What is an ICO? ADN Provides a Thorough Explainer
ICO is one of the most intriguing topics today. Learn about the ICO meaning and the ICO process in this comprehensive explainer from ADN.
As you might have noticed in our recent ADN blogs, we have been circling back to the basics of cryptocurrency and blockchain technology. There are already scores of resources out there. However, we deem it important to define these elementary topics in our own context.
We believe that these topics are crucial so that all of us will be on the same footing once we have gone live. That is why in this blog, we will be talking about the one topic that we are most passionate about — Initial coin Offerings (ICOs).
We know that most of us are aware of this crowdfunding platform. But for the sake of those who have joined the crypto revolution just recently, we will take a step back and give you a comprehensive explanation about the ICO process. Hopefully, we will be able to shove away all the myths and misconceptions and see the crowdfunding platform for what it’s really worth.
To understand the innovation that the ICO has introduced, let us take Andrew’s ice cream shop as an example.
Andrew’s “Forget-All-Your-Problems” Ice Cream Shop
Andrew’s family has been known in their locality for their delectable ice cream. Many who have tried their ice cream have been heard to claim that they forget everything for at least a minute — including their current problems — after having a mouthful.
What is more, Andrew could make ice cream that melts in the mouth and not on the hands. How that is possible, it is a secret that Andrew does not intend to reveal to us.
Now, Andrew wanted to make their renowned ice cream accessible for everyone not just in his town, but in the entire country as well. To do so, he would need to have enough capital to fund the operations and buy the ice cream ingredients.
Andrew does not have enough money, as his parents were avid travelers who toured the world often in search of the right ingredients to perfect their ice cream brand. As a consequence, they weren’t able to save lots of money.
Our determined Andrew didn’t let the lack of funds prevented him from making ice cream. So, he visited a number of banks and investors for funding. He presented his proposal to the investors, and when he let them taste his homemade ice cream, they immediately wanted to partner with him.
However, Andrew wasn’t very keen on making profits for his ice cream. He only wanted to make ice cream and fund the operations, and not to make an empire out of the recipe which he considered his family’s legacy and memorabilia.
Of course, none of the investors Andrew talked to agreed to support him without having something in return. So, he went home empty-handed.
Unable to afford food, Andrew ate the leftover ice cream for lunch. As he ate the last scoopful, he temporarily forgot about the troubles he encountered that day. Instead, he was able to think of an idea which he hasn’t thought of before: crowdfunding.
Icecreamcoin
Andrew thought that if he was going to make ice cream for everyone’s benefit, why not let everyone fund it?
And so, Andrew devised a plan. He would create his own special token which will become the only way for others to buy his ice cream. He would sell it so that he will have the capital to commence with the operations.
He went to his friend Peter, who could make special tokens which will be the official means for others to have access to the ice cream. These tokens can never be replicated or altered because just like Andrew’s ice cream, these genuine tokens will not melt when held by the hands (counterfeit tokens will).
Peter heard Andrew’s proposal, and he immediately liked it. He agreed to let Andrew make 100,000 tokens which he could sell to others.
They named the token Icecreamcoin.
Here’s how the solution works: There will be 100,000 Icecreamcoin, which will be sold at $1 each — the price of each big scoopful of Andrew’s ice cream. Those who would like to have a taste of the ice cream would trade their Icecreamcoin for it.
So he sells the Icecreamcoin to the people. He writes the details of his idea in a neat white sheet of paper so that they will understand what the token will be for. He didn’t need to conduct a free-tasting promotion of the ice cream because his family has already been well known in their place.
Of course, those who knew the taste of the ice cream purchased the token. Others also purchased because they thought that if there will only be 100,000 Icecreamcoins in existence, and if Andrew’s ice cream becomes a popular treat — which it most probably will — then they will be able to sell it for a higher price in the future.
ICO in a Nutshell
If you have been able to understand Andrew’s crowdfunding concept, then you now have grasped ICOs, because they work in the same way.
Short for initial coin offering, an ICO is a crowdfunding method enabled through blockchain technology.
A startup or an already-established firm would create a project which will need funding for its development and operations. To do so, it will mint its own token which can be sold at a specific price each. Users would buy the token because it provides a value tied to the platform.
To be clear, ICOs are different from initial public offerings (IPOs), wherein a company will sell its shares to the public. Generally, ICO does not sell the investors anything except the very tokens that the ICO companies are selling.
More often than not, these tokens are called utilities, which allow their possessor to utilize a service that the company offers. Another popular type is what we call a security token. Let us discuss them.
Token Types
One way to gauge the profitability of an ICO is to understand the nature of the token that it is offering. This is seen through its token type, and the purpose it serves within the platform.
As mentioned above, there are two popular types of blockchain-based tokens, even though there are others that may belong to a different (and newer) type altogether. These are the utility token and the security token.
