Everything* You Always Wanted to Know About ICOs But Were Afraid to ask

Arnaud Sahuguet
Oct 17, 2017 · 10 min read

« […] people agreed to represent imaginary goods — goods that do not exist in the present — with a special kind of money they called “credit.” Credit enables us to build the present at the expense of the future. » [1]

The acronym ICO stands for Initial Coin Offering, in reference or homage to IPO (Initial Public Offering) for when a company goes public. The term “coin” refers here to a cryptocurrency, of which Bitcoin is the most famous instance.

An ICO — also known as a token sale, coin sale or token generating event (TGE) — is an “unregulated and controversial means of crowdfunding via use of cryptocurrency, which can be a source of capital for startup companies”, according to Wikipedia.

To keep things simple, you ask people for money and in exchange you give them tokens of a cryptocurrency. This is not that different from buying tokens to ride the subway, to play arcade games, or to use at the laundromat.

What you can do with the cryptocurrency tokens you just bought and the fluctuation of their actual value is a different story.

What’s the big deal?

ICOs are a big deal for a few reasons.

First, because of the amount of money involved.

According to [2], “the amount of money raised by start-ups via so-called initial coin offerings (ICOs) has surpassed early stage venture capital (VC) funding for internet companies.” As of late September 2017, the cumulative ICO funding was over $2.3B (; see chart below).

Source: CoinDesk ICO Tracker [3].

Some companies managed to raise more than $100M in less than a week. And there are no strings attached. Compare that to talking to Venture Capital firms.

Second, because of the speculation on tokens

Bitcoin is the grandfather of all tokens. And its history — since the issuance of the first bitcoins in January 2009 — has been rather volatile, as illustrated by the chart below.

Source: Bloomberg.

The same is true for tokens issued during ICOs.

Just like for IPOs, early “investors” usually get a discount when buying their tokens. And since these newly minted tokens purchased during an ICO can be immediately traded on various exchanges, there is an obvious way to make money quickly. Hence the speculation.

Third, because of the low barrier of entry

As described in [4], tokens are made possible because of the last few years of innovation in the digital currency infrastructure including the success story of Bitcoin, the launch of exchanges and the buy-in from major industry and financial players.

Tokens can be created by using existing code or new code, running on an existing blockchain or a new one. Depending on the properties of the token you want to issue, you might have to build a lot or not at all. Ethereum even provides a “template token” called ERC20 which makes it trivial to define your new token. No code is required and it runs on the Ethereum blockchain. You just need to pay Ethereum a small fee for every transaction. There is even a web app called CoinCreator described in [5] that can do that for you.

It seems that, nowadays, all it takes to do an ICO is a token, a white paper and some good marketing. See CoinSchedule for a list of past, present and future ICOs and [6] for more details about how to start your own ICO.

Fourth, because of lack of regulation

Until very recently, ICO land was really the Wild Wild West. Some people still regard ICOs as a combination of money laundering and Ponzi schemes, as reported in [7].

The legal uncertainty is a source of fear: fear of losing everything, but also fear of missing out (FOMO).

Very recently, China and South Korea banned ICOs. And in the United States, the SEC has provided very limited guidance in terms of regulation regarding tokens. Lawyers are trying to adjust the Howey test — that defines what a security is — to tokens. See [8] for more details.

What makes ICOs interesting

« Money is based on two universal principles: (a) Universal convertibility: with money as an alchemist, you can turn land into loyalty, justice into health, and violence into knowledge. (b) Universal trust: with money as a go-between, any two people can cooperate on any project. » [1]

Across centuries, there has been many ways to get capital. ICO is just the new kid on the block.

With bank loans, the bank will lend you money. You will have to pay the money back with some interest. The bank might lose everything but it usually requires some collateral from you to manage risk.

With VC funding, you get money in exchange for some shares of your venture. The VC might lose everything. They might also make money when your venture gets sold to another company or goes public (IPO). But this usually can take a lot of time. Convincing a VC to fund your venture is hard and time consuming. And by trading shares of your venture for money, you reduce your pay-off and also your decision power and freedom as an entrepreneur.

