Initial coin offerings are all the rage. Many 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: 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. As opposed to offering shares within a company, though, a strong is instead offering digital assets called “tokens.”
A token sale is like a crowdfunding campaign, except it uses the technology behind Bitcoin to verify transactions. Oh, and tokens aren’t just stand-ins for stock-they may be create to ensure rather than a share of the company, holders get services, like cloud space for storage, as an example. Below, we run on the more popular then ever practice of launching an ICO and its particular possibility to upset business as we know it.
Let’s start out with VTC, the most famous token system. Bitcoin as well as other digital currencies derive from blockchains-cryptographic ledgers that record every transaction performed using Bitcoin tokens (see “Why Bitcoin Might Be Much Greater than a Currency”). Individual computers around the world, connected via the Internet, verify each transaction using open-source software. Some of the computers, called miners, compete to eliminate a computationally intensive cryptographic puzzle and earn the opportunity to add “blocks” of verified transactions towards the chain. For their work, the miners get tokens-bitcoins-in exchange.
Blockchains need miners to run, and tokens would be the economic incentive to mine. Some tokens are constructed on top of new versions of Bitcoin’s blockchain which were modified somehow-examples include Litecoin and ZCash. Ethereum, a favorite blockchain for companies launching ICOs, can be a newer, separate technology from Bitcoin, whose token is referred to as Ether. It’s even easy to build new tokens on top of Ethereum’s blockchain.
But advocates of blockchain technology say the potency of tokens goes beyond merely inventing new currencies from thin air. Bitcoin eliminates the requirement for a dependable central authority to mediate the exchange of worth-a credit card company or a central bank, say. In principle, that may be achieved for other stuff, too.
Take cloud storage, by way of example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of storage space, one that can challenge conventional providers like Dropbox and Amazon. The tokens in this instance will be the way of payment for storage. A blockchain verifies the transactions between buyers and sellers and works as a record of their legitimacy. Just how this works depends on the project. In Filecoin, which broke records recently by raising over $250 million by using an ICO, miners would earn tokens by supplying storage or retrieving stored data for users.
Among the first ICOs to create a big splash happened in May 2016 with all the Decentralized Autonomous Organization-aka, the DAO-which had been essentially a decentralized venture fund built on Ethereum. Investors could use the DAO’s tokens to cast votes on the way to disburse funds, and any profits were supposed to return for the stakeholders. Unfortunately for everyone involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of millions of dollars in digital currency (see “$80 Million Hack Shows the risks of Programmable Money”).
A lot of people think ICOs might lead to new, exotic methods for constructing a company. When a cloud storage outfit like Filecoin were to suddenly skyrocket in popularity, for instance, it would enrich anyone who holds or mines the token, instead of a set selection of the company’s executives and employees. This is a “decentralized” enterprise, says Peter Van Valkenburgh, director of research at Coin Center, a nonprofit research and advocacy group focused entirely on policy issues surrounding blockchain technology.
Someone has to build the blockchain, issue the tokens, and look after some software, though. To kickstart a new operation, entrepreneurs can pre-allocate tokens on their own along with their developers. Plus they can make use of ICOs to sell tokens to people interested in using the new service when it launches, or maybe in speculating regarding the future worth of the service. If value of the tokens goes up, everybody wins.
With all the hype around Bitcoin along with other cryptocurrencies, demand has become very high for some of the tokens showing up in the market lately. A small sampling of the projects that vtco1n raised millions via ICOs recently contains 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 way forward for the token marketplace is tremendously uncertain, because government regulators continue to be trying to puzzle out the way to address it. Complicating things is the fact that some tokens are more just like the basis of traditional buyer-seller relationships, like Filecoin, while some, like the DAO tokens, seem similar to stocks. In July, the United states Securities and Exchange Commission stated that DAO tokens were indeed securities, and this any tokens that function like securities will be regulated consequently. The other day, the SEC warned investors to watch out for ICO scams. This week, China went so far concerning ban ICOs, and also other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Many of the companies launching ICOs haven’t produced anything greater than a technical whitepaper describing an idea that may not pan out.
But Van Valkenburgh argues that it’s okay when the ICO boom is a bubble. In spite 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.