What Is An ICO?
An ICO, or “Initial Coin Offering,” uses cryptocurrency to raise capital for new ventures and projects. Each ICO features its own unique, project-specific crypto token, often referred to as an “ICO coin” or “ICO cryptocurrency,” which becomes available for public purchase when the ICO begins. When individuals buy ICO coins, they are functionally investing in the project. The idea behind an ICO is to get a high number of people to participate, raising as much capital as possible by distributing the tokens through blockchain technology among a wide variety of supporters.
ICOs are similar to crowdfunding in that they use digital networks to aggregate financial support from multiple funders. But ICOs have several features that do not apply to traditional crowdfunding platforms. For example, the asset acquired by a participant’s investment (i.e., the ICO coin) can appreciate in value. Indeed, this is a primary incentive for purchasing ICO coins. Beyond that, ICOs present a variety of new legal, ethical, and safety considerations. The concept of using blockchain technology to facilitate early-stage project funding has no functional precedent. Therefore, practices around policy, regulation, and security are still very much under debate.
Despite the sheer novelty of the concept, ICOs have been remarkably successful. In the last year alone, they have already raised over one billion USD in capital. While some blockchain-savvy technologists and financiers may have been aware of coin offerings before recently, in 2017, they have begun to seize attention beyond this niche audience. As interest in ICOs continues to increase, they are proving to be an excellent method to raise funds for forward-thinking projects.
- 1 Why Would Anyone Fund Or Invest In An ICO?
- 2 How Impactful Are ICOs, Really?
- 3 Security, Regulation, and Related Concerns
- 4 How Are ICO Coins Bought, Stored, And Sold?
Why Would Anyone Fund Or Invest In An ICO?
ICO coins represent financial value, although the specific types of assets they can represent vary widely. A major benefit of ICOs is that their developers have a great deal of freedom to determine the exchange rate and functionality of coins. For example, a mobile app company might develop ICO coins that can be used to make in-app purchases once a new tool is launched. At the time it is released, those who participated in the ICO will already have currency to spend in the application. This currency can gain in value over time, in which case participants may wish to sell their coins to other app users, or simply enjoy the benefits of having more money to spend than that which they initially spent. Depending on the stipulation of the ICO, coins might also be traded for other crypto-tokens, like Bitcoin or Ethereum.
ICO funding can be thought of as paying in advance for a tool or service that is still in beta, with the potential to capitalize on the risk inherent to any new project. Because there is always the possibility that a project will fall short of expectations, potential ICO investors are encouraged to learn as much as they can about an initiative before they fund it. Luckily, there are many ways to do this. In the case of virtually all ICOs, developers provide a white paper at launch time, so that potential investors can review technical specifics before spending their money. ICO developers also frequently build investor trust by posting their code on an open platform like Github.
This reflects a larger dynamic of ICOs, which is that they are almost exclusively used by technology initiatives — and mostly blockchain-based projects, at that. But this may change. For obvious reasons, ICO offerings have so far been embraced by the community that already believes in the power of digital currency. However, as the concept gains traction worldwide, a growing number of non-blockchain and even non-technology sector projects may become interested in how ICOs can help them.
How Impactful Are ICO Crowdsales, Really?
Past ICOs have demonstrated a promising margin of success, although they have not been without their drawbacks. The largest issue with ICOs has been security breaches. Luckily, technologists have learned quickly from past oversights. The most noteworthy security breach was the attack on the DAO, which served as a case study in the complexities of running an ICO.
Despite their attractiveness to hackers and the notoriety of the DAO hack, the success rate of coin offerings has grown significantly over time. Ethereum was one of the first notable projects to be funded by an ICO, raising eighteen million dollars in forty-two days. Ether, the Ethereum crypto-token, has since gone on to be the second most popular cryptocurrency in the world. Following their launch, a number of successful blockchain initiatives, including many ICOs, have been built on the Ethereum platform.
Other ventures, including The Golem Project — a tool for harnessing idle computer power — and Aragon — a blockchain platform that supports autonomous, decentralized businesses — were able to amplify their success with coin offerings. Golem’s token sale raised over eight million dollars in under ten minutes; meanwhile, Aragon raised twenty-five million dollars in twenty-six minutes
The current success rate of ICOs is just as encouraging. The August 2017 token sale for Filecoin, a tool that rewards participants for hosting files with the Ethereum-based Filecoin token, raised two hundred million dollars in an hour. There is a wide variety of resources to investigate recent, current, and upcoming ICOs, such as ico-list.com and icoalert.com. These demonstrate that the trend toward ICOs is spreading at a very promising rate.
