Initial Coin Offering
With the advent of blockchain, bright minds chase each other to open up virgin lands and strike on game-changing solutions. Yet, even the most brilliant idea isn’t worth much, unless you are able to make it stick. And while the days of solitary geniuses are long gone, it usually takes a hot team for a venture to make it to the top – the bills of such a team, just like time and tide, waiting for no man. You need to pay them here and now. How to raise the money? You can try and borrow it from a bank or launch a Kickstarter campaign, but cryptocommunity came up with a much easier and prompter kind of crowdfunding – Initial Coin Offering, or ICO.
What is it
ICO is an event that typically lasts for a week or more when everyone can buy newly issued tokens of a blockchain-based startup in exchange for fiats like USD or established cryptocurrencies like Bitcoin or Ether. It’s akin to Initial Public Offering (IPO), but the important difference is that investing in an ICO doesn’t give you any shares in the company. You’re just gambling that the currently worthless tokens you’re buying now will rise in value later and make you money.
How does it work
Startups opting for an ICO usually do the following.
- Write a white paper to explain the project’s idea and convince potential backers it is worth their money.
- Create a website to announce timelines, sum to be raised, the number of tokens to be issued and conditions they are offered on. Here, Ethereum platform comes in extremely handy, since their ERC20 Token Standard makes it far easier to put all the technical details into a smart contract form.
- Launch a marketing campaign to draw as much attention to the project as possible.
- Start the token sale. Sometimes, though, the step is preceded by a so-called Pre-ICO when the project contacts big investors privately and offers them to invest on favourable terms. Telegram, for instance, received $850 million in the first presale of its Telegram Open Network (TON) tokens and is reportedly trying to raise even more money in a second round to surpass the astronomical mark of $ 1.5 billion.
Pros & Cons
Right now ICOs are like the Wild West – there’s gold in the hills and little law to speak of. Even in China, where ICOs are officially banned, it doesn’t stop anyone from working and making money on them. This lack of limits and regulations can both play into your hands and lead to getting outfoxed.
Useless Ethereum Token (UET) is a case in point. A dude spent a week studying smart contracts, then copied a code from Stack Overflow and launched his ICO. In the project description, he frankly confessed that he is simply raising money for himself and UET tokens do not have any value – which did not prevent him from getting a hefty sum of about $100 000. Apparently, the backers appreciated his honesty.
On the other hand, there are dozens of really cool startups that have already proven they are no slouch.
The Brave browser team, for example, raised $36 million in 25 seconds selling their Basic Attention tokens (BAT) via Ethereum-powered ICO in May 2017. By the end of 2017, the browser had over 1 million monthly active users, and, at the time of writing, the BATs are doing very well on cryptocurrency exchanges.
FirstBlood raised $5.5 million in 10 minutes and developed an eSports platform that allows players to compete in online games and win rewards.
Melonport, a Swiss project that raised $2.9 million, came up with Melon protocol, an open-source tool for asset management, enabling participants to set up, manage and invest in digital asset management strategies in an open, competitive and decentralized manner.
Filecoin, with its record-breaking $257 ICO, works to present users a novel decentralized storage solution, allowing anyone worldwide to participate as storage providers.