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 rapidly accumulating development funds in support of 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 the initial coin offerings is growing as we speak.
A brief history of the ICO
Ripple is probably the first cryptocurrency to be 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 existing bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through the ICO. As early as 2016, Lisk raised approximately $ 5 million during their initial coin offering.
Nevertheless, Ethereum’s ICO, held in 2014, is perhaps the most famous to date. During their ICO, the Ethereum Foundation sold ETH for 0.0005 bitcoins each, raising nearly $ 20 million. With Ethereum, using the power of smart contracts, he paved the way for the next generation of initial coin offerings.
Ethereum ICO, recipe for success
Ethereum’s smart contract system has implemented the ERC20 protocol standard, which sets out the basic rules for creating other compatible tokens that can be executed in the Ethereum blockchain. This allowed others to create their own ERC20-compliant tokens that could be traded for ETH directly on the Ethereum network.
DAO is a remarkable example of the successful use of Ethereum’s smart contracts. The investment company raised $ 100 million from ETH, and investors received DAO tokens in return, allowing them to participate in the management of the platform. Unfortunately, DAO failed after being hacked.
Ethereum’s ICO and their ERC20 protocol outline the latest generation of blockchain-based group funding projects through initial coin proposals.
This also made it very easy to invest in other ERC20 tokens. Simply transfer ETH, place 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 in the Ethereum network, but almost any new blockchain-based project can launch an initial coin offering.
The legal status of the ICO
When it comes to the legitimacy of the ICO, there is a bit of a jungle. In theory, tokens are sold as digital goods, not as financial assets. Most jurisdictions have not yet regulated the ICO, so if we assume that the founders have an experienced lawyer on their team, the whole process should be paperless.
However, some jurisdictions are familiar with the ICO and are already working to regulate their similar sales of shares and securities.
As early as December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was preparing to stop ICOs, which they consider misleading investors.
There are some cases where the 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 may not be defined as financial security. Nevertheless, stock tokens aimed at increasing value are quite close to the concept of security. The truth is that most symbol purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs still remain in the gray legal area, 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 once regulations are finalized, the costs and effort required to comply with them may make ICOs less attractive than conventional funding options.
For now, ICOs remain an incredible way to fund new crypto projects, and there are many successful ones yet to come.
However, keep in mind that everyone is starting an ICO these days, and many of these projects are scams or lack the solid foundation they need to thrive and make the investment worthwhile. For this reason, you should definitely do a thorough research and research the team and background of each crypto project in which you would like to invest. There are many websites that list ICOs, just search on Google and you will find some options.