Security, Regulation, and Related Concerns
With so much excitement around ICOs, the fact that there are few established conventions for their governmental oversight and general security needs to be addressed. As mentioned, the biggest concern is hacking: since they often hold a high amount capital, bad actors have been interested in ICO crowdsales from the very start. The DAO hack was not the only ICO offering to be hijacked, and every instance of a security breach has led to scrutiny and debate among coin holders and the digital currency community in general.
The best anti-hacking strategy is strong defense. One good thing to implement at the beginning is a login system for every investor which should feature both email authentication and google authentication. Establishing multiple authentication methods, disperses risk. To access an investor’s funds, a hacker would have to hack both his Email Account and his Google Authenticator App on his smartphone. Another must-have security feature for any ICO is a script (usually a smart contract) that generates multiple address from one funding address. A single ICO funding address provides one centralized point of attack. Attacking and changing that address enables hackers to route any incoming funds away from their intended destination. Creating different addresses for every investor spreads minimizes that risk because a hacker needs to secure multiple addresses to acquire a large amount of funds.
Unfortunately, it’s possible to hold an ICO as a scam: proprietors collect the money raised with crowdsales and never return it. The company owners may claim that their ICO was drained through a hack, or simply vanish after they’ve received a certain amount of money. The best way to protect yourself against fraudulent ICOs is to conduct research on the holder, checking to see if the company is registered and if there is proper identifying information. Crucially, the ICO holders should implement KYC (know your customer) verifications, proving that they are committed to complying with anti-fraud laws. The legal and regulatory status of ICOs is another complex issue. The fact that ICOs are unregulated by state and national governments is frequently noted as both a concern and potential benefit. So far, ICOs have been conducted without government intervention. However, networks that support Bitcoin and other cryptocurrency exchanges have not been without legal attention entirely. In a handful of instances, they have come under scrutiny for their capacity to facilitate money laundering and the sale of illegal goods and services. This was the case of the Silk Road, which used the built-in anonymity of Bitcoin to protect the identity of its users.
Thus far, the capital generated from ICO crowdsales is not subject to the same taxation laws as traditional investments, including those made during an IPO. Because they are inherently transnational, the policy that governs ICO taxation will be difficult to develop. Nevertheless, it is very possible that they will be more heavily regulated in coming years. In the United States, policy advocates such as the Chamber For Digital Commerce have been working with government officials to discuss how this might unfold. Meanwhile, in terms of ensuring the utmost diligence in terms of how ICO coins are used, the owners of an ICO are urged to follow KYC processes. Blockchain, Bitcoin and all ventures that depend on them have a vested interest in establishing themselves as reputable and ethical systems. If blockchain developers and company owners strictly abide by the law, they will be supporting a future in which this technology can do the most good.
How Are ICO Coins Bought, Stored, And Sold?
The first step to buy ICO coins is to first purchase Bitcoin or Ether. Future ICOs may accept traditional currency, but the norm has been to exchange these popular digital currencies for ICO coins. Although BTC is more widespread, ETH is commonly accepted by ICOs, in part because many ICOs run on the Ethereum platform.
The next step is to make sure your digital currency assets are held in a wallet that you entirely own and control. Many popular digital currency wallets, such as the Coinbase wallet, do not offer users private keys. Therefore, if you invest in an ICO from Coinbase, your ICO tokens will flow into the entire Coinbase system as opposed to your personal storage. Wallets that offer private keys include Parity and My Ether Wallet (for ETH) and the blockchain.info wallet (for BTC). At this step, it is essential to make sure you do not lose your key information, as it’s necessary to gain access to your ICO coins after you’ve purchased them. Losing key information could mean losing all of your investment money. Thankfully, ICO service providers can provide key loss prevention tools. At draglet, for example, we always implement an account recovery system that allows anybody to access their tokens even after losing their password.
When you find an ICO that you wish to participate in, you invest by sending cryptographic information associated with your digital currency to an address posted by the ICO. The ICO holders receive BTC or ETH at this address, typically publicizing the amount of capital they earn on their website. It is common to incrementally raise the price of an ICO coin as more money is earned, and displaying earnings can help rapidly accelerate interest in the ICO.
Here, it is essential to make sure that the address to which you are sending your information is legitimate. Hackers can drain ICOs by establishing false addresses as the real ones for an ICO. It is also possible to automate your ICO investment with a smart contract. ICOs can operate very quickly, generating huge amounts of capital in minutes and potentially bottlenecking the system. Automating your investment may be wise if you are interested in acting rapidly — while the price of an ICO coin is still at its most affordable.
After you purchase ICO coins, it is advisable to use cold wallet (offline) storage to hold the cryptographic information necessary to cash in on tokens. This is one of the simplest and most effective ways to protect ICO coins and other digital currency assets.
The world of Initial Coin Offerings is deeply promising. At Skalex, we believe in their power to launch great ideas, and our expertise can yield a secure, highly successful crowdsale.