What is an Initial Coin Offering?

What is an initial coin offering
 

Initial Coin Offerings (ICO’s) have become all the rage in the blockchain space. With all the hype and media attention around ICO’s, it is hard to not view this new phenomenon as a passing fad. These events have, in reality, revolutionized crowdfunding for tech companies, and have opened up the doors to investors, entrepreneurs and innovation. In this article, we’ll discuss the fundamental components and highlight the qualities of a successful ICO.

What is an ICO?

Let’s start with the basics: ICO stands for Initial Coin Offering. ICO’s have also been used interchangeably with a TGE ( Token Generating Event) or a TDE ( Token Distribution Event). In essence, they are all ways for a startup to develop and issue unique cryptographic tokens through a Smart Contract. Through the decentralized blockchain technology that they leverage, ICO’s have led to innovation and opportunity beyond mere financial profit. An overwhelming majority of ICO’s today are for companies that are building out scalable decentralized applications (dApps) and token-based business models, services and products.

Distinguishing Token Type

What is the role and value of the token that is being offered during an ICO? Often times, the answer to this differs depending on the token in question. Tokens may perform a variety of different functions, may offer their contributors a different set of privileges, and may have a different economic value depending on the type of token it is. Below we have included two distinctive classes of tokens the market has seen thus far: security tokens and utility tokens.

token descriptions

Security tokens are tokens that derive their value as a tradable asset. To put this into perspective, let’s relate this concept to something we are all familiar with today: When established companies are ready to scale their business and raise funds, they often go public with a stock offering. This is called an Initial Public Offering. IPO’s offer investors a chance to own shares of a growing company early on. These shares may provide investors rights to the company, profits, dividends and price appreciation. Similarly, those individuals who purchase security tokens view this act as an investment; they are anticipating profit at a future time. Unlike an Initial Public Offering, contributors to a Initial Coin Offering do not gain legal rights or ownership to a project or business.

Many utility tokens, on the other hand, offer their contributors many different rights including the right to gain access to the company’s product or service at a future time. Keep in mind, this right may differ depending on the platform and situation.
Still confused? Think of this as an Amazon or an Alibaba gift card. You traded $100 USD (or your local currency) in exchange for this gift card that gives you credits to purchase items exclusively off of their platform. This is not considered an investment as you purchased the gift card to be used strictly as a user of the platform not as an investor. Alternatively, you could sell your gift card ( if you haven’t used it) to someone else who is interested in purchasing it. When you sell this gift card ( either at a loss or a profit) you are not creating a taxable event. Hence, it is not considered a security but a utility.

Success Beyond ICO’s:

Due to their functionality, utility tokens are not typically seen as an investment and as a result, may be exempt from many of the same rigid regulatory requirements that security tokens have been facing. For those who are out to launch a ICO ask yourself: What kind of intrinsic value do my tokens have and how can contributors benefit from it? An example of a company that not only raised a successful crowdsale but continues to make waves is Aeternity.

Aeternity is making scalable smart contracts interface with real-world data. Simply, put is a platform built to host smart contracts and dApps. Its off-chain smart contracts use real-world and real-time data by interacting with built-in oracles. This project was able to raise $36.96 million during the sale. What could be the reason for this? Project’s with valuable utility tokens have often had a much greater long term return potential than tokens without a use case.

According to Aeternity founder, Yanislav Malakhov, “For many companies, utility appears to be an afterthought, but for a token to be successfully adopted into the community, it is the most critical component.”

aeternity infobox

Aeternity’s blockchain economy and ecosystem is built around their token, AE. AE token can not only be transferred between the network participants but it also provides miners with an incentive and acts as fuel for the smart-contract. In addition, through their governance models, AE token user’s also have certain voting rights in the future of aeternity coin. In this way, Malakhov built a great team who built a great product and a token that offers real value to their users and consumers. Intrigued? Let us know your take on the future trend of ICO’s and if you are building out your ICO funding plan now, check out, Things to consider when setting a funding goal for you ICO to help keep your project on track.

So there it is! There is so much more to be uncovered as the blockchain industry matures at a growing pace. With that growth, so will our understanding and usage of different assets or tokens to kickstart a new product or platform that taps into the transformative potential of blockchain technology.Stay connected with us. Be sure to follow us on Facebook, Twitter, and LinkedIn for the latest blockchain guides and updates from Vanbex.