ICO stands for Initial Coin Offering. When launching a new cryptocurrency or crypto-token, developers offer investors a limited number of units in exchange for other major cryptocurrencies such as Bitcoin or Ethereum.
ICOs are amazing tools for the rapid rain of development funds to support new cryptocurrencies. Tokens offered during the ICO can be sold and traded on cryptocurrency exchanges, provided there is sufficient demand for them.
Ethereum ICO is one of the most notable successes, and the popularity of initial coin offerings is growing as we speak.
A brief history of the ICO
Ripple is probably the first cryptocurrency to be distributed through ICOs. In early 2013, Ripple Labs began developing the Ripple payment system and generated approximately 100 billion XRP tokens. They were sold through the ICO to fund the development of the Ripple platform.
Mastercoin is another cryptocurrency that sold several million tokens for Bitcoin during the ICO, also in 2013. Mastercoin aimed to tokenize Bitcoin transactions and execute smart contracts by creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through the ICO. Back in 2016, Lisk raised about $ 5 million during their initial coin offering.
Still, the Ethereum ICO that took place in 2014 is probably the most prominent so far. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoins, raising nearly $ 20 million. Leveraging the power of smart contracts with Ethereum, it paved the way for the next generation of initial coin offerings.
ICO Ethereum, a recipe for success
The Ethereum smart contract system has implemented the ERC20 protocol standard that sets out the basic rules for creating other matched tokens that can be transactional on the Ethereum blockchain. This allowed others to create their own tokens, in line with the ERC20 standard, that can be traded for ETH directly on Ethereum’s network.
DAO is a notable example of the successful use of Ethereum smart contracts. The investment firm raised $ 100 million in ETH, and investors received DAO tokens in return that allow them to participate in platform management. Unfortunately, the DAO failed after it was hacked.
Ethereum’s ICO and their ERC20 protocol highlighted the latest generation of blockchain-based crowdfunding projects through Initial Coin Offerings.
It has also greatly facilitated investing in other ERC20 tokens. Simply transfer ETH, paste the contract into your wallet and the new tokens will appear in your account so you can use them as you wish.
Obviously not all cryptocurrencies with ERC20 tokens live on the Ethereum network, but almost any new blockchain-based project can trigger an initial coin offering.
The rule of law of the ICO
As for the legality of the ICO, there’s a bit of a jungle out there. In theory, tokens are sold as digital goods, not as financial assets. Most jurisdictions have not yet regulated ICOs, so assuming the founders have a seasonal lawyer on their team, the entire process should be paperless.
Nevertheless, some jurisdictions have become aware of ICOs and are already working on their regulation in a similar way as the sale of shares and securities.
As early as December 2017, the U.S. Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was preparing to stop ICOs that they believe are misleading investors.
There are cases where the token is just a service token. This means that the owner can easily use it to access a particular network or protocol, in which case it may not be defined as financial security. Nevertheless, capital tokens whose purpose is to assess value are quite close to the concept of security. Truth be told, most symbol purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs remain in the gray legal area and until a clearer set of regulations is imposed, entrepreneurs will try to benefit from initial coin offerings.
It is also worth mentioning that once regulations reach their final form, the costs and efforts required to comply can make ICOs less attractive compared to conventional funding opportunities.
For now, ICOs remain an amazing way to fund new crypto-related projects, and there have been more successful ones with even more.
However, keep in mind that everyone today is running ICOs, and many of these projects are fraudulent or lack the solid foundations they need to thrive and return on investment. For this reason, you should definitely thoroughly research and research the team and background of any crypto project you may want to invest in. There are several websites that list ICOs, just search on Google and you will find some options.