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The TGE model generates positive network effects that can vitalize and strengthen the application that requires numerous users (or operational nodes). The platforms decentralized applications will feature significant network effects wherein the user experience for each user improves upon the inclusion of additional users. The process will generate a large user base that will sustain the operation, security, and vitality of the decentralized network.
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Valtteri is founder of ICOtokennews.com and Digital Assets Ou that is doing online marketing consulting for ICOs. Before entering the crypto space Valtteri has been managing online marketing agency for years and has a strong skill set it all kind of aspects in online marketing and business consulting.
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What is an ICO
Complete Beginner’s Guide to the ICOs: What You Need to Know
If you are a newbie to the world of cryptocurrency, the term, ICO, may be strange to you. Even if you are not a newbie, you probably have little or no knowledge of ICO. In either case, this piece is written to demystify the concept of ICO and highlight the benefits of the concept.
For a start, ICO simply means Initial Coin Offering. This is a convenient fundraising technique for a new project, business, or cryptocurrency venture. Otherwise known as Initial Public Coin Offering, it is an unregulated means of crowdfunding through the use of a cryptocurrency.
During the implementation of an ICO, a company or a new venture can easily raise funds for the continuation of a project or the launching of a new one by selling tokens of a cryptocurrency. During an ICO, a small percentage of a newly-issued cryptocurrency will be sold to potential cryptocurrency investors in exchange for money or any other legal tender.
Many companies are leveraging the opportunity offered by an ICO for fundraising due to its appealing attributes. ICOs provide easier fundraising techniques and are unregulated as well. They are also free of the constraints that are the trademark of capitalists and banks.
Another important feature of ICOs is their time cap. They are designed to last for a couple of days or weeks. Many companies have completed their ICO in a matter of minutes or hours whereas others have taken a couple of weeks to. On rare occasions, you will see some companies drag out their ICO over a period spanning a month or so.
Take note of this if you are passionate about investing in an ICO: you should stay clear of ICOs that drag on for weeks or months. That’s a red flag and a signal that something is wrong with the ICO. ICOs are designed to raise funds for a specific project or purpose and should have a deadline.
In an ideal situation, if there is a need for a huge amount of money, the company may decide to do the fundraising in stages, with each stage having a well-defined target that is strictly kept to. When an ICO is purported to be used for raising hundreds of millions or billions of dollars at once, it could be a signal that the investors are setting themselves up for scamming. Don’t make yourself a sitting duck and become the unsuspecting victim of a cyber scam.
Nevertheless, there are a few exceptions. You must take the time to conduct due diligence and distinguish between a scammer and a legit ICO operator. Since ICOs are not regulated by a credible body like the Securities Exchange Commission (SEC), any funds lost during an ICO may be gone for life without any chances of recovery.
There are some practical tips that can help you confirm that there is a legit company behind an ICO. Such a company is expected to set up a website where its whitepaper is made available to the public, and especially, potential investors.
This whitepaper should contain some valuable information that will make the ICO legit. This includes the purpose of the project, the duration of the fundraising, the amount to be raised, and the number of tokens to be sold in exchange for the legal tender.
Other information includes the cost of each of the tokens, what will be used in exchange for the token – a cryptocurrency or fiat money – and the team behind the planned project.
During the ICO campaign, both the supporters of the initiative and the enthusiasts will purchase some of the available digital coins with virtual or fiat currency. These currencies are known as tokens. They are similar to the shares of a company that are sold in an Initial Public Offering transaction to willing investors.
During the campaign, the ability of the ICO to raise the projected funds or not determines the success of the ICO campaign. If the projected funds are raised within the allotted time, the campaign is deemed successful and the money generated will be used for financing the project that necessitated the fundraising. If, the ICO is considered a failure, the backers are refunded their money.
If you set some time aside to look into this critically, you will see some signals that will indicate whether you should proceed with your investment or stay clear of such a project.
