Initial coin offerings are very popular. A large number of companies have raised nearly $1.5 billion through the novel fundraising mechanism this year. Celebrities from Floyd Mayweather to Paris Hilton have jumped about the hype train. But don’t feel bad if you’re still wondering: exactly what the hell is definitely an ICO?
The acronym probably sounds familiar, and that’s on purpose-an ICO does indeed work similarly with an initial public offering. As an alternative to offering shares in a company, though, a company is instead offering digital assets called “tokens.”
A token sale is sort of a crowdfunding campaign, except it uses the technology behind Bitcoin to verify transactions. Oh, and tokens aren’t just stand-ins for stock-they can be setup in order that as opposed to a share of your company, holders get services, like cloud storage space, as an example. Below, we run down the increasingly popular practice of launching an ICO and its particular possibility to upset business as you may know it.
Let’s start out with Vtcoin, the most common token system. Bitcoin as well as other digital currencies are based on blockchains-cryptographic ledgers that record every transaction performed using Bitcoin tokens (see “Why Bitcoin Could Be Much Greater than a Currency”). Individual computers around the world, connected over the internet, verify each transaction using open-source software. A few of these computers, called miners, compete to resolve a computationally intensive cryptographic puzzle and earn opportunities to add “blocks” of verified transactions for the chain. For their work, the miners get tokens-bitcoins-in return.
Blockchains need miners to work, and tokens are definitely the economic incentive to mine. Some tokens are constructed in addition to new versions of Bitcoin’s blockchain that were modified in some manner-examples include Litecoin and ZCash. Ethereum, a popular blockchain for companies launching ICOs, is a newer, separate technology from Bitcoin, whose token is referred to as Ether. It’s even easy to build completely new tokens in addition to Ethereum’s blockchain.
But advocates of blockchain technology say the strength of tokens goes past merely inventing new currencies from thin air. Bitcoin eliminates the requirement for a dependable central authority to mediate the exchange of value-a credit card company or even a central bank, say. In principle, that can be achieved for other things, too.
Take cloud storage, by way of example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of storage area, a model that could challenge conventional providers like Dropbox and Amazon. The tokens in this instance would be the method of payment for storage. A blockchain verifies the transactions between buyers and sellers and functions as a record in their legitimacy. How exactly this works is dependent upon the project. In Filecoin, which broke records last month by raising greater than $250 million with an ICO, miners would earn tokens by offering storage or retrieving stored data for users.
One of the first ICOs to create a big splash happened in May 2016 together with the Decentralized Autonomous Organization-aka, the DAO-that has been essentially a decentralized venture fund built on Ethereum. Investors could use the DAO’s tokens to cast votes concerning how to disburse funds, and then any profits were supposed to return to the stakeholders. Unfortunately for anyone involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of huge amounts of money in digital currency (see “$80 Million Hack Shows the hazards of Programmable Money”).
A lot of people think ICOs might lead to new, exotic means of developing a company. In case a cloud storage outfit like Filecoin would suddenly skyrocket in popularity, for example, it might enrich anyone who holds or mines the token, rather than a set band of the company’s executives and employees. This would be a “decentralized” enterprise, says Peter Van Valkenburgh, director of research at Coin Center, a nonprofit research and advocacy group focused on policy issues surrounding blockchain technology.
Someone has to build the blockchain, issue the tokens, and sustain some software, though. In order to kickstart a whole new operation, entrepreneurs can pre-allocate tokens on their own in addition to their developers. And so they can make use of ICOs to promote tokens to the people interested in using the new service if it launches, or maybe in speculating as to the future worth of the service. If the value of the tokens goes up, everybody wins.
With all the hype around Bitcoin and also other cryptocurrencies, demand is extremely high for some of the tokens showing up in the market lately. A small sampling of your projects that vtco1n raised millions via ICOs recently includes a Web browser geared towards eliminating intermediaries in digital advertising, a decentralized prediction market, along with a blockchain-based marketplace for insurers and insurance brokers.
Still, the future of the token marketplace is very uncertain, because government regulators will still be trying to puzzle out how you can treat it. Complicating things is the fact that some tokens tend to be more like the basis of traditional buyer-seller relationships, like Filecoin, while others, like the DAO tokens, seem a lot more like stocks. In July, the U.S. Securities and Exchange Commission claimed that DAO tokens were indeed securities, and that any tokens that function like securities will likely be regulated as such. A week ago, the SEC warned investors to take into consideration ICO scams. This week, China went so far concerning ban ICOs, as well as other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Most of the companies launching ICOs haven’t produced anything greater than a technical whitepaper describing an understanding that may not pan out.
But Van Valkenburgh argues that it’s okay in the event the ICO boom can be a bubble. In spite of the silliness of the dot-com era, he says, out of it came “funding and excitement and human capital development that ultimately triggered the important wave of Internet innovation” we enjoy today.