Let’s talk about what the recent popular ICO is

ICOs (Initial Coin Offerings) are a popular way to invest in cryptocurrency projects. Typically, new cryptocurrency projects sell some of their platform tokens through ICOs, and early holders and enthusiasts of these tokens can one day exchange their tokens for money. ICOs are the best way for cryptocurrency project founders to raise funds for the operation of their platforms, and most ICOs raise funds in the form of Bitcoin or its altcoins.

ICOs are usually launched before the project is completed, and the funds raised are used for the development work of the founding team to help the project be released smoothly. For some large projects, part of the funds obtained in the ICO will be taken over by the foundation to support the continuous development of the project. ICO represents the initial distribution model of cryptocurrency tokens, which is more common in the PoS consensus algorithm.

ICO participants contribute to the success of the project. They can help spread the word, build a larger community, and let more people know about the new project. They can also provide early liquidity for the tokens while trading them. Of course, ICO participants are driven by potential profits, and they expect that the price of the tokens will be higher than the price during the ICO after the project is released.

Are ICOs the same as IPOs?

When compared to initial public offerings (IPOs) ^[1] , ICOs do have some similarities. Both raise funds by selling equity, and investors in both are motivated by the potential for profit and weigh the potential of the project against the risks.

But there are big differences between the two. ICOs are backed by early enthusiasts rather than professional investors. ICOs are similar to Kickstarter ^[2] , except that backers hold equity in the project. ICOs are unregulated and do not need to be registered with any government agency, so investors have little protection other than the rules of the project platform itself.

Most ICOs today are promoted as "software pre-sale tokens," like the closed beta of some new games. To avoid unnecessary legal issues, most ICOs use names such as "crowdsale" or "fundraising." Most ICOs also issue a disclaimer to inform participants in advance that this is not a securities sale. As for whether the global legal authorities can distinguish it from securities sales, it is still unknown. Because so far, no case involving ICOs has appeared in court.

In June, authorities first took notice of the ICO project, The DAO. The DAO was a crowdfunding project built on Ethereum smart contracts, but was hacked shortly after its launch. The U.S. Securities and Exchange Commission (SEC) is said to be investigating The DAO.

History of ICOs

The first documented ICO project in history was Mastercoin (MSC), which was crowdfunded on the Bitcointalk forum. Mastercoin is a transmission protocol built on the Bitcoin blockchain that can provide functions that the Bitcoin protocol layer cannot provide. The Mastercoin ICO was launched in June 2013. Everyone can buy MSC by sending Bitcoin to the Exodus address, and a total of more than 5,000 Bitcoins were raised (100 MSC/BTC).

Then, the second cryptocurrency ICO project appeared on the Bitcointalk forum, Futurecoin (NXT), which raised 21 bitcoins (about $6,000 at the time). NXT was based on a newly written cryptocurrency code (not a fork of the original Bitcoin code) and was the first system to use PoS entirely. The project was very successful for ICO investors at the time, and at its peak, NXT's market value exceeded $100 million (now it is only $10 million). NXT has therefore become the most successful ICOs in the eyes of investors.

After seeing the success of NXT, a large number of ICOs emerged in late 2013 and early 2014. Coincidentally, that was when the price of Bitcoin rose the most. Unfortunately, most of the ICOs failed due to over-hype or scams. However, that period did see a few successful ICOs, such as Ethereum.

Today, Ethereum is one of the largest ICOs, raising over $18 million and reaching a market cap of $1 billion.

The Ethereum project The DAO created a smart contract that can accept Ether investments and use the investment proceeds to fund cryptocurrency projects. Its operating model is very similar to that of traditional venture capital firms. As for investment choices, they are decided by voting by token holders. Strictly speaking, DAO is not an ICO because the funds raised are only stored in the smart contract, and in theory these funds can be returned to investors. In June this year, attackers exploited a vulnerability in the DAO smart contract to steal all project funds.

The Development of ICOs

ICOs are somewhere between fundraising and investment. Due to the constant emergence of scams in the industry, the community has developed a lot of rules. The decentralized application crowdfunding platform Koinify (now defunct) once promised to conduct a thorough investigation before launching a project and only transfer funds to a project after clearly understanding the goals of the project development team. Some community members have also proposed using multi-signature wallets to ensure the security of ICOs.

Some ICOs use public Bitcoin addresses to raise funds, which inevitably undermines privacy, but helps the community to jointly monitor the progress of the ICO.

Some ICOs use existing cryptocurrency protocols to create tokens. This helps simplify the token creation process. NXT, Counterparty, Bitshares, and Mastercoin all followed this approach to their ICOs. The recently launched Waves is also a token platform that raised over $16 million during its ICO.

Some of the more well-known cryptocurrencies that were developed through ICOs include NXT, Mastercoin, BitShares, Ethereum, Maidsafecoin, NEM, Synereo, Factom, DigixDAO, Lisk, and Waves.

How does it work?

Usually, ICOs are announced on various cryptocurrency forums, especially Bitcointalk. The official post will include key information about the project, such as the white paper, project goals, ICO time, project development strategy, development team (team experience, etc.), project features, and other relevant ICO details.

Funds are raised in the form of Bitcoin, and there are two specific methods. The first is to use a universal address, and participants only need to send Bitcoin from their own address to the ICO public address. The second is to provide each participant with a unique Bitcoin address. In the end, all funds will be transferred to a multi-signature address for public display.

The details of an ICO vary from project to project. But it will at least involve a fundraising period of several weeks to raise as much money as possible. Some ICOs will raise more than their target amount. A small portion of the tokens will be used for early promotional rewards, such as forum signatures, social media, business newsletters, etc.

Once the ICO is completed and the project is officially launched, various cryptocurrency exchanges will list the ICO tokens. The largest exchange currently is Poloniex. The token price will fluctuate based on the cryptocurrency market conditions, news about the project's progress, and new features added to the project.

Notes (↵ returns to text)

1. Initial Public Offerings (IPO): refers to the first time a company or company (stock company) sells its shares to the public (IPO refers to the first time a stock company publicly offers shares to the public). ↵

2. Kickstarter is a commercial finance company that provides people with the means to raise funds for their creative projects through public fundraising on the website. However, due to the nature of crowdfunding platforms, people cannot make money through Kickstarter as an investment project, which means that the invested parties cannot return money. Therefore, they give back to funders by returning physical rewards (but they can be priced) or unique experiences, such as a thank you note, a customized T-shirt, dinner with the author, or the first experience of a new product. ↵