If you want to increase your chances of making the right decision, it is imperative that you know some important facts about ICOs. This will include what an ICO is, how it works, the difference between an IPO and an ICO, and other related points.
Top interesting facts about ICOs
1. The first ICO
Mastercoin was the first to launch an ICO. It was the first of its kind for raising funds for a cryptocurrency project. This meta-protocol was situated on top of the widely known and accepted Bitcoin blockchain. It was built from Bitcoin and was used extensively for building a new layer of currency and comes with its own new rules. Nevertheless, its foundation remained unchanged. Its position on the Bitcoin blockchain gave it some additional features that are alien to the Bitcoin base.
In 2013, the project raised a total of 5,000 Bitcoins (that was the equivalent at the time of the fundraising) after it was launched on Bitcoin forums that year. Mastercoin was later changed to Omni.
2. The most profitable ICO for investors
ICOs have proved to be valuable fundraising tools for investors since the concept was brought into the limelight in 2013. In that year, an NXT project was funded by an ICO that was conducted on Bitcointalk forums. Within a short period of time, the startup used the ICO to raise a whopping 21 Bitcoin, which was about $6,000 back then.
The cryptocurrency created by NXT for the ICO process was coded from scratch without depending on the fork of the existing Bitcoin code. It was the first implementation of the proof-of-stake system by project developers.
Investors in the project found it to be profitable. It was a successful investment for investors as the market capitalization of the project eventually reached over $100 million.
ICOs have gained an immense popularity among investors due to the ease with which they can be used for fundraising. So far this year, investors have used ICOs to raise over $1.8 billion while a recent ICO by Brave Internet Browser outperformed the others by raising over $35 million in less than 30 seconds. At this rate, it will turn into a major fundraising technique of the future, especially considering the strict rules that are associated with taking loans from banks and others.
3. ICO vs. IPO
Initial Coin Offerings (ICO) and Initial Public Offerings (IPO) share some similarities Both of them are used for raising money for the company behind the project. In ICOs, a stake of the company or startup is sold to the general public to raise money for the maintenance of the company or its entire operations. IPO on the other hand, deals primarily with investors who are promised some financial rewards for their investments. That’s why ICOs are considered as crowd sales.
Another difference is in the area of regulation. While ICOs are known for not being regulated, the same cannot be said about IPOs. They are regulated by credible bodies such as the Securities Exchange Commissions and other relevant bodies. In most cases, ICOs are launched and conducted by relatively unknown teams without any proof of a previous success in that field although a couple of them have enviable track records. This gives IPOs more credibility than ICOs.
There is also a stark difference in their lifespan. While ICOs are known for their short lifespan, IPOs are long-term fundraising programs. Most IPOs last for years while some ICOs have been found to last for a few weeks or months at most.
4. Who creates ICOs?
ICOs are the handiwork of start-up businesses. They use them as a convenient means of raising capital to finance a project or complete an existing one without going through the stressful loan-taking process with traditional institutions such as banks and loan-lending companies. By resorting to the use of an ICO, they are able to bypass the rigors associated with regulated lending channels.
These companies find it extremely easy to create an ICO. They only need to create an effective whitepaper that details what the project is all about. It also contains other valuable information that will help a potential investor understand what the project is and why the investor should purchase a token.
Both the internal and external distribution of ownership is also explained fully in the whitepaper to prevent any ambiguity. Ownership is shared via either virtual tokens or cryptocoins.
5. Token supply
The values of ICOs are usually pre-designated and are maintained throughout the duration of the campaign. This is because the company already has a targeted amount for the project they need to fund. Once the company fixes a specific amount, it cannot be altered.
Companies involved in ICO campaigns distribute coins according to their projected supply. In a dynamic ICO, the projected financial goal determines both the price and the token supply. On the other hand, both the price and quantity of the token are determined before the launch and remain the same throughout the duration of the launch.
