What is an initial coin offering (ICO)?
In the world of digital currencies, developers and idea makers can fund their project development through a method called Coin Initialization (ICO) and attract large investors from around the world. In this post, we will explain the concept of ICO.
What is an ICO?
Initial Coin Offering (ICO) is a technique of raising capital and investing opportunities in which the tokens (the same digital currencies) of a project are sold before the project is launched. And individuals can buy tokens in it. Invest.
ICO tokens in a project-based Blockchain in the future will be used, which makes the success of the project, in theory, their value will go up.
Participants invest in the assignment and receive tokens for their currencies using other digital currencies (often Bitcoin or Ethereum) or ordinary currencies (dollars or euros). The ICO has many similarities to the IPO.
An example
Refer to this example to better understand the ICO. The names are quite hypothetical.
A software engineer named Mr. X comes up with an interesting idea. That he can implement using decentralized blockchain technology.
Suppose his idea is to build a decentralized advertising platform. He calls his platform tokens “adscoin” with which advertisers can pay their advertisers. Thus, adscoin is an applicable token that if the platform users increase, the token price will also increase.
Mr. X assembles his team to implement his idea as soon as possible. But there is a problem. Budget and capital are needed to develop the project. Mr. X has several ways to raise capital. He can contract with a real investor or get the capital he needs by persuading a local accelerator company.
But now that Mr. X’s project represents something called a blockchain and token. Why not use an ICO and get help from the general public around the world to raise capital?
But another problem. How to make and sell tokens when the scheme is not ready yet? Blockchains like Ethereum, which smart contracting support, come to his aid. Using the Ethereum platform and smart contracts. He builds some tokens very quickly, sets up a white paper (project description) with his team, and places it on the ICO site, along with a series of different project and team descriptions. Gives.
Many investors read about his project and invest in it and get tokens for their money. Now, with the money raised, Mr. X is implementing his idea and building his blockchain. Then, during a technical process, the atrium tokens are transferred to the main network, the new Blockchain.
The project successfully achieves its goals, the value of adscoin tokens is multiplied. And the investors who invested in it taste the profits of several hundred percent.
It was a coin. On the other side of the coin, which occurs more often, Mr. X, after raising capital, abandons his project and idea and begins his luxurious life with the money of investors.
Severe scams in ICOs
The truth is that although ICOs are an interesting idea and can be very profitable. Unfortunately in most cases, they are either scams or the ambitious ideas of their developers do not work out. And are left without any response from investors.
In 2017, many investors fell into the black dream of becoming rich overnight by investing in ICOs that claimed to solve all the world’s problems.
Since there are no specific rules on ICOs in most countries of the world, and since the ICO is a completely online process and does not require a face-to-face visit, the method used by the Ethereum team to raise capital has now become a scam idea. Has been.
Scammers can easily trap uninformed investors by writing a few ambitious articles about a dream idea and designing a profitable website.
Since the investment amount is received in the form of digital currencies such as Bitcoin and Ethereum, due to the semi-anonymity of digital currency transactions, it is very difficult to track them and one should not expect their return almost after sending the money.
According to the latest research, about 90% of all ICOs introduced in 2017 have either turned out to be scams or have been abandoned.
These days, because of the risks that ICOs can pose to investors, and given the distrust of this type of crowdfunding, other methods have been devised to replace it.
Alternative methods of ICO
An alternative method has been introduced for ICOs with more than two fingers. But currently, only two to three of them can be performed on a large scale. Two of the main alternatives that are widely used these days are:
Exchange Initial Offer (IEO)
Initial Exchange Offering, or IEO for short, is similar to ICO, except that it is held in large digital currency exchange and investors go to the exchange to buy tokens.
In fact, unlike the initial coin offering, which is held directly by the team of a project. The initial public offering of exchange is managed by an exchange on behalf of a startup to raise capital in exchange for the sale of tokens.
Many digital currency exchanges have started accepting CEOs led by Binance Exchange.
Because large digital currency exchanges conduct the necessary checks before pre-selling tokens, the risk of fraud in this method is greatly reduced because there is a large exchange between the investor and the development team.
The initial offering of securities token (STO)
Security Token Offering, or STO for short, is another method of raising capital in the world of digital currencies that is very similar to the ICO, but with features that reduce investor risk, will probably soon replace the previous methods.
Simply put, in this method of collecting, tokens must be registered as securities that require legal procedures.
Given that the law guarantees the validity of securities ownership, in the STO, investors will have a legal and formal role to play in advancing the project, as well as the developers and the project team will be legally authenticated. In this process, the investment risk is greatly reduced and the commitment of developers will be significantly more credible.