Utility tokens are those that are used by users of a particular platform to avail of its services. For example, developers could create a decentralized application (DApp) wherein users could own digital rabbits and breed them. They may be allowed to sell them to other interested users.
To purchase the rabbits, they will have to pay the seller with the token native to the platform. This is what we usually call a utility token.
Security tokens, on the other hand, are those that fall under the category of securities, only that they are tokenized in this case. Securities are financial assets that can be traded. They are usually recognized by financial authorities such as the US Securities and Exchange Commission (SEC).
You may be asking, ‘what is a security’? In the traditional scene, financial security consists of bonds, stocks, and other similar assets. In cryptocurrency, security tokens represent the said fungible assets.
Issues With ICO
Of course, every platform deals with its own unique set of issues, and ICO is never an exemption to this rule.
If you have been lingering in the cryptocurrency space for a considerable amount of time, then you would surely have heard of ICOs that have turned sour for a couple of reasons, including scams, misrepresentations, and hacks.
Not that there really is a problem with ICO itself; it is only a tool, and its goodness of bad-ness depends on the motive of the person using it.
Many people, both the project heads and the investors themselves, have thought of it as a get-rich-quickly scheme. For some instances, it could be. But many have proven the opposite. What is worse, others are using it with malicious intent. In fact, a study revealed that 80% of ICOs in 2017 are scams.
Thankfully, the cryptocurrency world has become more mature today, and many of us have accepted the fact that getting blessed in this world, at least financially speaking, is not something that can be achieved overnight.
ICO Alternatives
To further answer the issues that ICO has faced, many have conceived of other options that are becoming popular by the day. These are the initial exchange offering (IEO) and the security token offering (STO).
Initial Exchange Offering(IEO)
Perhaps the most popular alternative option to ICO, IEO is the crowdfunding method which directly involves a particular cryptocurrency exchange. In this setup, project proponents reach out to crypto exchange and discuss their crowdfunding idea to them.
The exchange reviews the token’s purpose on top of doing a background check on the ones who are applying for the IEO.
If the exchange doesn’t find anything suspicious, or that which could tarnish its reputation, then it gives the IEO a green light. It facilitates the token sale and does the know-your-customer (KYC) process on the project’s behalf. Furthermore, it will automatically list the token on its exchange once the sale has concluded.
For its part, the exchange will take a certain percentage of the sales as its commission.
For its security and convenience, IEO is the most popular crowdfunding option today in many cryptocurrency circles. However, others scrutinize it because it is centralized, with the exchange as the intermediary. This contradicts the very essence of cryptocurrencies.
Some exchanges have been alleged to be charging hefty IEO fees to the projects, who, by the way, are looking to get funding for their operations. Finally, these exchanges can be plagued with transparency issues.
Security Token Offering(STO)
Another option is the STO, wherein a company looks to sell security tokens instead of utility tokens — contrary to ICO, which mainly sells utility tokens.
STOs are considered by many to be legitimate and secure due to the fact that they are tied to the company that is issuing the security token. Of course, no company would expect to sell its security token if it does not have an established reputation, to begin with.
The problem that this crowdfunding platform faces is regulatory, as many financial authorities like the US SEC would have to step in and review the security token in question before it approves of it. The security’s regulatory compliance depends on the standards imposed by the financial authority of the country where it is issued.
Do proceed with the STO, the company would need to undergo the process required by the authority, and this will cause it to spend a considerable amount of time and money.
Once again, centralization is definitely in play, as the regulating body would need to give the security token a thumbs-up before it can be sold to the public.
ADN’s ICO Solution
Along with the invention of blockchain technology came various innovations that we could impute to our daily lives. As we are continuously tinkering with the said technology, we are finding ways to improve it. Thankfully, the ICO cryptocurrency space is not an exemption.
That is why we at ADN are proposing a solution to improve the ICO practice. We have noticed that not all people are satisfied with either IEO and STO, and they are looking for other decentralized options.
To solve their needs, we are giving birth to a new ICO security solution that is both decentralized and secure. We are creating the ICO Wallet, an app that is unprecedented in terms of investor protection and ICO quality assurance.
The ICO Wallet will give investors of specific projects a voice in their development, to ensure that the ICO companies will accomplish their endeavors successfully and that the investors will get the expected value for their money.
According to an interview with ADN CEO Ron Lim,
It [the ICO Wallet] will also display the investment that each participant has for each ICO he invests in real-time. We are also working on an interface wherein upcoming and live ICOs will be displayed so that they may also choose which to invest in.
Blockchain is a very interesting facet of our everyday life, even more so, ICO. We are excited about the developments that it will undergo in the months and years to come. And we hope that as the world expands more in innovation, so will we in our knowledge and market maturity.
We hope that you were able to learn much about the ICO meaning through this blog, and we hope you’ll stay tuned for more content that will come from us.
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