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 quickly raising development funds to support new cryptocurrencies. Tokens offered during the ICO can be sold and traded on cryptocurrency exchanges, provided that there is sufficient demand for them.
Ethereum ICO is one of the most notable successes and the popularity of the Initial Coin Offer is growing as we talk.
A brief history of the ICO
Ripple is probably the first cryptocurrency distributed through ICO. 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 Bitcoin tokens 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.
However, Ethereum’s ICO, which took place in 2014, is probably the most prominent so far. During their ICO, the Ethereum Foundation sold ETH for 0.0005 bitcoins each, raising nearly $ 20 million. With Ethereum leveraging the power of smart contracts, it paved the way for the next generation of Initial Coin Offers.
Ethereum ICO, a recipe for success
Ethereum’s smart contract system has implemented the ERC20 standard, which sets out the basic rules for creating other compliant tokens that can be run on Ethereum’s blockchain. This allowed others to create their own tokens, in line with the ERC20 standard, which can be traded for ETH directly on the Ethereum network.
DAO is a significant example of the successful use of Ethereum’s smart contracts. The investment company raised $ 100 million in ETH, and in return, investors received DAO tokens that allow them to participate in the management of the platform. Unfortunately, the DAO failed after it was hacked.
Ethereum’s ICO and their ERC20 protocol outlined the latest generation of blockchain-based crowdfunding projects through Initial Coin Offerings.
It also made it easier to invest in other ERC20 tokens. Simply transfer ETH, paste the contract into your wallet and new tokens will appear in your account so you can use them however you want.
Obviously, not all cryptocurrencies have ERC20 tokens that live on the Ethereum network, but almost any new blockchain-based project can trigger an initial coin offering.
Legal status of the ICO
When it comes to the legality of the ICO, there is a bit of a jungle. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions have not yet regulated the ICO, so assuming the founders have an experienced lawyer on their team, the whole process should be paperless.
Nevertheless, some jurisdictions have become aware of ICOs and are already working to regulate them in a similar way as the sale of stocks and securities.
Back in December 2017, the US 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 some cases where the token is just an auxiliary token. This means that the owner can easily use it to access a particular network or protocol in which case they may not be defined as financial security. However, proprietary tokens whose purpose is to increase value are quite close to the concept of security. Truth be told, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs remain in the gray legal zone and until a clearer set of regulations is imposed, entrepreneurs will try to take advantage of initial coin offerings.
It is also worth mentioning that when regulations come to a final form, the cost and effort required to comply could make ICOs less attractive compared to conventional funding options.
For now, ICOs remain an amazing way to fund new cryptocurrency-related projects, and there have been more successful projects with much more.
However, keep in mind that everyone is running an ICO today and many of these projects are scams or lack the solid foundation they need to thrive and be worth the investment. For this reason, you should definitely thoroughly research and research the team and background of any crypto project you could invest in. There are several websites that list ICOs, just search Google and you will find some options.