With crowdfunding (think Kickstarter), you get some money in exchange for a product that is yet to be built. The crowdfunding platform usually escrows the funds until a funding goal has been met and also monitors the development of the product. If the funding goal is not met or the product not built, people usually get their money back.

With an ICO, you get money in exchange for tokens. Like for crowdfunding, anyone can buy your tokens. With smart contracts, you can be as creative as you want in terms of the money-for-token exchange. From an investor point of view, tokens can be exchanged almost as soon as they are purchased, which makes speculation possible. This is a major difference compared to the crowdfunding model where your money is "stuck" until the product has been produced and there is no opportunity for direct speculation (of course, you can always resell the item on eBay at a higher price).

ICOs offer a very innovative way to raise capital, with access to wider audience (unlike banks and VCs), easier path, no risk of dilution. This is also appealing to investors because of the fluidity of the investment (tokens can be exchanged right away) and the opportunity for speculation.

« ICOs open the door to bootstrapping the network effect when there is not even a product yet to create this network. It’s a 2-in-1 you get a community of “interest” a la kickstarter and you get S** load of money without dilution giving instant economic value to your token. » [9]

It is all about the token

At the core of the legal trouble for ICOs is the ambiguity about the role played by tokens. See [8] for an in-depth legal analysis.

[10] identifies 3 main kinds of tokens: coins, utility tokens and tokenized securities.

Coins are a form of a digital currency, but operating independently. Bitcoin and more recently Ubin [11] out of Singapore are two such examples.

Utility tokens can be seen as units of “services” like the arcade game or laundromat I mentioned earlier. In [4], utility tokens are compared to paid API keys.

Tokenized securities represent shares of a business, but in digital form.

The function played by the token is not the only interesting debate. The nature and motivations of the people or entities interested in the token is another one.

[9] identifies 3 roles for token owners — token buyers, token holders, and token users — spread across 4 different types — the team behind the ICO, institutional buyers, public buyers, and users.

Token Dynamics, by Ouriel Ohayon.

In lots of current ICOs, these 3 roles are totally distinct which leads to people buying tokens for pure speculation motives, with no intention of holding them or even using them. This lack of aligned incentives in the token dynamics might be the demise of the current model of ICOs, as pointed out in [9].

Current and future ICOs

« Thanks to money, even people who don’t know each other and don’t trust each other can nevertheless cooperate effectively. » [1]

Current ICOs span pretty much all industries. Looking at data (from 142 ICOs) from CoinSchedule leads to the following pie chart. As you can see, lots of ICOs are focusing on money.

Some ICOs that make sense to me

Here are some examples of ICOs that make sense to me.

Bitcoin and the Bitcoin blockchain have some serious limitations. Ethereum and more recently Tezos chose to create and launch their own blockchain from scratch (new chain running on new code), focusing on specific features: smart-contract and developer friendliness for Ethereum, self-governance for Tezos.

Another category of ICOs put the focus on internet-related services, such as storage — e.g. FileCoin, Storj — and privacy — e.g. Mysterium. In these cases, the token owner can spend their coins to use resources and services offered by the service provider.

Yet another category that makes sense to me is around real-estate. You raise money to create a built environment and your tenants can use their tokens to pay for rent, transportation, utilities, etc. An example is Xaurum Gamma, who wants to build six luxury villas on the island Krk in Croatia.

Some ICOs that I haven’t totally figured out yet

« There are those that look at ICOs the way they are, and ask why? I dream of ICOs that never were, and ask why not? » — shamelessly adapted from R. F. Kennedy.

Here are two examples where ICOs might be a good way to get funding.

Funding open source

I am big fan of open source. But the field is clearly underfunded as reported by the Ford Foundation report [12]. The same is true for civic tech software, due to the fact that procurement is not friendly to startups trying to bring innovation to cities. There are lots of software developers interested in this field but it is hard for them find a home that can pay them. ICOs to the rescue?

The idea would be to do an ICO to raise money to pay for the development and maintenance of open source tools. The open question is what the tokens can be used for: to pay for projects, to prioritize features, to pay for hosting, to pay for bugs, etc.

FundRequest seems to be aiming at doing exactly that.

