In the world of digital currencies, developers and idea makers can fund their project development through a method called ICO Initiation and attract large investors from all over the world. In this post, we will explain the concept of ICO.
What is an ICO?
Initial Coin Offering (ICO) is a way to raise capital and investment opportunity in which the tokens (the same digital currencies) of a project are sold before the project is launched and people can buy tokens in it. Invest.
In the ICO, tokens from a blockchain-based project will be used in the future, which theoretically increases their value if the project is successful.
Participants invest in the project using other digital currencies (often Bitcoin or Ethereum) or common currencies (dollars or euros) and receive tokens for their currencies. The ICO has many similarities to the IPO.
Refer to this example to better understand the ICO. The names are quite hypothetical.
A software engineer named Mr. X comes up with an interesting idea that he can implement using decentralized blockchain technology.
Suppose his idea is to build a decentralized platform for advertising. He calls his platform tokens “adscoin”, with which advertisers can pay their advertisers. Therefore, adscoin is a functional token that if the platform users increase, the token price will also increase.
Mr. X assembles his team to implement his idea as soon as possible. But there is a problem. Budget and capital are needed to develop the project. Mr. X has several ways to raise capital. He can contract with a real investor or get the capital he needs by convincing a local accelerator company.
But now that Mr. X’s project defines something called a blockchain and token, why not use an ICO and get help from the general public around the world to raise capital?
But another problem. How to make and sell tokens when the project is not ready yet? Blockchains like Ethereum, which support smart contracts, come to his aid. Using the Ethereum platform and smart contracts, he quickly builds up some tokens and sets up a white paper (project description) with his team, and places it on the ICO site, along with a series of additional project and team descriptions Gives.
Many investors read about his project and invest in it and get tokens for their money. Now, with the money earned, Mr. X is implementing his idea and building his own Blockchain. Then, in a technical process, the Ethereum tokens are transferred to the main network, the new blockchain.
The project successfully achieves its goals, the value of adscoin tokens is multiplied, and the investors who invested in it taste the profits of several hundred percent.
It was a coin. On the other side of the coin, which happens more often, Mr. X, after raising capital, gives up his project and idea and starts his luxurious life with the money of investors.
Severe scams in ICOs
The truth is that although ICOs are an interesting idea and can be very profitable, unfortunately in most cases they are either scams or the ambitious ideas of their developers do not work and are left without any response to investors.
In 2017, many investors fell into the black dream of getting rich overnight by investing in ICOs that claimed to solve all the world’s problems.
Since most countries around the world do not have specific rules on ICOs, and since the ICO is a completely online process and does not require a face-to-face visit, the method used by the Ethereum team to raise capital has now become a scam idea. Has been.
Scammers can easily trap uninformed investors by writing ambitious articles about a dream idea and designing a booming website.
Since the investment amount is received in the form of digital currencies such as Bitcoin and Ethereum, due to the semi-anonymity of digital currency transactions, it is very difficult to track them and one should not expect them to return almost after sending the money.
According to the latest research, about 90% of all ICOs introduced in 2017 have either turned out to be scams or have been abandoned after no results.
These days, because of the risks that ICOs can pose to investors, and given the distrust of this type of crowdfunding, other methods have been devised to replace it.
Alternative methods of ICO
An alternative method has been introduced for ICOs with more than two fingers, but currently only two to three of them can be performed on a large scale. Two of the most commonly used alternative methods these days are:
Exchange Initial Offer (IEO)
Initial Exchange Offering, or IEO for short, is similar to ICO, except that it is held in a large digital currency exchange and investors go to the exchange to buy tokens.
In fact, unlike the initial coin offering, which is held directly by the team of a project, the initial public offering of an exchange is managed by an exchange on behalf of a startup with the aim of raising capital in exchange for the sale of tokens.
Many digital currency exchanges have started accepting IEOs led by Bainance Exchange.
Because large digital currency exchanges conduct the necessary checks before pre-selling tokens, the risk of fraud in this method is greatly reduced because there is a large exchange between the investor and the development team.
Initial offering of securities token (STO)
Security Token Offering, or STO for short, is another method of raising capital in the world of digital currencies that is very similar to the ICO, but with features that reduce investor risk, will probably soon replace the previous methods.
Simply put, in this method of collecting, tokens must be registered as securities that require legal procedures.
Given that the law guarantees the validity of securities ownership, in the STO, investors will have a legal and formal role to play in advancing the project, as well as the developers and the project team will be legally authenticated. In this process, the investment risk is greatly reduced and the commitment of developers will be significantly more credible.