What is an ICO and How Does it works?

What is an ICO

If you are aware of cryptocurrency and Blockchain, you’ve probably heard of an Initial Coin Offering (ICO). Today, ICOs are an increasingly popular way of fundraising which has been attracting attention outside of the cryptocurrency community. It not only benefits the blockchain startups but also the early birds who invest in tokens at lower prices. Here’s your guide to understanding what an initial coin offering is, history of ICO world, and how does it work.

What is an ICO?

An Initial Coin Offering, or ICO, is a modern way of fundraising which has been used by new projects in which they sell their proprietary crypto tokens for Bitcoin and Ethereum, and the funds resulted from this sale are used to help the project develop. An ICO is similar in principle to an Initial Public Offering (IPO) in which the shares of a company are made available for purchase to public investors.

Brief History of ICO

The first-ever ICO was hosted by Ripple which took place in early 2013. A company behind Ripple or XRP – Ripple Labs has developed a payment system and made approximately 100 billion XRP tokens which were then sold to investors in order to fund their platform. 

The first ICO token sale was held by Mastercoin in July 2013. In 2014, Ethereum raised funds with a token sale, raising 3,700 BTC in its first 12 hours, equal to approximately $2.3 million at the time. Since then, ICO token sale became very popular in 2017, several other cryptocurrencies have then been funded with ICO.

At the start of October 2017, ICO coin sale worth $2.3 billion had been conducted during the year. Ten times more than it was in all of 2016. By the end of 2017, ICOs had raised almost 40 times as much capital as they had raised in 2016, although still amounting to less than two percent of the capital raised by IPOs.

How does an ICO work?

For every successful ICO project, there are few basic processes that should be accomplished to achieve the milestone. 

  1. Announcing Project/Marketing.

Once a company decides to launch an ICO, they have to announce the project and raise awareness via online marketing and promotions to hit their funding goals. There’s a lot of ways to do this, but the most common way is to run either free or paid (advertising) promotions on major ICO’s listing websites.

  1. Releasing the White Paper.

Another key feature of ICOs is the white paper. The team behind an ICO project prepares a white paper to describe details about their project. There might not be a standardized format for the white paper, but every ICO needs one.

  1. Creating the Tokens.

Once the white paper is released, and there’s a lot of interest in the project then the team has to create the ICO tokens. This is done by writing up the ICO smart contract, which will distribute the ICO tokens at a set exchange rate.

For example, an ICO might issue 1,000 of its tokens for every ETH that it receives. Some ICOs also include bonuses for early investors or people who otherwise show heightened interest in the project.

  1. Token Sale.

Once marketing has been done, the white paper has been written, and the tokens have been created, it’s time for the actual token sale. 

Usually, promotions will be ramped up, even more, leading up to the token sale so that the project can make sure it meets its funding goals.

  1. Crowdfunding.

ICOs are used to raise funds, with almost all of this being done via online crowdfunding. These basically allow investors from around the globe to check out new ICO projects, invest and purchase tokens online.

Pros and Cons of ICOs

Pros

  • Gives opportunities to promising projects
  • Doesn’t require unnecessary paperwork
  • Community building
  • Exposure for projects
  • Early access to potentially valuable tokens
  • Incentive for innovation

Cons

  • Attracts a lot of scammers
  • Government intervention
Written by Amandeep Sonewane

Leave a comment