An initial coin offering, or ICO, is a way for teams to raise funds for projects in the cryptocurrency space . In an ICO, the team generates blockchain-based tokens that are sold to early backers. This is a crowdfunding stage – users receive tokens they can use (either immediately or in the future) and projects receive funds for development.
The practice became popular in 2014, when it was used to fund the development of Ethereum. Hundreds of businesses have since taken this approach (especially during the boom years of 2017), with varying degrees of success. While the name sounds similar to an initial public offering (IPO), the two financing methods are fundamentally different.
IPOs are generally for established businesses that sell fractional ownership shares of a company to raise capital. In contrast, ICO Development s are used as a fundraising mechanism, allowing companies to raise funds in the earliest stages of a project. When ICO investors buy tokens, they are not buying any ownership in the company.
For tech startups, ICOs can be a viable alternative to traditional financing. Oftentimes, new entrants have a hard time getting funding without an already functional product. In the blockchain space, established companies rarely invest in projects just because of a white paper. What’s more, the lack of cryptocurrency regulation is preventing many from considering blockchain startups.
This approach isn't just for newly established startups, though. Established businesses sometimes launch reverse ICOs that are very similar in function to regular ICOs. In this case, the business already owns the product or service and issues tokens to decentralize its ecosystem. Alternatively, they could hold an ICO to include a wider range of investors to raise funds for a new blockchain-based product.
ICO and IEO (Initial Exchange Offering)
There are many similarities between ICOs and initial exchange offerings . The key difference is that instead of being hosted by the ad hoc team alone, the IEO is hosted with the cryptocurrency exchange.
The exchange works with the team to allow its users to buy tokens directly on its platform. This benefits all parties involved. When a reputable exchange supports an IEO, users can expect that the project has been rigorously audited. The team behind the IEO benefits from the increased exposure, and the exchange will also be rewarded from the success of the project.
ICO and STO (Security Token Offering)
Security token offerings were once referred to as "new ICOs". From a technical point of view, they are the same - tokens are created and distributed in the same way. But when it comes to the law, the two are very different.
Due to some legal ambiguity, there is no consensus on how regulators should qualify ICOs (discussed in detail below). As a result, the industry has yet to see any meaningful regulation.
Some companies have decided to go the STO route, offering equity in the form of tokens. Also, it helps them avoid any uncertainty. Issuers register their products as securities with relevant government agencies, subjecting them to the same treatment as traditional securities.
How do ICOs work?
ICOs can take many forms. Occasionally, the hosting team will have a functional blockchain that will continue to be developed over the next few months and years. In this case, users can buy tokens, which are sent to their on-chain addresses.
Alternatively, the blockchain may not have been launched, at which point tokens will be issued on an established chain (like Ethereum). Once the new chain goes live, holders can exchange their tokens for new tokens issued on it.
However, the most common practice is to issue tokens on a chain with smart contract capabilities . Again, mostly done on Ethereum - many applications use the ERC-20 token development standard. While not all tokens originated from ICOs, it is estimated that there are more than 200,000 different Ethereum tokens.
Besides Ethereum, there are other chains that can be used - some common examples are Waves, NEO, NEM or Stellar. Given the flexibility of these agreements, many organizations have no plans to migrate, opting instead to build on existing ones. This approach allows them to leverage the network effects of an established ecosystem, giving developers access to tools that have been tried and tested.
ICOs are announced in advance and specify the rules for how they will be run. It may outline the time frame in which it will operate, impose a hard cap on the number of tokens sold, or a combination of the two. ICO developement company There may also be a whitelist where participants must register in advance.
The user then sends the funds to the specified address – in general, Bitcoin and Ethereum are accepted due to their popularity. The buyer can provide a new address to receive the tokens, or the tokens will be automatically sent to the payment address.
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