6. Crowdfunding vs. ICO
Some people entertain the misconception that an ICO is crowdfunding. The fact is that crowdfunding and ICO are not the same. While crowdfunding leverages the Internet to connect entrepreneurs with potential investors via social media and other avenues for the purpose of supporting their businesses through their contributions, ICO takes a different approach to fundraising.
In most cases, crowdfunding is strictly done as making donations to a project while ICO supporters derive their motivation from the potential of the project to become successful in the future and thus reap a high return on their investment.
Despite the success of crowdfunding, the US government is putting some regulations in place to restrict how much a potential investor can invest in crowdfunding. The regulation also covers who is qualified to participate in crowdfunding and who is not. This is because the US government considers the interest of the investors to be of paramount importance and underscores an important point: participants in IPOs are taking a huge risk.
Nevertheless, crowdfunding has been successful too. In 2013, an estimated $1 billion was raised through this method. A year later, the figure rose astronomically to $16 billion. The figure for 2015 more than doubled the 2014 figure as it reached an unprecedented value of $34 billion. According to experts, the figure is expected to grow to an impressive $300 billion by 2025 as the figure keeps rising year in, year out.
7. Dangers inherent in ICOs
An ICO is not completely risk-free either. The model has repeatedly attracted scammers who specialize in luring gullible investors into campaigns that are destined for failure from the beginning. Investors in such sham ICO campaigns have zero chances of getting any returns on their investment and should bid goodbye to his or her money.
Some ICOs also place restrictions on people from other countries participating in the campaign. People from the United States are specifically the target of such restrictions. This is because these investors want to prevent themselves from being the target of US law enforcement agencies in case of an unfortunate outcome from their illegal ICO campaign.
Another inherent danger in ICO is the volatility it shares with cryptocurrencies in general. Any fluctuation in the prices of tokens and cryptocurrencies will definitely have an impact on the performance of an ICO.
ICOs have also been affected by regulations from governments that are concerned about the impact of ICOs on the world’s economy. A typical case is the ban placed on ICOs by the Chinese government recently. The ban is probably out of concern for investors due to the increasing number of fraudulent practices in the cryptocurrency world as well as its ability to disrupt the economy of any country where cryptocurrencies are accepted as a means of exchange.
It is safe to conclude that taking part in ICOs is risky. It shares this characteristic with other profitable businesses. If you want to invest in an ICO, understand that you are taking a huge risk. You can’t recover your investment in the case of an unfortunate incident. The US financial regulator has repeatedly sounded this warning to all Americans who intend investing in ICOs.
I have to repeat this: not all ICOs are fraudulent. Many ICOs have been successfully executed without fraudulent issues. A good number of them have been transparently executed to the delight of the investors. In fact, many people have experienced a positive change in their financial status through their investment in ICOs and other cryptocurrencies.
In a nutshell, while ICOs have some degree of risk attached to them, that has not prevented the successful ones from having a positive impact on both the company and the investors. Many people have turned their attention to investing in ICOs because of their conviction that if it could work for some people, they see no reason why it won’t work for them too.
For the umpteenth time, potential investors are encouraged to do their due diligence before making the move.
8. The most tragic ICO
The DAO was supposed to be the first decentralized venture fund. It was based on Ether and a lot of potential investors were strongly convinced that it would succeed. DAO launched its ICO in 2016 and raised over $150 million through the ICO campaign.
However, the smart contract behind the DAO had a small bug that was later exploited by a hacker who eventually made off with $50 million. Both the fundraisers of the ICO and the investors were devastated by the news. To rectify the situation, the founders were forced to resort to the use of the Ethereum hard fork to freeze all the existing DAO tokens. This helped them to eventually reverse the theft so that they could move to another smart contract. Through the newly-created address, all the token holders were paid their shares back.
These are some of the fundamental and informative facts about ICOs. However, there are still some related concepts that you must know to fully understand the concept of ICO.
What is cryptocurrency?
