Initial coin offerings are all the rage. 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 around the hype train. But don’t feel bad if you’re still wondering: precisely 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 in the company, though, a strong 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 create to ensure rather than share of any company, holders get services, like cloud storage space, by way of example. Below, we run across the increasingly popular practice of launching an ICO and its particular possible ways to upset business as we know it.
Let’s start with VTC, the most popular token system. Bitcoin and also other digital currencies are based on blockchains-cryptographic ledgers that record every transaction conducted using Bitcoin tokens (see “Why Bitcoin Could Possibly Be Much More Than a Currency”). Individual computers around the globe, connected online, verify each transaction using open-source software. Some of the computers, called miners, compete to solve a computationally intensive cryptographic puzzle and earn opportunities to add “blocks” of verified transactions for the chain. For his or her work, the miners get tokens-bitcoins-in return.
Blockchains need miners to perform, and tokens will be the economic incentive to mine. Some tokens are built along with new versions of Bitcoin’s blockchain which were modified somehow-examples include Litecoin and ZCash. Ethereum, a common blockchain for companies launching ICOs, is a newer, separate technology from Bitcoin, whose token is known as Ether. It’s even easy to build brand new tokens on the top of Ethereum’s blockchain.
But advocates of blockchain technology say the strength of tokens goes past merely inventing new currencies from thin air. Bitcoin eliminates the demand for an honest central authority to mediate the exchange of worth-credit cards company or possibly a central bank, say. In principle, which can be achieved for other things, too.
Take cloud storage, for instance. Several companies are building blockchains to facilitate the peer-to-peer buying and selling of space for storing, a model that could challenge conventional providers like Dropbox and Amazon. The tokens in cases like this will be the way of payment for storage. A blockchain verifies the transactions between buyers and sellers and functions as a record of the legitimacy. Exactly how this works is dependent upon the project. In Filecoin, which broke records last month by raising over $250 million via an ICO, miners would earn tokens by offering storage or retrieving stored data for users.
Among the first ICOs to make a big splash happened in May 2016 using 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 regarding how to disburse funds, and then any profits were supposed to return towards the stakeholders. Unfortunately for everybody involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of huge amounts of money in digital currency (see “$80 Million Hack Shows the Dangers of Programmable Money”).
A lot of people think ICOs might lead to new, exotic methods for developing a company. When a cloud storage outfit like Filecoin would suddenly skyrocket in popularity, by way of example, it would enrich anyone that holds or mines the token, rather than a set group 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 dedicated to policy issues surrounding blockchain technology.
Someone has got to build the blockchain, issue the tokens, and look after some software, though. To kickstart a whole new operation, entrepreneurs can pre-allocate tokens for themselves and their developers. And they may use ICOs to market tokens to people enthusiastic about while using new service whenever it launches, or even in speculating as to the future value of the service. If value of the tokens goes up, everybody wins.
Because of the hype around Bitcoin along with other cryptocurrencies, demand continues to be very high for some of the tokens striking the market lately. A tiny sampling of the projects that vtco1n raised millions via ICOs recently includes a Browser targeted 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 figuring out the way to address it. Complicating things is some tokens will be more like the basis of traditional buyer-seller relationships, like Filecoin, while some, like the DAO tokens, seem more like stocks. In July, the U.S. Securities and Exchange Commission mentioned that DAO tokens were indeed securities, and this any tokens that function like securities is going to be regulated consequently. A week ago, the SEC warned investors to watch out for ICO scams. In the week, China went thus far with regards to ban ICOs, as well as other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Many of the companies launching ICOs haven’t produced anything more than a technical whitepaper describing a perception that may not pan out.
But Van Valkenburgh argues that it’s okay when the ICO boom is actually a bubble. Regardless of the silliness of your dot-com era, he says, from it came “funding and excitement and human capital development that ultimately triggered the large wave of Internet innovation” we enjoy today.