ICO is short for Initial Coin Offering. When a new cryptocurrency or cryptotoken is launched, developers offer investors a limited number of units in exchange for other major cryptocurrencies such as Bitcoin or Ethereum.
ICOs are amazing tools to quickly drop 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.
The Ethereum ICO is one of the most notable successes, and initial coin offerings are growing in popularity as we speak.
A brief history of ICOs
Ripple is probably the first cryptocurrency to be distributed through an ICO. In early 2013, Ripple Labs started developing the Ripple payment system and generated about 100 billion XRP tokens. They were sold through an 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’s goal was 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 ICOs. Back in 2016, Lisk raised around $5 million during its initial coin offering.
However, the Ethereum ICO that took place in 2014 is probably the most famous to date. During its ICO, the Ethereum Foundation sold ETH at 0.0005 Bitcoin each, raising nearly $20 million. Thanks to Ethereum’s use of smart contracts, it has paved the way for the next generation of Initial Coin Offerings.
ICO Ethereum, a recipe for success
The Ethereum smart contract system implemented the ERC20 protocol standard, which sets the ground rules for creating other compatible tokens that can be transacted on the Ethereum blockchain. This allowed others to create their own tokens compatible with the ERC20 standard that could be exchanged for ETH directly on the Ethereum network.
The DAO is a prime example of the successful use of Ethereum smart contracts. The investment firm raised $100 million worth of ETH, and investors received DAO tokens in return, which allow them to participate in the management of the platform. Unfortunately, the DAO went down after the hack.
Ethereum ICOs and their ERC20 protocol defined the latest generation of blockchain-based crowdfunding projects through Initial Coin Offerings.
It also made it very easy to invest in other ERC20 tokens. You simply transfer ETH, insert the contract into your wallet, and the new tokens appear in your account, so you can use them however you like.
Obviously, not all cryptocurrencies have ERC20 tokens living on the Ethereum network, but almost any new blockchain-based project can launch an initial coin offering.
Legal Status of ICOs
It’s a jungle out there when it comes to the legality of ICOs. In theory, tokens are sold as digital goods, not as financial assets. Most jurisdictions have yet to regulate ICOs, so provided the founding team has experienced legal counsel, the entire process should be paperless.
Despite this, some jurisdictions have become aware of ICOs and are already working to regulate them in the same 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 a token is just a utility token. This means that the owner can simply use it to access a particular network or protocol, in which case it cannot be defined as a financial security. However, equity tokens whose purpose is to increase value are quite close to the concept of security. In truth, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs still remain in a legal gray area, and until a clearer set of rules is put in place, entrepreneurs will try to capitalize on initial coin offerings.
It should also be noted that once the regulations reach their final form, the costs and effort required to comply may make ICOs less attractive compared to conventional funding options.
At the moment, ICOs remain an amazing way to fund new crypto projects, and there have been several successful ones with more to come.
However, keep in mind that everyone is launching an ICO these days, and many of these projects are scams or lack the solid foundation needed to succeed and justify investment. For this reason, you should definitely do your thorough research and study the team and history of any crypto project you want to invest in. There are several websites that list ICOs, just do a Google search and you will find several options.