What is an ICO really?
There has been an explosion in initial coin offerings (ICOs) recently. According to CoinDesk, the total amount of money raised in total has rose from $300 million in 2014 to more than $3 billion in 2017. The ICO frenzy is not expected to slow down anytime soon. There are just too many people hoping to become ICO investors.
However, for many people, the thought of investing in ICOs may be confusing as there is a lot of technical jargon and incorrect information floating around.
So, what exactly is an ICO? Let’s illustrate it with a story.
Let’s say you wanted to build a new business – an app store only for mobile games.
You got a brilliant business plan. Gamers will be able to download games, buy power-ups and unlock bonus levels in the games that they bought from your stores. You will get commission from the money earned and pass the rest to the game developers.
Then you looked around and realised this could never happen. You were trapped in the same one-room apartment for years. You have been working on different business for years but none of them took off. And your family and friends are convincing you go back to your day job.
But what would it take for this business to succeed?
To build your app store, you needed huge sums of money. You need to hire engineers to build the platform, get game developers on board and get gamers to convert to your platform.
Even if you build a great app store with all these amazing features, you will still have problems. Game developers need to upload their games before the gamers will come. But without any gamers already using the platform, game developers are hesitant to build new games for your platform since it’s likely they won’t make money. But the thing is gamers won’t go to your platform if there are not games. So, you find yourself caught in a catch-22 situation.
You start to consider your family’s advice seriously. Should you give up and go back to your day job?
No, you have come so far, and you weren’t going to quit now.
One day, you were looking through a tech news site and saw an article about a new ICO. Suddenly, a light bulb goes off in your head and you realise you can create your own game coins in the system.
Instead of asking gamers to pay in dollars, you will ask them to pay you in your game coins instead. And instead of paying developers in dollars, you will pay them in your game coins. To get people to start using and accepting your coins, you can give coin owners certain privileges. Coins with a utility are also known as tokens.
The introduction of your own game coin on your platform will help you solve all your problems. This solution is powered by blockchain technology or the C in the ICO which stands for coins. These coins would be done on a public blockchain where anyone can verify their ownership of the token and transfer it to anyone.
But even before you create and market your app store, you can set up and sell the coins at a fixed nominal price. This brings us to the other letters of the ICO – I and O – or Initial Offering.
Now, as an entrepreneur, you need to convince the world by telling how credible and capable you are in building a platform for gamers and developers. You also need to narrate the story of your coins and how it would become more valuable in the future. You tell the investors you are willing to offer them a discounted price for your coins even before the platform is built. This would allow you to raise enough capital to build the platform.
The initial coin offering happens on top of a public blockchain like Ethereum to provide ownership and transferability. So, you are really building your own coin on top of another coin.
And you haven’t already realised by now, digital value or coins are just entries on a ledger. Isn’t that mind-blowing?
Because you were such an amazing orator, everyone starts buying into your story and bought your coins at the initial coins offering. Now you can start building your app store!
One of the interesting side effects of making people own your token is that these individuals want it to become usable and appreciate in value. So token owners would evangelize your token and platforms to people they know to ensure the value of the coins appreciate.
Therefore, we can see that ICO is more than a way to raise money, it is also a new way to get customers and evangelizers for your platform.
Now as your empty pockets burst at the seams with cash, you became overcame by greed. Why give all this money back just to build an app store? As you thought of how the money will change your life, you decided to just cash out and go to another country where no one can find you.
A few months after you disappeared, the investors didn’t hear anything from you and realised that there was something fishy going on. They tried to call you, but no one picked up. At this time, most investors realised they were victims of a fraud.
One day, an investor of your gaming tokens bumped into you on the streets of Manhattan. He confronted you and demanded that you paid him back his investments or he would sue you. You shrugged your shoulders and said “just too bad”. The ICO was labelled as utility tokens or something you can get some utility on the app store but since you didn’t build the app store, the tokens were useless. The absence of legal guidelines prevented the investors to take any legal actions against you.
Like with anything, there are people that will find loopholes in the system and exploit them. Every coin has two sides. ICO is no different. There will be actors telling you the fake stories of what they would build if people buy their tokens but, they are not planning the money to good use. So, it pays to be cautious and discern potential opportunities from grab-the-money-and-run schemes.