested parties, so there is a great incentive to enter first.
- It leads them to pay high transactional commissions to buy first, resulting in a high concentration of tokens in a few hands—many unfulfilled stakeholders and euphoric miners.
- Examples of this ICO perfect were First Blood, which high $ 5.5 million in 2 minutes, and BAT (Basic Attention Token), $ 35 million in 30 seconds.
2. ICO for Unlimited Sale (Uncapped Sales)
- In which as many tokens sell as investors wish to buy. Having no limit on coins’ issue gives members great uncertainty about their valuation and presents issuers as greedy.
- Many people are likely to want to pay $ 10,000 for a certain amount of ICO tokens. They knew for a fact that this amount represents 1% of all existing passes.
- But many of them would be wary if they bought an amount of, say, 5,000 tokens from the ICO, having no idea whether the total supply will be 50,000, 500,000, or 500 million.
3. A Good ICO Sale
From criticism of the sales models implemented so far, Vitalik comes up with a list of desired properties. An ICO should have to be fair, democratic, and economically efficient. Some natural properties include:
- If you contribute to an ICO, you must be sure about at least a cap on the valuation (or, in other words, a floor on the percentage of all tokens you are receiving).
Certainty of Participation
- If you are trying to participate in an ICO, you should be able to count on being able to do so.
Limit the Amount to Raise
- To avoid being perceived as avaricious (or possibly to mitigate the risk of regulatory attention).
- The sale must have a limit on the amount of money it intends to raise.
- No central banking: the issuer of the token for sale. It should not be able to end up with an unexpectedly large percentage of the tickets. It would give them control over the market.
- The sale must not generate substantial economic inefficiencies or irrecoverable losses.
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