A cryptocurrency is a digital currency that is equally used as a means of exchange in some countries around the world. It is a secure, anonymous, and decentralized digital currency that performs a similar function as the traditional currencies such as the dollar, pound, and the like. However, cryptocurrencies are not in physical form like the aforementioned currencies, they are in digital form.
Cryptocurrencies are built on the principle of cryptography. This is a process that has been used for years for the conversion of intelligible information into a difficult-to-crack code. It is also used for tracking transfers and purchases.
The developers of cryptography never had the concept of digital currency in mind. It was first experimented with during World War I when there was an increase in the need for an effective and secure means of communication. The soldiers used it extensively for that purpose.
The success achieved as a secured means of communication led to its current use in alliance with computer science and mathematical theory providing a secure communication. It is also used for online financial transactions and information.
Unlike traditional currencies that are controlled by a central authority, such as the central bank, cryptocurrencies are a different entity entirely. They are built on the principle of decentralized technology. This helps the users to ensure the security of their financial transactions in addition to securing their stored money. They do this without hiring the services of a bank or other financial institutions.
They are also driven by blockchain technology. This is a digital ledger where all transactions are securely saved. The content of a blockchain is permanently saved without the possibility of a stakeholder altering it. As a result, any transaction that is stored on blockchain technology is secure. This is one of the numerous factors behind the global recognition of cryptocurrencies as a secure means of exchange in recent years.
This brings up another issue: blockchain. What’s this about?
What is a blockchain?
A blockchain is a digitized, decentralized, public record with all cryptocurrency transactions carefully and safely stored. Although blockchain was originally developed to handle Bitcoin transactions, over time it has extended to all cryptocurrencies.
It uses distributed ledger technology for recording all cryptocurrency transactions. Whatever transaction is recorded in this digital database is permanently stored and cannot be altered, deleted, or tampered with in any way. This assigns some degree of credibility to the record and makes its content reliable as can be attested to by all the stakeholders in the blockchain. Whenever a blockchain is completed, another one is created to take over.
What are altcoins?
Altcoin is a derivative of two different words: alternative and coin. As such, altcoin refers to alternative coins. These are other digital currencies that are created following the success of Bitcoin in the cryptocurrency world. In other words, they are alternatives to Bitcoin, the world’s first decentralized digital coin.
There are currently over a thousand different alternatives to Bitcoin. These currencies promise to address a fault in Bitcoin or offer a different service entirely. While writing this piece, there are over 1,200 altcoins in circulation. They are listed on many exchange sites for potential investors. That is not all. New altcoins are created and launched almost on a daily basis.
Despite the failure of some coins to live up to their billings as alternatives to Bitcoin, some have performed beyond expectation and are still in existence today. Some coins like Ripple, Ethereum, Litecoin, Dash, and the like belong to this group of coins.
Investors still try their luck with these coins and are richly rewarded for it.
What is a Decentralized Autonomous Organization (DAO)?
This is another important concept in cryptocurrency. A Decentralized Autonomous Organization (DAO) refers to an organization that is operated by a set of rules that are referred to as smart contracts. The set of rules guiding smart contracts and the financial transactions that are carried out on it are stored on a blockchain. Some popular DAOs include Digix.io, the DAO, and Dash governance.
After a DAO has been successfully deployed to the Ethereum blockchain, changing it is extremely difficult. The smart contract behind it cannot easily be changed either. This makes it nearly impossible for a single person to alter the content of the blockchain. The rules are also unable to be changed.
While this feature of DAO makes it very secure, it can also turn out to become its weakness. If a bug is detected in a DAO, developers cannot easily change the code to remove the bug. A good case study is the the DAO hack I mentioned above. Without resorting to the use of the fork, it would have been impossible to retrieve the stolen funds. That’s a big disadvantage.
Understanding decentralized applications
Decentralized applications (DApp) are software programs that are designed to be under the control of no entity. You can understand this better if you compare it with Bitcoin, which is another decentralized entity, a cryptocurrency.
