What is an ICO? Understand the initial coin offering: The world of finance has undergone great changes recently. The introduction of Initial Coin Offerings (ICOs) has been one of the most significant changes over the past two years. It’s no surprise that one of the most popular questions in the crypto space over the past year has been “What is an ICO?”
What is an ICO: Introduction
While you might be familiar with some popular cryptocurrencies like Bitcoin and Ethereum, you might not be as familiar with ICOs.
Before I get into the specifics of ICOs, however, I need to make sure that you have a fair understanding of the technology behind ICOs – blockchains and smart contracts. If you are already confident in your understanding of these two technologies, feel free to skip ahead to “The Concept of an ICO”.
So let’s get started!
What is an ICO: Blockchains
A blockchain is not Bitcoin or any other cryptocurrency. No, it’s just that cryptocurrencies use the blockchain. In terms simple , a block is a group of transactions. The chain is a group of blocks connected to each other. Put those two words together and voila: blockchain.
All these blocks linked together on the chain form a public database. This database is public because it is shared with hundreds or even thousands of computers. We can think of these computers as the servers of the blockchain / database.
Source: steemit
(These computers are called nodes) .
Any changes to the database must be verified by more than 51% of the nodes. If they are not verified, the change cannot be made. This makes it very difficult to hack the database as you would have to hack over 51% of the nodes, and the nodes are normally owned by many people and companies.
This effect is called decentralization – which means that the database is not stored in one place, but in many different places.
When we talk about “changes” to the database, we are talking about data transactions. In the case of Bitcoin, for example, these are Bitcoin transactions – people transferring Bitcoins to other people.
(To learn more about blockchain technology, read our Blockchain Explained guide.)
Now let’s move on to the next piece of technology used by ICOs.
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What is an ICO: tokens and smart contracts
The transactions that occur in the database are not limited to financial transactions such as those on the Bitcoin blockchain. Instead, they can be anything of value.
For example, the value of the transaction could be a house or a stock in a business. Of course, you can’t physically place a house or business share on the blockchain. Instead, you need something that represents the value of the home or the share of the business.
Tokens
Welcome to the world of tokens. A token is created to represent the value of something. For example, a house, electricity, store credit or a share in a business.
These tokens cannot be applied directly to the blockchain, as these can normally only process transactions of their own cryptocurrency, like Ether on the Ethereum blockchain and Bitcoin on the Bitcoin blockchain.
Instead, tokens must use an app.
Smart contracts
The applications used by tokens are called smart contracts. However, they look like a bunch of code. So, to be used by normal users, developers create dApps (decentralized applications).
You can think of dApps as the interface you see when using Instagram or Twitter, but behind Instagram and Twitter is a series of coded apps. These coded applications are smart contracts.
These smart contracts are unique for several reasons. These reasons include the following:
- They can automatically process transactions
- Transactions are triggered by certain conditions written in the smart contract
- Imagine it like this: “When Peter pays 100 Ether in the smart contract, THEN the token from John’s house is sent to Peter”
- They use blockchain technology, so the terms of the smart contract cannot be changed
For more information on smart contracts, see our guide What is a smart contract?
So you are now familiar with the two technologies that made ICOs the success they are today. Now let’s talk about what an ICO is!
What is an ICO? The concept of an ICO
ICOs can be compared to IPOs. An IPO is an initial public offering – this is a term used when a company first lists its shares on the stock market. Previously, the company’s shares were private and its shares were not available to the public. Therefore, initial public offering. It is important to understand the differences between an IPO and what an ICO is.
When companies go public, interested individuals and companies can acquire shares of the company for a certain price.
Shares can be used to vote on specific company shares because you have become a partial owner! If the company is doing well, the value of their shares will increase in the same way and you can sell them later.
ICOs are not as tidy and clean as IPOs. ICOs can be seen as a means of crowdfunding.
With an ICO, you get a token. These tokens do not give you any long-term authority or ownership rights over the project. they are just a way for the project to raise funds.
However, again, if the project is successful, the value of your token could increase. So you can sell the token for a higher price than what you bought (if you wanted to).
What is an ICO? How do ICOs work?
To simplify the basic concept of an ICO or explain what an ICO is:
How does ICO work | Source: cleveroad
If you want to start your own cryptocurrency or dApp, you will need a lot of money. To get this money, you can start an ICO. If people are interested in your ICO and think the project is good, they can buy your token for a certain price.
