Initial Coin Offering

ICOs

If you’re new to the world of cryptocurrency, you’ll have to get acquainted with its terminology. A very important one to know of is the ICO, which stands for Initial Coin Offering.

An initial coin offering is the cryptocurrency equivalent of initial public offerings (IPO) in the fiat sector. There are several differences that have propelled them to the forefront and generated quite the fuss. They have also helped draw much attention to the world of cryptocurrency and as a result the growth of the crypto markets can be partially accredited to the recent ICO boom.

The first coin to conduct an ICO was MasterCoin, now known as OMNI. In an ICO, the new company first creates a token or a coin. Then they market their company’s innovations and features, and crowd-sell the coin or token, usually keeping a cut. This in one of the more commonly used distribution schemes:

A certain amount of tokens or coins, from the total supply are allotted to the initial coin offering. For example, a new crypto company decides to take the ICO route for funding. They create 1 million tokens, keep 100,000 for the company to fund development, and put the other 900 thousand towards the ICO. A set funding period for the ICO is chosen, in this case one month. After the month is over, tokens are distributed proportionately to the funders according to their funding amount. For example, $4.5 million total is raised, funder #1 put in $350K, and funder #2 put in $600K.

• Each token is worth ($4.5M/1M token) = $4.50 / token.
• The creators receive a fixed 100,000 tokens/coins, a $450,000 value ($4.5M/1M tok. * 100,000 tok.)
• Funder #1 receives ($350K/$4.5M*900,000) = 70,000 tokens, a $315,000 value (315=350*(900K/1M)).
• Funder #2 receives ($600K/$4.5M*900,000) = 120,000 tokens, a $540,000 value (540=600*0.9).

With this distribution scheme, whatever fraction of the coins to be distributed the creators take is the same fraction of the total investment capital they get to keep. The founder’s initial investment’s worth is reduced by the same fraction as well. The founders are taking a risk in the belief that the company will grow more than the amount the company took for its founding. In this case the founders are in the money if the company makes a 12% gain or greater (> 10/9).

Ethereum

Another cryptocurrency was realeased after MasterCoin, and as of today it remains the most successful initial coin offering ever. That coin is Ethereum.

Ethereum was really the catalyst of the ICO boom. Their innovative coin is a platform for decentralized applications, cryptocurrency wallets and miners are applications, so Ethereum is able to create new cryptocurrencies inside of itself, with infinitely more features than just processing transactions.

Before long, there were countless new cryptocurrency startups, creating tokens off of the Ethereum chain, creating startup sites to fund their ICOs. Because Ethereum’s an application development platform, the variety of features creators could give their coins greatly increased the amount of new assets created.

Because of Ethereum opening the door to countless design possibilities for decentralized applications, and ICOs attracting massive funding if their company seems even the least bit innovative, there has been a mass of scams posing as ICOs. The scammers say that their company is going to provide a bunch of new features to the world of blockchain, create a good looking whitepaper and ICO site, build a large amount of public interest, and then take the money and run.

The rise of scam ICOs has started an international effort to regulate them. Some countries have banned them outright, while others are taking less severe approaches. The ICO flood has been a financial frenzy and despite attempts at regulation, it shows hardly any sign of slowing in the future.

Originally published at ChainReport.