What is an ICO: Analyzing the concept of “Initial Coin Offering”
What is an ICO : Introduction
Lately, the world of finance has undergone great changes. One of the biggest changes in the last two years has been the introduction of Initial Coin Offering (ICOs). It is no wonder that one of the most popular questions in the cryptocurrency world has been What is an ICO ?
Although you may be familiar with some popular cryptocurrencies like Bitcoin and Ethereum, you may not be as familiar with ICOs.
However, before going into details of the ICOs, I need to make sure you have a fair understanding of the technology behind the ICOs, chain blocks and intelligent contracts . If you already have confidence in your understanding of these two technologies, feel free to jump into the “Concept of an ICO”.
So, let’s get started!
What is an ICO : Blockchain
A blockchain is not Bitcoin or any other cryptocurrency. No. It is just that cryptocurrencies use the blockchain . Simply put, a block is a group of transactions. The chain is a group of blocks that are connected to each other. Put those two words together, and there you have it, a blockchain .
All these blocks joined in the chain form a public database. This database is public because it is shared with hundreds or even thousands of computers. We can think of these computers as the blockchain / database servers .
(These teams are called nodes .)
Any changes made to the database must be verified by more than 51% of the nodes. If they are not verified, the change cannot be made. This makes it very difficult to hack the database because you would need to hack more than 51% of the nodes and the nodes are normally owned by many different people and companies.
This effect is called decentralization , which means that the database is not stored in one place, but in many different places.
When we talk about “changes” in the database, it is about data transactions. In the case of Bitcoin, for example, these are Bitcoin transactions, people who transfer Bitcoin to other people.
(For more information on blockchain technology , read our Explanation of Blockchains guide .)
Now, let’s move on to the next piece of technology that ICOs use.
What is an ICO : Tokens and smart contracts
The transactions that occur in the database are not limited to financial transactions like those of the Bitcoin block. Instead, they can be anything of value.
For example, the value of the transaction could be a house or part of a business. Of course, you can’t physically place a house or share a company on the blockchain . Instead, you need something that represents the value of the house or part of the company.
I welcome you to the world of tokens . A token is created to represent the value of something. For example, a house, electricity, store credit, or part of a business.
These tokens can not be applied directly to the chain block , as usually can only process their own transactions cryptocurrency as Ether in the block chain ethereum Bitcoin and the block chain Bitcoin.
Instead, tokens must use an app.
Applications that use tokens are called smart contracts . However, they seem like a lot of code. Therefore, developers create dApps (decentralized applications) for use by regular users.
You can think of dApps as the interface you see when you use Instagram or Twitter, but behind Instagram and Twitter there are a number of encrypted applications. These encrypted applications are smart contracts .
These smart contracts are unique for many reasons. These reasons include the following:
They can automatically process transactions.
Operations are triggered by certain conditions that are recorded in the smart contract.
Imagine it like this: “ When Pedro pays 100 ether in the smart contract, Juan’s house token is sent to Pedro.”
They use blockchain technology, so the terms of the smart contract cannot be changed.
For more information on smart contracts , see our What is a Smart Contract Guide .
So now that you know the two pieces of technology that have made ICOs the success they are today. Let’s talk about what an ICO is !
What is an ICO : The ICO concept
ICOs can be compared to IPOs. An IPO is an Initial Public Offering, this is a term used when a company first launches its shares on the stock market. Before that, the company’s shares were private and its shares were not available to the public. For this same reason, it is called a Public Offer of Sale. It is important to understand the differences between the IPO and what is an ICO .
When companies are publicly traded, interested individuals and companies can buy their shares at a specified price.
The shares can be used to vote on specific shares that the company is taking, as it has actually become a partial owner! If the company does well, the value of its shares increases similarly and you can sell them at a later stage for profit.
ICOs are not as clean as IPOs. The Initial Offering Coin can be considered as a means of collective funding.
With an Initial Coin Offering , you get a token. These tokens do not give you any authority or long-term ownership of the project; they are simply a means for the project to raise funds.
However, once again, if the project is successful, the value of your token could increase. Therefore, you could sell the token for more than you bought it (if you want, that’s it).
What is an ICO : How do ICOs work?
To simplify the basic concept of an Initial Coin Offering or better explain what an ICO is :
How ICOs work | Source: cleveroad
If you want to start your own cryptocurrency or dApp, you will need a lot of money. To get this money, you can run an ICO. If people are interested in your ICO and think the project is good, they can buy your token for a certain price.
These prices are normally set in Ether (ETH), however some projects accept more than one cryptocurrency, typically Bitcoin (BTC) and Litecoin (LTC).
When you invest in an Initial Coin Offering , you send your ETH, BTC, LTC, or whatever currency you want to pay, to the ICO smart contract. This smart contract sends you the amount of token you have paid.
There are normally two main reasons to buy token from ICOs:
Sell the token in the future at a higher price.
To use the token for your purpose.
Tokens typically provide token holders with benefits such as discount fees, a share of the benefits, or premium features.
Some tokens can be used to buy things in the project app when it is created, these types of tokens are known as utility tokens.
What is an ICO How do investors know which ICOs to invest in?
Just because the idea is good does not mean that the project will be good!
An idea may seem very good, but then it fails completely once you raise the funds. It is true, unfortunately. There have even been cases where ICOs have turned out to be a complete scam! So now that you understand what an ICO is , make sure that when researching an ICO you are careful.
Investors often pay close attention to the following things:
Does the project have a competitor? If so, what do they do differently from their competitors?
Who is the team working on the project? Do they have good and relevant backgrounds? Have you worked on similar projects before?
The use of funds.
How will they use the money they collect from their ICO?
The road map.
What do you plan to do and how long will it take?
How many tokens will there be? What is the price of each token? How many tokens will be sold in the ICO and how many will be saved for other things?
Another alternative could be the use of an Initial Coin Offering monitoring application . There are separate companies that are being formed that spend their time researching, reviewing, categorizing, and following market news around different ICOs. One of these applications is Coinview , which allows its users to track the performance of different ICOs and monitor their performance in cryptocurrencies.
There are many questions, I know. The good news is that you can usually find most of the answers on their white paper! Feedback on the project and reviews are important. But, you should always make sure to do your own research to form your opinion. A large amount of information on the Internet may be inaccurate or based on emotion!
What is an ICO What is a White Paper?
Knowing what an ICO is is almost as important as understanding what a white paper is. A white paper is a document that presents the idea for which the ICO is raising funds. It contains much more detail than the descriptions you will find on the Initial Coin Offering website .
You’ll find things like system architecture, the need for his idea (the problem he’s solving, etc.), token uses, market data, and growth projections.
You’ll also often see a list of team members, investors, and advisors. Although, this is normally displayed on the website itself.
For an ICO to be successful, you need a good solid white paper. If you ever find a live ICO but it doesn’t have a white paper, I recommend that you don’t buy any tokens from it.
Very few people will want to invest in a project that does not have a white paper.
A good white paper will also provide information on what the funds will be used for. The focus should be on the funds used to grow the business and not on personal gain. This is important!
How to launch an ICO
If you are creating an ICO and you are not investing in one, you need to understand how investors research ICOs. You need to understand that they need to see all the things we have mentioned, otherwise they will not trust your ICO.
You need to keep your community up-to-date, treat it with respect, and make sure your project can do what it says it will. Always make sure you can deliver your project on time, and never tell lies.
So this is my guide to ICOs, thanks for reading! Now that you know what an ICO is , what do you think of this new way of raising funds for ideas? Do you want to invest in an ICO? Do you want to create an ICO? Let me know!
Also, if you have any questions, I will gladly answer them!