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What are ICOs (Initial Coin Offering) and how they really work

An ICO (acronym for Initial Coin Offering) is a financing mechanism for a new project initiative based on Blockchain, through the sale to the financiers of the project, in exchange for a consideration, of tokens that guarantee some form of law on the initiative itself.

Difference Between IPO and ICO

The term Initial Coin Offering (ICO) is derived from the more traditional Initial Public Offering (IPO) used to indicate the public offering of securities of a company that intends to list for the first time on the stock market.

The two procedures described both aim to raise capital for the implementation of a project, but an ICO differs in two fundamental aspects:

• in the main object of the offer, which is in this case a Coin or Token;
• in the place where this offer takes place, which is not a regulated market, but a blockchain platform.

The token at the "center" of Initial Coin Offerings

The types of Tokens object of the offer in ICOs can be summarized in two main categories: utility tokens and security tokens.

Utility tokens are a way to fund projects that could not previously be funded. To allow the construction of such ecosystems, some tokens can be "pre-extracted", as well as being sold in "crowd-sales" during the token offering. The usefulness of this token is that it will allow access to a company's product or service in the future.

With the creation of utility tokens, a startup can sell "digital coupons" for the service it is developing, just as some electronics retailers accept pre-orders for video games that will be released only after several months. Utility tokens are services or units of services that can be purchased. One of the distinctive features of utility tokens is that n on are designed as an investment tool, which exempts them from the laws that govern financial securities to protect savers, making their market freer from the various constraints and controls they would otherwise face. Utility token creators usually refer to these crowdsales as token generation events (TGE) or token distribution events (TDEs) to avoid getting involved in something similar to a stock offering.

Security tokens (or asset tokens) are those tokens whose value is linked to a tradable external asset. This type therefore becomes similar to financial securities and is therefore subject to the rules that regulate them. Failure to comply with these rules and regulations could result in penalties and could threaten to derail the project. However, if startups meet all regulatory obligations, Tokenized Security could have the potential for a wide variety of applications, the most promising of which is the ability to issue tokens that represent shares in the company.

The typical process of an ICO

The process of making an ICO can be described in 4 main steps:

1. drafting of a whitepaper that describes the project and its progress, the financing needs, how many tokens will remain in the hands of the founders, with which (crypt)currencies you can buy the tokens and how long the campaign will last;
2. communication activities that often takes place by creating ad hoc discussion pages to promote the ICO and attract potential investors;
3. purchase of tokens by investors. If the collection targets are not met, the funds are returned to investors. If the requirements are met, the funds raised are used to start or complete the project;
4. at the end of the initial sale, tokens are placed in the exchange lists and can be exchanged between users

ICO and Blockchain: a bit of history

ICO's first experiments date back a few years. It is July 2013 when Mastercoin raises $500,000 simply by publishing a Bitcoin address to send the funds to. In the following April, Maidsafe raises $7 million in just 5 hours. Indictions that led to the creation of a standard. In July 2014, in fact, Ethereum, which collects in the form of a donation, 18.4 million and launches a platform and standard (ERC20) for the creation of new tokens on its blockchain. The first problems are just around the corner. In June 2016, for example, TheDAO suffered a hacker attack and $55 million was stolen.

Nevertheless, 2017 is the year of the boom: in April, Gnosis, an Ethereum-based market forecasting platform, collects 12.5 million in 12 minutes; in June the Israeli Bancor exchange collects 153 million in just 3 hours, while in August the sums collected through the ICOs outperforms the investments of the VC. In September 2017, celebrities ride the ICO wave: Paris Hilton sponsors Lydian which raises 11 million.

Initial Coin Offering: Scam or Great Opportunity?

But problems resurface, and scams explode (fraud attempts). In December 2017, and in the months to come, some things happen: PlexCoin is blocked because she is accused of declaring returns on investment impossible to obtain and of having used false experts to certify them; the founders of Centra (sponsored by Floyd Mayweather) are found guilty of fraud.

The founders of Benebit, who had provided false generalities, close all the startup's accounts and disappear with the 2.7 million collected.

This is where the regulator begins to intervene decisively. In January 2018, Facebook, followed by Google, bans campaigns advertising ICOs and cryptocurrencies. China bans ICOs by declaring sales of "illegal and disruptive to economic and financial stability" tokens. It is February 2018, however, when the Swiss Financial Market Supervisory Authority publishes guidelines for those who want to launch an ICO.

At the moment there is still no uniform vision: some countries (Switzerland, Malta, etc.) have a positive attitude with the aim of attracting investment and capital, the US and EU are observing the phenomenon by strongly emphasizing the risks, while countries such as China and South Korea have taken decidedly contrary positions.