What’s more of a bubble than Bitcoin?
The phenomenon of the initial coin offering, or ‘ICO’, may qualify as THE bubble of the year. ICOs emerged as a major thing during 2017; in total they have raised over $3.6bn.
The term ‘initial coin offering’ evokes the more traditional initial public offering or IPO. An IPO happens when a company ‘goes public’ and lists its shares on a stock exchange, for the public to be able to buy and sell.
ICOs work in a similar way; the company issues ‘tokens’ in exchange for cryptocurrency. Individuals (high-net-worth or accredited investors) hand over usually either Bitcoin or Ether and receive a number of tokens in return. Each company doing an ICO will often create its own tokens, with the name linked to the name of the company.
The whole point of the ICO is for the company to raise funds for its current/future projects.
Types of ICO
There are different types of ICO: sometimes the company has already built the thing they say they want to build and it’s live in action. Sometimes no one has built anything but they’ve written lots about it and how amazing it will be (in what’s called a ‘whitepaper’).
Often the tokens will be used in the company’s ecosystem, for example by using the token to pay for a product or service through their network. Sometimes they will give you rights to vote on the strategy of the company, like a normal share, and other times they won’t have much use at all (there is even a Useless Ethereum Token out there aiming to prove this point).
What kind of tokens are out there?
Some of the biggest and most well-known ICOs involved companies like Filecoin and the DAO (Decentralised Autonomous Organisation).
The DAO was one of the early ICOs to occur, in April 2016. The organisation raised around £150m in the cryptocurrency ether and it operated as a venture fund. The tokens issued to the people handing over the ether did not give them ownership of the DAO, like a traditional share of a company would. But they did give voting rights on which projects the DAO should invest in, and meant the organisation should be run in a ‘democratic’ way.
Unfortunately, the DAO was hacked in June 2016 and $60m of ether was stolen. This highlights the risks with ICOs and blockchain tech more generally as a new phenomenon that is still constantly developing.
Filecoin raised more than $200m in its ICO in August 2017. Filecoin is a decentralised storage network built on a blockchain. It makes use of unused storage space on computers in the network; people who need storage pay people who have extra space available to host their files, at market prices. Filecoin created their filecoin token, which can be exchanged via online wallets for other cryptocurrencies like Bitcoin, or fiat currency like USD. So Filecoin is an example of a token being used within a network to pay for a service.
How does it work?
In many ICOs the idea is once you have the tokens initially, you will want to sell them later at a profit, and it’s this bit that attracts people looking to make a quick buck getting in early and selling at a high price later on.
ICO tokens are digital things recorded on a blockchain network. See my previous posts on WTF is blockchain, How blockchain works Part I and Part II for more info on those. Although from all different companies, tokens have developed standardised formats.
The ERC20 token type is an example of the ICO industry standardising code for tokens. This makes them similar to other tokens, and also makes it easier to interact with different platforms like exchanges or wallets.
Why do an ICO?
Usually at early stages of development, funding sources are limited to people like venture capital (VCs) firms with large amounts of money who are looking to make a return – in exchange they may want some control over the direction of the business. An ICO is a simpler and much cheaper way for companies to get a short term inflow of cash for the product/app/thing they are building.
ICOs have become popular with companies working with blockchain because they can do the same thing – get loads of money off people – without the same kind of costs involved in listing on say the London Stock Exchange, and without needing to hand over the control wanted by VCs.
What is the future for ICOs?
There is huge disagreement over the ‘status’ of ICOs and tokens from a legal and regulatory perspective. The views range from outright bans in China, to a cautiously welcoming stance from Japan, Singapore and the US.
The US Securities and Exchange Commission is one of the only regulators to have issued an opinion on the DAO ICO – stating that the tokens released in that event were ‘securities’ and therefore should be regulated by them as normal shares would be. Clearly across the globe regulators are becoming more aware of the phenomenon and are likely to start writing rules for companies around ICOs.
ICOs look like they’re here to stay, and we will undoubtedly see many more companies creating their own tokens of various kinds. Already there are a long list of companies lined up for a future ICO event.
ICOs are an interesting and exciting thing to come out of blockchain and the crypto space. But beware the hype!! There are many benefits to both the companies and the individuals participating in an ICO, but there are also many risks. So don’t believe everything you read/hear.