Beginners Guide to How an ICO Works
It was explained in the Beginners Guide to What is an ICO that an initial coin offering (ICO) is a way to raise money for a project, business, or a company. In this guide we’ll go through how an ICO works.
An ICO works through creating a large number of ‘digital coins’. These coins are distributed to the buyers in exchange for another digital cryptocurrency which are then used to fund any underlying projects or ventures. The easiest way to think about an Initial Coin Offering is as crowd-source funding, except in exchange of money directly, the founders hope to receive cryptocurrency.
The first ever token sale in the history of blockchain was by Mastercoin (now known as Omni). The sale was held in mid 2013. The crowd sourcing only had a few investors but managed source just over $500,000 USD in funding.
2017 saw the real rise of ICOs with over 200 ICOs being raised and managed to collect over 3 Billion dollars in total!
One of the most popular ones to date though is the Ethereum token sale. It’s value has gone from mid dollar range during the ICO, to all the way into the hundreds over the next few years. And because of Ethereum we actually saw this exponential growth in ICOs, afterall, EThereum is designed to create tokens and smart contracts easily!
So if you are looking to start your own ICO, this will serve as a basic understanding on what to do and look out for. If you are looking to invest or participate in an ICO, it is good to have a basic understanding on how an ICO works.
How does an ICO work?
Let’s go through the process to see how an ICO works. The first thing to keep in mind is, there are no hard and fast rules on how every ICO works.
- A company is formed (it may be an existing company) to launch a new startup project
- The idea is formed, usually documented within a ‘white paper’
- The founding team is formed, backed by experience, knowledge, and development expertise
- The idea is validated through a prototype, MVP, or using any viable means to determine product-market fit
- The white paper is also published online
At this stage the company also needs to decide on the structure of the ICO: the funding goals (or limits) and the supply of the coins. For example the company may do any or a combination of the below:
- Decide to limit the funding such that once 500,000ETH is received the funding will be closed
- Limit the supply of the digital coin to 2,000,000,000 which will be partitioned so that on a daily basis only 100,000 coins are available for purchase
- Distribute the coins according to how much funding is being received
- May set a predetermined price of each coin
Once the structure and business rules are decided the company will be looking to create the actual token (digital coin). As the tocken is build on blockchain technology, it also requires creation of the smart contract.
The smart contract should enable the distribution of the new token as per the business rules that should have been determined by now. Basically, it automates most of the underlying processes required to not just run the application but the organisation.
Creating the token
The Ethereum platform is currently the go-to platform for designing and creating new cryptocurrencies. Ethereum, simply put, allows for the creation of decentralised applications that allow the creation and self-enforcement of smart contracts.
Create a tradeable digital token that can be used as a currency, a representation of an asset, a virtual share, a proof of membership or anything at all.- Ethereum.org
There are other blockchain technologies that allow you to quickly deploy new cryptocurrencies. Waves also allows you to create your own digital coin very easily. Ethereum is the most popular, some other popular ones include Stratis, Lisk, Ark, and NEO. Expect other platforms to pick up momentum of the coming years.
The other option is to create your own blockchain! You could create an original blockchain (from scratch) or you could fork an existing blockchain. By forking a chain, you use the source code of the existing chain, the success rate is variable though and really depends on the value proposition (or your marketing budget!). Several popular forked chains include Litecoin and Bitcoin Cash.
The ICO phase is the actual crowdfunding stage. Each ICO will vary. This depends on the structure and distribution strategy as per the smart contract and the underlying technology used.
ICOs are generally marketed through the cryptocurrency community channels as you will find your direct relevant target market hanging out here. There are also numerous websites serving as directories for new ICOs. There are even services being offered that will market your ICO for you!
Okay, so that’s the low down on How an ICO works. As the cryptocurrency market takes on new heights we do foresee initial coin offerings remain a prominent way to crowdfund or achieve other business goals. There are also existing services that will help you setup, launch, and deploy your ICO.
Service providers in this area can provide a full service from the KYC (know your customer) integration, token development, campaign marketing and strategy, technical audit and documentation, legal guidance up to investor relations.
Next, we’ll break it down further and show you exactly how you can personally benefit from an ICO. However, there are issues and negatives that you need to extremely careful about. We’ll break these down so stay tuned as we show you what to look for.
Next Chapter: Chapter 3- What are the risks I face from an ICO
Previous Chapter: Chapter 2- Beginners guide of what is an ICO