Just like Bitcoin, decentralized applications are under the control of no central authority and also make use of the Ethereum blockchain technology for their operations.
Some notable companies that have leveraged the power of decentralized applications are:
This is the decentralized application behind a microblogging service. It runs on the Ethereum blockchain and allows users to tweet a message of a maximum of 160 characters.
This decentralized application has been used by this company to provide funds for small businesses in Africa, using digital currency. The project includes providing unsecured debt to small business owners of the continent.
WeiFund uses smart contract for its crowdfunding. The company takes advantage of the Ethereum ecosystem to provide crowdfunding utilities that are open to any user. The platform also goes out of its way to make sure that all the important aspects of the platform are decentralized.
Decentralized applications have these features:
- They are open source. Every member of the public can view its source code whenever they desire to do so.
- They have an incentive. They are designed with digital assets/crypto-tokens for self-fuelling.
- They are decentralized. They adopt a similar technology to blockchain technology. This technology also works like the cryptographic technology to ensure that decentralized applications are independent of any central authority.
- They have a protocol/algorithm. This helps them to generate tokens like others. They also possess a built-in consensus mechanism.
Those are the four features that decentralized applications employ. The implication is that these applications are powered by the tokens which they create with their protocol/algorithm.
Since it is an open source, stakeholders can see the code and make changes to it if necessary. It has the ability to speed up the process of product development in addition to making them scalable in terms of quantity and quality.
Decentralized applications are also built on blockchain technology. This serves as a ledger where transactions and records can be permanently stored. To update the content of a ledger, a token is needed.
What is a smart contract?
This is the driving force behind DAO and other Ethereum-based applications. It is a contract that self-executes whenever the terms of agreement between parties to an agreement have been met. Both the agreement and the code are both stored on a network of decentralized and distributed blockchain.
Smart contracts have an array of applications. It is possible for you to conduct a secure transaction with someone you’ve never met by taking full advantage of a smart contract. The smart contract will execute itself once both of you have met the conditions you define in your agreement. You can thus bypass central authority, any legal system, or any enforcement mechanism in the process.
Smart contracts are reputable for making transactions traceable, transparent, and permanent. They also eliminate the possibility of being defrauded since the smart contract acts according to the mutual agreement between the parties involved in the contract.
Therefore, you can exchange shares, property, money, or other assets transparently without the input of a middleman. Even in the case of a breach of agreement, a smart contract will execute its already defined penalties for the defaulter.
Smart contracts have been used in:
You can control your online identity with a smart contract. Smart contracts allow you to decide the type of personal and confidential information you are ready to disclose to the other party. It also protects people from identity theft and the dire consequences for the victim.
Capitalization table management can be simplified with smart contracts. Smart contracts also make it possible to easily make automatic payments of stock splits and dividends. In the process, operational risks are reduced.
Smart contracts have also been applied in mortgages. They make mortgage automation possible. This allows the parties involved to be automatically connected so that the process can be less error-prone and frictionless. Payment can also be automatically processed while liens can also be released from land records after the full payment of the loan.
By leveraging the power of the Internet of Things, smart contracts can easily monitor the movement of a product from the production factory floor to the storage room. This makes inventory tracking easy so that supply chain insurance, financing, and risk can be handled properly. The verification and tracking reduce the vulnerability of a supply chain to fraud and theft.
The car insurance process is filled with discrepancies. Smart contracts can be deployed to effectively improve the sector and make the process less stressful and error-free. A smart contract has the potential to keep details of the the driving record, policy, and driver’s previous accident reports so that a car equipped with the Internet of Things can self-execute and make claims soon after an accident.
This is because smart contracts have been used to automate the verification, processing, and payment. Each of the policyholder’s records will include his or her vehicle history, driving record, as well as accident reports. This eliminates duplicated recording, for the best result.