These prices are normally defined in Ether (ETH). However, some projects accept more than one cryptocurrency – normally Bitcoin (BTC) and Litecoin (LTC).
When you invest in an ICO, you send your ETH, BTC, LTC, or whatever currency you want to pay in, to the ICO smart contract. This smart contract then sends you the number of tokens you paid.
There are generally two main reasons to buy tokens from country offices:
- Sell the token at a higher price
- To use the token for this purpose
- Tokens normally provide token holders with benefits, such as reduced fees, a share of the profits, or premium features.
- Some tokens can be used to purchase items in the project app when it is created. These types of tokens are called utility tokens.
What is an ICO? How do investors know which ICO to invest in?
It is not because the idea is good that the project will be good!
An idea may sound like a really good one, but then fails completely once the funds are raised. It is, unfortunately. There have even been cases where ICOs turned out to be complete scams! So, now that you understand what an ICO is, make sure that when looking for an ICO you pay attention.
Investors will generally pay attention to the following:
- Does the project have any competitors? If so, what are they doing differently from their competition?
- Who is the team working on the project? Do they have a good relevant background? Have they worked on similar projects before?
- How will they use the money they collect from their ICO?
- What are they planning to do and how long will it take them?
- How many tokens will there be? What is the price of each token? How many tokens will be sold in the ICO and how many will be kept?
Another alternative could be to use an ICO monitoring app. There are different companies that are dedicated to research, review, categorization and market information regarding different ICOs. Coinview is one of those apps. It allows users to follow the evolution of the performance of different ICOs and monitor their performance in terms of cryptocurrency.
That’s a lot of questions, I know. The good news is that you can normally find most of the answers in their whitepaper! Opinions about the project and reviews are important. However, you should always make sure you do your own research to form an opinion. A lot of information on the Internet can be inaccurate or based on emotions!
What is an ICO? What is a white paper?
Knowing what a CIO is is almost as important as understanding what a white paper is. A white paper is a document that presents the idea for which the ICO is fundraising. It contains much more detail than the descriptions you will find on the ICO website.
There you will find things like system architecture, the need for their idea (the problem to be solved, etc.), the uses of the token, market data, and growth projections.
You will also often see a list of team members, investors, and advisors. Although this is normally displayed on the site itself.
For an ICO to be successful, it needs a good white paper. If you ever find a live ICO but don’t have a whitepaper, I would advise you not to buy tokens.
Very few people will want to invest in a project that doesn’t have a white paper and a good white paper.
A good white paper will also provide information on the use of funds. The focus should be on funds used for the growth of the business and not for personal gain. It is important!
An additional note
As you can see, you will find most of the answers you need in an ICO white paper. However, you should continue your research outside of the white paper and the ICO website.
You should check how well they keep their community up to date. A good way to do this is to join their Telegram group (if they have one) or post their forums. From there you can see how they handle questions etc.
What is an ICO: an example of a successful ICO
BitDegree is the world’s first online education platform using blockchains and enabling talent acquisition. The project raised around 32,500 ETH during the tour and successfully reached the Hard Cap.
The BitDegree white paper was very detailed and contained a lot of information about the project work plan, with full details on how the BDG token works and how funds are allocated.
For team members, each had a full story provided and an MVP was presented.
The roadmap is also very detailed and the community has been updated with blog posts and forum responses. As you can see, it is important to gain the trust of the community. It was a very important part of success – no one gives money to people they don’t trust.
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What is an ICO: Conclusion
Now that you know what an ICO is, keep in mind that these are new, which means there are very few regulations. So, as mentioned earlier, you should always be careful when choosing an ICO to invest in. It is extremely important to do your own research!
You need to understand the creators of the ICO and the market that the ICO is entering. Always study and consider their ability to complete the project on time and on budget. Find out more about what they plan to do with the funds they receive, and use their roadmap to find out when they announce their project launch.
How to launch an ICO …
If you are creating an ICO without investing in another, you need to understand how investors research ICOs. You have to understand that they need to see everything we have mentioned – otherwise, they won’t trust your ICO.
You need to keep your community up to date, treat it with respect, and make sure your project can do what it says it does. Always make sure you can deliver your project on time and never lie .
So this is my guide to ICOs – thanks for reading! Now that you know what an ICO is, what do you think of this new way to fundraise for ideas? Do you want to invest in an ICO? Do you want to create an ICO? Let me know!
Also, if you have any questions, I will be happy to answer them!
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