Initial coin offerings are very popular. Dozens of companies have raised nearly $1.5 billion through the novel fundraising mechanism 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: just what the hell is an ICO?
The acronym probably sounds familiar, and that’s on purpose-an ICO truly does work similarly to a initial public offering. As opposed to offering shares within a company, though, a firm is instead offering digital assets called “tokens.”
A token sale is sort of a crowdfunding campaign, except it uses the technology behind Bitcoin to verify transactions. Oh, and tokens aren’t just stand-ins for stock-they can be setup in order that instead of a share of your company, holders get services, like cloud storage space, as an example. Below, we run down the increasingly popular practice of launching an ICO and its particular possibility to upset business as we know it.
Let’s get started with Vtcoin, the most famous token system. Bitcoin as well as other digital currencies are derived from blockchains-cryptographic ledgers that record every transaction conducted using Bitcoin tokens (see “Why Bitcoin Might Be Much Over a Currency”). Individual computers worldwide, connected via the Internet, verify each transaction using open-source software. A few of those computers, called miners, compete to solve a computationally intensive cryptographic puzzle and earn chances to add “blocks” of verified transactions for the chain. For their work, the miners get tokens-bitcoins-in turn.
Blockchains need miners to run, and tokens would be the economic incentive to mine. Some tokens are constructed on the top of new versions of Bitcoin’s blockchain that were 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 known as Ether. It’s even possible to build brand new tokens along with Ethereum’s blockchain.
But advocates of blockchain technology say the power of tokens goes past merely inventing new currencies from thin air. Bitcoin eliminates the requirement for a dependable central authority to mediate the exchange of value-a credit card company or perhaps a central bank, say. In theory, which can be achieved for other activities, too.
Take cloud storage, as an example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of storage space, one that could challenge conventional providers like Dropbox and Amazon. The tokens in such a case will be the method of payment for storage. A blockchain verifies the transactions between sellers and buyers and serves as a record in their legitimacy. How exactly this works is determined by the project. In Filecoin, which broke records recently by raising a lot more than $250 million by using an ICO, miners would earn tokens by supplying storage or retrieving stored data for users.
The first ICOs to produce a big splash happened in May 2016 together with the Decentralized Autonomous Organization-aka, the DAO-that was essentially a decentralized venture fund built on Ethereum. Investors can use the DAO’s tokens to cast votes on the way to disburse funds, and any profits were supposed to come back on the stakeholders. Unfortunately for everyone involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of vast amounts in digital currency (see “$80 Million Hack Shows the hazards of Programmable Money”).
Many people think ICOs could lead to new, exotic methods for creating a company. In case a cloud storage outfit like Filecoin were to suddenly skyrocket in popularity, for instance, it would enrich anyone who holds or mines the token, as opposed to a set band of the company’s executives and employees. This could be a “decentralized” enterprise, says Peter Van Valkenburgh, director of research at Coin Center, a nonprofit research and advocacy group centered on policy issues surrounding blockchain technology.
Someone needs to build the blockchain, issue the tokens, and maintain some software, though. So to kickstart a fresh operation, entrepreneurs can pre-allocate tokens by themselves and their developers. And they also may use ICOs to sell tokens to the people interested in while using new service whenever it launches, or perhaps in speculating about the future value of the service. If the need for the tokens increases, everybody wins.
With all the current hype around Bitcoin as well as other cryptocurrencies, demand has been very 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 geared towards 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 will still be trying to puzzle out the way to address it. Complicating things is some tokens tend to be more much like the basis of traditional buyer-seller relationships, like Filecoin, although some, such as the DAO tokens, seem much more like stocks. In July, the Usa Securities and Exchange Commission stated that DAO tokens were indeed securities, which any tokens that function like securities will likely be regulated as a result. The other day, the SEC warned investors to watch out for ICO scams. This week, China went so far regarding ban ICOs, and other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Lots of the companies launching ICOs haven’t produced anything greater than a technical whitepaper describing an understanding that could not pan out.
But Van Valkenburgh argues that it’s okay in case the ICO boom is actually a bubble. Despite the silliness in the dot-com era, he says, from it came “funding and excitement and human capital development that ultimately led to the large wave of Internet innovation” we enjoy today.