Initial coin offerings are very popular. A large number of companies have raised nearly $1.5 billion using the novel fundraising mechanism just this year. Celebrities from Floyd Mayweather to Paris Hilton have jumped on the hype train. But don’t feel bad if you’re still wondering: exactly what the hell is surely an ICO?
The acronym probably sounds familiar, and that’s on purpose-an ICO truly does work similarly to an initial public offering. Instead of offering shares inside a company, though, a firm is instead offering digital assets called “tokens.”
A token sale is like a crowdfunding campaign, except it uses the technology behind Bitcoin to ensure transactions. Oh, and tokens aren’t just stand-ins for stock-they are often set up in order that instead of a share of any company, holders get services, like cloud storage space, as an example. Below, we run on the popular practice of launching an ICO along with its possible ways to upset business as you may know it.
Let’s start with Vtcoin, the most popular token system. Bitcoin and also other digital currencies derive from blockchains-cryptographic ledgers that record every transaction carried out using Bitcoin tokens (see “Why Bitcoin May Be Much More Than a Currency”). Individual computers all over the world, connected via 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 possibilities to add “blocks” of verified transactions on the chain. For his or her work, the miners get tokens-bitcoins-in turn.
Blockchains need miners to operate, and tokens are definitely the economic incentive to mine. Some tokens are constructed in addition to new versions of Bitcoin’s blockchain which have been modified in some way-examples include Litecoin and ZCash. Ethereum, a well known blockchain for companies launching ICOs, can be a newer, separate technology from Bitcoin, whose token is referred to as Ether. It’s even possible to build completely new tokens on the top of Ethereum’s blockchain.
But advocates of blockchain technology say the strength of tokens goes beyond merely inventing new currencies from thin air. Bitcoin eliminates the need for an honest central authority to mediate the exchange of value-a credit card company or perhaps a central bank, say. Theoretically, that may be achieved for other stuff, too.
Take cloud storage, as an example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of storage space, a model which could challenge conventional providers like Dropbox and Amazon. The tokens in this case are definitely the way of payment for storage. A blockchain verifies the transactions between buyers and sellers and serves as a record of the legitimacy. Exactly how this works depends upon the project. In Filecoin, which broke records last month by raising over $250 million via an ICO, miners would earn tokens by providing storage or retrieving stored data for users.
Among the first ICOs to create a big splash happened in May 2016 with all the Decentralized Autonomous Organization-aka, the DAO-that has been essentially a decentralized venture fund built on Ethereum. Investors can use the DAO’s tokens to cast votes on the way to disburse funds, as well as profits were supposed to return towards the stakeholders. Unfortunately for all involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of millions of dollars in digital currency (see “$80 Million Hack Shows the hazards of Programmable Money”).
Many people think ICOs may lead to new, exotic means of creating a company. If your cloud storage outfit like Filecoin would suddenly skyrocket in popularity, by way of example, it would enrich anyone who holds or mines the token, rather than a set number 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 dedicated to policy issues surrounding blockchain technology.
Someone has got to build the blockchain, issue the tokens, and sustain some software, though. To kickstart a whole new operation, entrepreneurs can pre-allocate tokens for their own reasons and their developers. And they can use ICOs to promote tokens to the people interested in utilizing the new service if it launches, or maybe in speculating about the future price of the service. If value of the tokens rises, everybody wins.
With all the hype around Bitcoin along with other cryptocurrencies, demand continues to be extremely high for a number of the tokens hitting the market lately. A little sampling in the projects that vtco1n raised millions via ICOs recently features a Browser aimed at eliminating intermediaries in digital advertising, a decentralized prediction market, as well as a blockchain-based marketplace for insurers and insurance brokers.
Still, the future of the token marketplace is highly uncertain, because government regulators continue to be considering the best way to treat it. Complicating things is the fact that some tokens are definitely more such as the basis of traditional buyer-seller relationships, like Filecoin, while others, such as the DAO tokens, seem a lot more like stocks. In July, the United states Securities and Exchange Commission said that DAO tokens were indeed securities, and that any tokens that function like securities is going to be regulated therefore. Last week, the SEC warned investors to watch out for ICO scams. In the week, China went thus far regarding ban ICOs, and 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 case the ICO boom is really a bubble. Regardless of the silliness from the dot-com era, he says, from it came “funding and excitement and human capital development that ultimately resulted in the important wave of Internet innovation” we enjoy today.