Funding services for underserved populations

There have been a lot of talks about blockchains for refugees. I haven't reached my Eureka moment yet. But there area lots of needs for underserved populations here and abroad. ICOs to the rescue?

The idea would be to do an ICO to build a refugee camp, build a homeless shelter or improve on an existing one. Residents would be able to use the token to pay for services. The concern here is that token buyers are not token users and we need to figure out a way to transfer the tokens from do-gooders to people in need. Maybe we need to come up with a token donation mechanism, which then opens the door to tax exemption for the donor.


« Token buyers will be to investors what bloggers/tweeters are to journalists. » [4]

From my point of view, self-driving cars are to AI what blockchains are to cryptography (and distributed systems). Cryptocurrencies have been an amazing source of innovation both at the technical and business levels. And ICOs are just the latest manifestation of this appetite for innovation.

ICOs are still very young and most of them are an excuse to get rich fast, either as an investor or an entrepreneur. The industry need to get clarity in terms of regulation. Investors need to better understand what they buy. And entrepreneurs need to adjust the ICO model to a more realistic funding sequence with multi-series coin offering replicating the VC rounds, as advocated in [13].

We are just beginning to touch the range of industries that can be disrupted by ICOs. And the same way blockchain is not the silver bullet to all distributed systems problems, ICOs are not a replacement for more traditional sources of funding.

So, stay tuned and to be continued …

For my Cornell Tech readers

Here is a special shout-out for the class of 2018. For your Startup Studio class next Spring, whether you want to take it as a purely academic exercise or you want to start a real company, consider an ICO route. That should be fun. Check [6,14] for some advice on how to start your own ICO today!


Special thanks to Ari Juels, Roni Michaely, Rafael Pass from Cornell Tech and Elaine Shi and Gun Sirer for organizing the IC3 Blockchain workshop where lots of these issues were discussed.


[1] N. Y. Harari, A Brief History of Humankind. New York: HarperCollins, 2011.

[2] A. Kharpal, “Initial coin offerings have raised $1.2 billion this year and now surpass early stage VC funding,” CNBC, 14-Mar-2014. [Online].

[3] M. del Castillo, N. De, M. J. Casey, S. Higgins, A. Bennington, and A. Stanley, “CoinDesk ICO Tracker — CoinDesk,” CoinDesk. [Online].

[4] B. S. Srinivasan, “Thoughts on Tokens” news.21.co [Online].

[5] J. Biggs, “Build your own token sale with CoinLaunch’s CoinCreator,” TechCrunch, 13-Oct-2017. [Online]

[6] M. Benoliel, “Hack your Funding with an Initial Coin Offering — Startup Grind — Medium,” Medium, 08-Jun-2017. [Online]

[7] D. Z. Morris, “The Rise of Cryptocurrency Ponzi Schemes,” The Atlantic, 31-May-2017. [Online]

[8] R. Bramanathan, “Introducing the Blockchain Token Securities Law Framework,” The Coinbase Blog, 12-Dec-2016. [Online]

[9] O. Ohayon, “Token buyers, Token holders and Token users — Hacker Noon,” Hacker Noon, 09-Oct-2017. [Online]

[10] M. Benoliel, “Understanding the difference between coins, utility tokens and tokenized securities,” Medium, 08-Aug-2017. [Online]

[11] “Project Ubin.” [Online]

[12] N. Eghbal, “Roads and Bridges: The Unseen Labor Behind Our Digital Infrastructure,” Ford Foundation, 16-May-2017. [Online]

[13] D. Petrovcic, “ICOs, don’t bite off more than you can chew — Hacker Noon,” Hacker Noon, 06-Oct-2017. [Online]

[14] O. Ohayon, “ICOs for Dummies (like me) — Hacker Noon,” Hacker Noon, 30-Jun-2017. [Online]

Cornell Tech

Written by and for pioneers radically committed to the digital age.

Arnaud Sahuguet

Written by

@sahuguet, Director of The Foundry @ Cornell Tech, previous life includes NYU GovLab, Google, Bell Labs, UPenn, X91.

Cornell Tech

Written by and for pioneers radically committed to the digital age.