How do ICO/IEOs really work? Learn the inside story from real world blockchain (DLT) experienced experts

Read our introduction to What Is An ICO / IEO ? to get a handle on the regulatory and jurisdiction considerations before diving into this article.

First of all, in summary, if you do not wish to read this entire article we recommend avoiding ICOs and IEOs unless:
1) you have a strong technological understanding and business reason to use blockchain, otherwise known as Distributed Ledger Technology (DLT)
2) you understand the risks of raising money in this way in relation to regulatory risk
3) you understand you might be cut off from equity investors and stunt the long-term business growth.

In this article we are going to dive into each one of these 3 points and provide some learning and mistakes we have made while participating in an ICO.

Understanding Blockchain Technology
We prefer to call it by the name Distributed Ledger Technology, as we find it a better description of what advantages the technology offers. Simply put, a ledger is a way of recording records and performing simple functions on those records.

The abacus is a good visual representation of what is going on with a record. The apples, oranges, pears etc. could represent different tokens, signatures, stamps of approval, or transactions. The wooden frame is the blockchain, and the child represents what is known as the consensus algorithms. It is basically a way of making sure it is all accounted for and no-one has cheated by moving a lemon across where it should not have gone. The consensus algorithm and the wooden framework are computer programs running on a network of computers. There are different types of consensus algorithms- typically they work by solving some sort of difficult mathematical problem based on prime numbers, to create a set of beans that can be counted and moved over to the other side in one go. Blocks are linked together in a time sequence. This is to avoid double counting a bean from one side to the other. For example, if you decide to add 2 beans then remove 1 bean and it was out of time sequence, you could end up removing 1 bean first which would equal -1 then adding the 2 beans. The -1 would cause all kinds of problems for your bank account and is known as the double-spend problem. The double spend problem is actually the reason blocks put into a chain of time sequences or blockchain was created.

But who pays for all these networks of computers? After all it costs money to run a computer — electricity, internet connection and obviously a premise to keep it, cool it and maintain it.
The network of computers are called miners, and they solve the problem associated with each block which then points to the next block in the time sequence. Every time they solve the mathematical problem associated with a block they are given some tokens issued by the blockchain.

So there are different flavours of blockchain. You may have heard of Bitcoin with its proof-of-stake consensus algorithm whereabout miners earn some Bitcoin (BTC) every time they solve the mathematical bean counting block problem. Ethereum is another blockchain which uses a proof-of-work consensus algorithm, and its network of computers (aka miners) earn ETH when they solve the block problem.

The blockchains do not understand nor care what the block contains- i.e. the type of lemons, apples, beans or digital version of the US dollar etc. that are being passed around or counted. The various blockchain provide a framework for counting the beans and a ledger of how the beans were counted. The ledger is the key part here, as once an addition, subtraction or action has been taken it is logged and cannot be removed. This means you have traceability and transparency over what has happened.

Finally this brings us to the reason this technology offers so much potential and it comes down to one word.

Trust.

Let us take an example. When you go into the supermarket and buy a lemon- how do you know that lemon is organic, hasn’t been coated in toxic chemicals and is sourced from a ethical place? Right now you put your trust into the supermarket who puts trust into stamps on bits of paper from various trust authorities along the SUPPLY CHAIN. This is fundamental to every part of trade and every industry.
What if instead of stamps on a piece of paper or recorded in the “cloud”, those stamps were instead put on the blockchain? A blockchain that is independent from Costco, Tesco’s, Sainsbury’s or whomever you have to trust. Instead- remember the miners don’t care what is being passed around- you could look for yourself via the blockchain. This transparency would hold supermarkets to more account.
The same could be applied to banks. Remember the last time you transferred some money from your account to pay for something. Now imagine if that transfer did not happen it would leave you without a place to stay, mean you lose out on that rare ticket,l or missed an opportunity you should have otherwise had. This happens daily, and in these cases you have to go through a complaints procedure and hope the banks haven’t tampered with the information for their own interest (remember the Libor scandal which was on a $ trillion market). If that transaction were to use blockchain the banks would have nowhere to hide. The additional level of transparency or audit of what happens would revolutionise entire industries and the practices they currently employ. A new level of accountability and corporate governance would be issued in.

Another key benefit of DLT is what is known as tokenisation.

Because beans can be created in any form and the blockchains do not care what they represent, they can be used to represent for example a new currency- like a digital version of USD (this is what Facebook’s Libra is supposed to be), Livetree’s Seed Token, or a token to represent the deeds to your house. This digital representation presents a new economy with a new form of access. Access that is not restricted by banks, institutions or those living in poorer continents such as Africa where the infrastructure prevents them from being part of the financial system. IT provides access to those known as the ‘unbanked’.

There are 18 decimal points to each token (well, on the Ethereum blockchain anyway): 0.000000000000000001. Why is that important? Well, you can imagine now that the token that represents your house property deeds can now be split and sold digitally, without the need of a financial institution.

Stay tuned to find out more about how Livetree uses blockchain, and our experience with ICO/IEOs!