This is not the complete list of all the areas of application of smart contracts. With each passing day, developers keep finding more areas of application for smart contracts. The goal is to fully utilize its potential and see what the future holds in the world of smart contracts and ICOs.
Why should you invest in an ICO?
It is true that there are potential scammers who want to bank on the popularity of ICOs to defraud unwary investors. This does not classify all organizers of ICOs as a bunch of scammers. There are still some honest ones out there. In reality, I’m yet to see a business that is 100% risk-free. They are all risky, though with varying degrees of risk.
Why, then, should you consider investing in an ICO despite its risks? Well, as I pointed out, no business is risk-free. An ICO has its own share of risks just like every other business ideas.
On the other hand, ICO offers these awesome benefits to its investors:
- It has no central authority due to its decentralization. So, nobody can singlehandedly determine the fate of the investors.
- You will find it easy to invest in an ICO since it is not heavily regulated like others, such as IPOs. You can therefore conveniently avoid the bottlenecks that are common with venture capitalists and banks.
- They are also affordable. ICO tokens are not sold at exorbitant prices. No, they are offered to investors at cheap prices. This allows investors to make a profit on them after selling the tokens at a higher price later.
- Participating in an ICO is also easy. You don’t need special skills or need to be a financial expert before you can take advantage of an ICO to invest in cryptocurrency. You only need to understand the concept before you participate in it. The good news is that information about ICOs is abundant on the Internet. You can also find tutorial videos on the subject too.
- It is a financially rewarding investment. Many cryptocurrencies have turned millions of people into millionaires since the creation of Bitcoin in 2009. This is the right time for you to make a move and invest in your future by investing in ICO. If you missed the party in 2009, this is your second chance that you shouldn’t miss for any reason.
You stand to gain these benefits and much more if you make the move and invest in an ICO, no matter how little your investment is.
A good number of start-ups have successfully used ICOs to raise funds for their projects.
This is a short list of some of the ICOs that have successfully done that:
This is arguably the most successful ICO in history. On August 10, 2017, Filecoin launched its ICO. The ICO had raised over $250 million by the end of the ICO.
Tezos launched its ICO in July 2017. At the end of the ICO, the company had successfully raised $232 million worth of Ethereum and Bitcoin (in just 13 days). It is considered to be the second most successful ICO, after Filecoin.
EOS also held a successful ICO. In July 2017, the company raised $185 million via its ICO. EOS is the third most successful ICO after Filecoin and Tezos.
Bancor also conducted its own ICO in June 2017. The company raised $153 worth of Ether after 3 hours of selling its tokens. That’s how successful the ICO was.
Status also has a place among the most successful ICOs. This company ran its successful ICO in June 2017. Through this ICO, Status broke the $100 million mark by raking in about $108 million.
Ethereum itself took advantage of its ICO to raise $18 million in 42 days. This makes it one of the successful companies that were able to earn their needed funds after launching their ICOs.
When Vitalik Buterin, a programmer and cryptocurrency researcher for Bitcoin proposed the idea of Ethereum as an altcoin in 2013, only a handful of people expected the digital currency to achieve so much within such a short period of time.
Ethereum has exceeded all expectations with its smart contracts and ICOs. Billions of dollars have been raised to finance existing projects or launch new ones. Millions of people have also been richly rewarded for taking the risk of investing in ICOs.
For as long as Ethereum exists, ICOs, and smart contracts will continue to exist too. This implies that the future is bright for ICO investors and other users of smart contracts. Ethereum is obviously the coin for the future.
Although digital currency, in general, and ICOs, in particular, have some bad elements, the high return on investment (ROI) offered by ICOs is worth investing in. If you start investing today, it is a decision that will pay you great dividends in the long run.
As a reminder, we will do due diligence for you before you make any investment decision. That will spare you the stress of having to deal with scammers or losing your hard-earned money to cyber criminals.
ICOs with proven business models and strong teams behind them are the ones that we will recommend for you.