What is an ICO?

What is an ICO

Welcome to our What is an ICO guide!

Just when you thought the financial world couldn’t get any more surprising, the year of 2017 goes and throws ICOs in your face. A ton of overwhelming stats, figures and terminology you’d never heard before.

In this guide, we’ll explain it all.

Let’s start with the basics — what is an ICO?

ICOs Explained

First things first, ICO stands for Initial Coin Offering. This sounds similar to Initial Public Offering (IPO), and that’s because it slightly is.

Just as an IPO is the first time a stock is offered to the public, an ICO is the first time a coin/token is offered to the public. The reason for offering a token to the public is to raise funds for a blockchain-based project, typically a DApp (decentralized application) or a new blockchain protocol.

Essentially, ICOs are blockchain-based crowdfunding — similar in ways to that of Kickstarter and Indiegogo but decentralized rather than centralized.

Let’s imagine you have a brilliant idea for a DApp that you want to see brought to life. Well, an ICO would be a good way to go about raising the funds required to develop it.

What’s in it for the Investors?

One of the motives is often speculation for profit:

Typically, if the project seems good and/or has performed well since the ICO, the demand for the token will be high and the ICO investors will be able to sell their tokens for a higher price than they bought them at.

The other most common factor is utility:

Tokens normally enable the use of the DApp being created by offering some form of utility. For example, some tokens are required to purchase services on the DApp from other users. Other tokens may offer benefits such as premium features, voting rights, or a share of transactions fees charged by the DApp.

They’ve proved to be terrifically successful for startups thus far, having raised over $5.6 billion in 2017!

How Do ICOs Work?

So, you now know the answer to, ‘what is an ICO?’, but do you know how they work?

Let’s keep this simple.

  1. Dave has an idea for a new DApp named HealthChain. He needs $5 million to start his project. He gets a team together, works on a white paper, a website etc. and everything else he needs to show to investors.
  2. He gets the developer in his team to create a smart contract for the ICO. Smart contracts have tons of use cases, but here it essentially acts as a decentralized escrow system: it will accept funds from the investors and give them HealthChain tokens in return.
    1. It also enforces certain details such as the price of each HealthChain token, the soft cap, and the hard cap.
  3. Investors follow the instructions on the HealthChain website and send their cryptocurrency to the ICO smart contract. The smart contract sends the investors the number of tokens they paid for.
  4. The ICO ends when either of the following smart-contract conditions are met:
    1. When the pre-defined time limit is reached.
    2. When the hard cap is reached.
  5. As long as the ICO raised enough to meet its soft cap, the crowdfunded investment is safe. If it didn’t meet its soft cap before the time limit, the smart contract refunds all investors.
  6. Provided that the ICO was successful in reaching its soft cap, Dave and the team now have their funds to start the project. They can begin their mission to complete the roadmap they have set out for themselves and create the HealthChain application.
  7. At a later date, the HealthChain token is launched onto trading exchanges so that other users can buy the token from the investors that bought it at the ICO if they’re willing to sell any.

How Do Investors Know Which ICOs to Invest in?

Investors base their decisions on various components of ICOs, including the concept, the team, the roadmap, the existing MVP (Minimum Viable Product) if it is available, and many others.

That’s all for our What is an ICO guide! To learn more about finding ICOs to invest in, see our full guide here.

 

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