What Is AN Initial Coin Offering? ICO In A Nutshell

An initial coin offering (ICO) is the cryptocurrency equivalent to an initial public offering (IPO). Companies use ICOs whenever they need to raise money for a new coin, app, or service.



Understanding an initial coin offering

Initial coin offerings are a blockchain-based funding process, enabling investors to purchase coins or tokens related to a specific product or project using cryptocurrency.

Coins and tokens are usually linked to the specific business model of the company running the ICO. This gives investors the right to use the company’s product or participate in a project at some predetermined future time.

In general terms, an ICO can be summarized as an IPO that instead uses cryptocurrencies. But there are a couple of key differences. While most IPOs use intermediaries in the capital-raising process, ICOs allow investors direct access to the company they are investing in. Importantly, the interests and values of both parties are more often than not aligned.

Types of initial coin offerings

There are two main types of ICO:

  • Private ICOs – where only a small number of investors participate. Many companies choose to set a minimum investment amount which means that only high net-worth individuals and financial institutions can invest.
  • Public ICOs – a more accessible form of capital raising akin to crowdfunding. Public ICOs are a democratized form of investing since almost anyone can participate.

How can a business undertake an ICO?

Undertaking an ICO is a complex process requiring an adequate understanding of technology, finance, and relevant legislation. The concept of ICOs is still relatively new in many parts of the world, and regulations are constantly changing.

A general step-by-step process is described below:

  1. Clarify investment targets – who are the investment targets? To increase the odds of success, the business should have a sound understanding of the type of investor they are targeting.
  2. Create tokens – as noted earlier, tokens represent assets or utilities in the blockchain. Tokens are fungible and tradeable and should not be confused with pre-existing cryptocurrencies. That is, tokens do not give the investor equity in the company performing an ICO. To that end, Blockchain networks using cryptocurrencies such as Bitcoin can be easily modified to create new tokens.
  3. Run a promotional campaign – with the information gathered from the first step, the company must run a promotional campaign to attract investors. Most choose to run campaigns online, although in recent times Facebook and Google have taken steps to ban ICO campaigns.
  4. Initial offering – tokens are then offered to investors who are interested in the ICO across several rounds. Capital is then used to launch the product or service. An investor may choose to utilize the product or service or simply wait for the tokens to appreciate.

Key takeaways:

  • An initial coin offering is the cryptocurrency equivalent to an initial public offering. Companies use a blockchain-based funding process to raise money for a new coin, app, or service.
  • There are two main types of initial coin offerings. Participation in a private ICO is generally restricted to financial institutions and the rich. Public ICOs can be thought of as a more accessible, democratized form of crowdfunding.
  • Launching an ICO requires knowledge of country-specific regulations and legality. Businesses must also understand the type of investor they are endeavoring to attract.

Read Next: Proof-of-stakeProof-of-workBitcoinEthereumBlockchain.

Connected Business Concepts

According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum). However, according to blockchain investor Paivinen due to ease of forking, incentives to compete and improved interoperability and interchangeability also in a blockchain-based economy, protocols might get thinner. Although the marginal value of scale might be lower compared to a web-based economy, where massive scale created an economic advantage. The success of the Blockchain will depend on its commercial viability!
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
A Blockchain Business Model according to the FourWeekMBA framework is made of four main components: Value Model (Core Philosophy, Core Values and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics/incentives through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
The Graph is an ERC20 Utility Token (built on top of Ethereum) to enable consumers to freely query the blockchain through a fully decentralized database kept by indexers, incentivized by the payment of tokens (called GRT). The network is also ministered by curators and delegators that help maintain a high-quality index.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
In 2012, co-founders Christian Larsen and Jed McCaleb created Ripple, a technology acting as both a pre-mined cryptocurrency called XRP and a digital payment platform enabling monetary transactions. Where Ripple is the tech company, XRP is the decentralized ledger.
In 2014, Jed McCaleb – which also played a key role in the development of Ripple – created a cryptocurrency to provide fast, reliable, and affordable money transactions. The same cryptocurrency has considerably grown seven years later. It is now one of the most stellar cryptocurrencies to provide a real-time platform that links banks, payment systems, and people. Meet, Stellar!
In early 2019, a joint project between TRON and BitTorrent Foundation called BitTorrent Token came to fruition. BitTorrent Token launched to tokenize in-demand file-sharing protocol and enhance content delivery and bandwidth accessibility with blockchain technology.
Chainlink is considered the most established decentralized oracle network. As an ecosystem housing several decentralized oracle networks running simultaneously. As a decentralized oracle service built on Ethereum, Chainlink has the power to support the development of blockchain solutions for both traditional businesses and enterprises.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Designed and created as an alternative to Ethereum, Cardano claims to be the first decentralized blockchain protocol to use a scientific approach and undergo a peer evaluation.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.

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