ICO is short for initial coin offering. When launching a new cryptocurrency or crypto-token, developers offer investors a limited number of units in exchange for Bitcoin or other major cryptocurrencies such as Ethereum.
ICOs are amazing tools for rapidly raising funds to support new cryptocurrencies. The tokens offered during the ICO can be sold and traded on cryptocurrency exchanges if 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 distributed through an ICO. In early 2013, Ripple Labs began developing the Ripple payment system and created approximately 100 billion XRP tokens. These 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 its ICO in 2013 as well. Mastercoin aims 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. In 2016, Lisk raised nearly $5 million during its initial coin offering.
Nevertheless, Ethereum’s ICO in 2014 is probably the most prominent so far. During the ICO, the Ethereum Foundation raised almost $20 million by selling ETH for 0.0005 Bitcoins each. Ethereum has ushered in the next generation of initial coin offerings, harnessing the power of smart contracts.
Ethereum’s ICO is a recipe for success
Ethereum’s smart contracts system implemented the ERC20 protocol standard, which defines the basic rules for creating other compatible tokens that can be transacted on Ethereum’s blockchain. This allowed others to create their own ERC20-compliant tokens that could be traded for ETH directly on the Ethereum network.
The DAO is a notable example of the successful use of Ethereum’s smart contracts. The investment company raised $100 million worth of ETH, and investors received DAO tokens in exchange, which allowed them to participate in the management of the platform. Unfortunately, the DAO failed after it was hacked.
Ethereum’s ICO and ERC20 protocol described the latest generation of crowdfunding blockchain-based projects through Initial Coin Offerings.
This made it very easy to invest in other ERC20 tokens as well. You simply transfer ETH, stick the contract in your wallet and the new tokens will appear in your account so you can use them as you wish.
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
There is a bit of a jungle out there when it comes to the legality of ICOs. In theory, tokens are traded as digital goods rather than financial assets. Most jurisdictions have yet to regulate ICOs, so the entire process should be paperless, assuming founders have experienced attorneys on their teams.
However, some jurisdictions have become aware of ICOs and are already working to regulate them similarly to 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 investors considered fraudulent.
There are some cases where a token is just a useful token. This means that the owner can simply use it to access a particular network or protocol, in which case they cannot be identified as financial security. Nevertheless, equity tokens, whose purpose is to appreciate in value, are quite close to the concept of security. To be honest, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs still remain in a gray legal area, and until a clearer set of rules is in place, entrepreneurs will try to take advantage of Initial Coin Offerings.
It’s also worth noting that once the regulations are finalized, the cost and effort required to comply may make ICOs less attractive than conventional funding options.
For now, ICOs remain an amazing way to fund new cryptocurrency projects, and there are many more successful projects to come.
But remember that everyone is launching ICOs these days, and many of these projects are scams or lack the solid foundation needed to grow and make the investment worthwhile. For this reason, you should definitely do your due diligence and research the team and background of any crypto project you want to invest in. There are many websites out there that list ICOs, just do a Google search and you will find some options. .