Think of this as your definitive ICO guide.
You may have heard of ICOs as the new way for startups to raise funding. Maybe you've heard they're a new way for regular people to get rich. Or maybe you've even heard that they're a scam. There's a lot to clear up here, so let's get started.
So what is an ICO?
ICO stands for “initial coin offering.” An ICO is essentially the creation and sale of digital tokens. This can be initiated by a company that has existed for several years, or by a few people who simply have an idea that they need startup money for. In a somewhat similar and more traditional comparison, an IPO (initial public offering) is the first sale of stock issued by a company to the public. An ICO is also a public sale, except the current owners aren't giving up any equity in their company to launch an ICO.
Instead, a project creates digital tokens via a smart contract and sells them to the public. Somewhat similar to Contributions are typically made using existing cryptocurrencies, such as Ethereum or Bitcoin.
What are the types of ICO tokens?
1. Digital Assets. Digital currencies are the best-known type of digital token. The majority of crypto-tokens fall under this category. They are also known as cryptocurrencies, currency tokens as well as digital coins. Digital currencies are based on distributed ledger technology in order to facilitate easy and fast peer-to-peer transactions.
The largest and most valuable of these is bitcoin. However, there are a number of alternatives to it that perform well on the crypto market. These tokens, known as altcoins, changed certain aspects of their blockchain in order to introduce features that bitcoin did not have.
2. Utility Tokens. Utility tokens give a user the ability to use a platform. Within a blockchain-based platform that provides a certain service, tokens are required in order to access it.
These tokens provide the holder with the authority to exist within a platform. A good analogy to use in order to understand how these tokens work is to consider paid APIs in the context of the Internet economy.
Go ahead, feel free to learn more about the different classifications of tokens.
When are ICOs used?
As a new type of crowdfunding, ICOs enable startups to raise funds without giving up equity. Instead, participants are purchasing the right to use a digital platform in the future that will provide utility (or equity) in some way.
They also help “bootstrap” products into existence by incentivizing adoption and usage from the initial token holders.
How do ICOs work?
Usually, an ICO will announce their project on bitcointalk.org (and other sites) and develop a website to attract potential investors. They will also create a whitepaper, explaining their project, the technology behind it, and details about their team members.
In most cases, investors will send common cryptocurrencies (BTC, ETH) to a smart contract address to participate in the ICO. This smart contract will then automatically return the ICO’s native crypto asset to the investor’s wallet.
Where are ICOs located?
ICO and cryptocurrency regulation is a complex, daunting, yet important subject. Many crypto companies and ICOs have chosen to incorporate their business outside of their home country in an effort to mitigate imminent regulatory risks. Certain locations around the world are seen as more crypto-friendly due to general business and tax purposes, but also crypto-specific regulation. In fact, smaller and less regulated countries, are encouraging ICOs and crypto companies to incorporate in their country, in an effort to bolster GDP and spur innovation and growth.