ICO
- by Maria Pilar Gimeno
- 3 posts
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Jen WiecznerSep 27, 2017
Ethereum creator Vitalik Buterin, who is so influential even rumors of his mortality can swing that cryptocurrency's price, has come up with a way to revolutionize his industry's hottest trend: the phenomena known as ICOs.An ICO, or initial coin offering, is a nascent fundraising method that has become both extremely popular and controversial in recent months.
ICOs, in which companies sell their own digital tokens in exchange for the cryptocurrency Ethereum, have raised about $1.3 billion this year through the end of July, according to data from Smith & Crown. That's nearly quadruple the amount of traditional venture capital raised in the same period.
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Meanwhile, the top U.S. markets regulator, the Securities and Exchange Commission, has announced its intention to treat ICOs, and the tokens created by them, like any other security. Last month, the SEC cracked down on ICO pump-and-dump schemes, a tactic previously associated with the penny stock market by which scammers artificially inflate the price of an asset.
Promotion of ICOs by celebrities from Paris Hilton to boxer Floyd Mayweather have added to regulators' concerns.Now, Buterin is attempting to address some of those issues. In a 15-page white paper published this week, Buterin and his co-author Jason Teutsch, the founder of blockchain verification project TrueBit, outline a different kind of ICO that they call an "interactive coin offering.
"Essentially, the authors are proposing a way to bring fundamental principles of market value to ICOs, which have so far suffered from a lack of rational free-market economics, allowing hype and promotion to wield outsized influence.
Here's what they mean by a lack of rational economics: When a new company prepares to offer stock through an initial public offering or IPO, as Snapchat maker Snap (SNAP, +1.01%) did earlier this year, it releases its financial data and shops the deal to investors to arrive at a stock price.
But nothing like that exists with cryptocurrency. For one thing, ICOs sell tokens that have never existed before, and which have unproven functionality, so there is no way to come up with an appropriate valuation—or as Buterin and Teutsch put it in the paper, "traditional analysis fails.
"The duo recommends solving this in two key ways. First, ICOs—which the authors call "token crowdsales"—would have no upfront cap on the amount of money raised, as is common among current offerings. That stipulation aims to avoid the stampede mentality that has overpowered rational buying behavior in certain capped ICOs, such as one in June that raised its maximum $35 million in just 30 seconds, with only 130 people able to buy tokens.
"Capped sales can reach tens of millions of dollars and sell out in a matter of minutes, leaving buyers unable to participate, disappointed, and frustrated," the authors write.
Secondly, the authors' proposal would allow ICO investors to do something which has so far not been possible in token sales: cancel their purchase.
The ability to withdraw offers in an ICO should help ensure that the law of supply and demand plays a healthy role in the process. That's where the "interactive" component comes in, the authors write:
"Potential buyers may enter and exit the crowdsale based on behaviors of other buyers, and in doing so tend the valuation towards a market equilibrium."To make this happen, Buterin and Teutsch's new system introduces the concept of a "limit order," something that has long existed in stock trading, to the ICO market.
Instead of asking investors to buy tokens at an arbitrarily set price, the new method would allow buyers to enter bids for how many tokens they would be willing to purchase at different valuations.
The buyers could also set a maximum price, or limit, at which they are comfortable participating. In effect, the system is not wholly unlike the one used at auction site eBay (EBAY, +0.53%).
Practically speaking...continue reading on Fortune here: http://fortune.com/2017/09/27/ethereum-ico-vitalik-buterin/- By Admin
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Jose Ojeda Portillo Adviser at Blockchain Company / Water Health Environment / Biosphere University << ICOs have raised about $1.3 billion this year through the end of July. That's nearly quadruple the amount of traditional venture capital raised in the same period. >>- 10 1 vote
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Jose Ojeda Portillo Adviser at Blockchain Company / Water Health Environment / Biosphere University << To make this happen, Buterin and Teutsch's new system introduces the concept of a "limit order," something that has long existed in stock trading, to the ICO market. Instead of asking investors to buy tokens at an arbitrarily set price, the new method would allow buyers to enter bids for how many tokens they would be willing to purchase at different valuations. The buyers could also set a maximum price, or limit, at which they are comfortable participating. In effect, the system is not wholly unlike the one used at auction site eBay. (...) would make token prices more reasonable and fair, deter deep-pocketed investors (or "whales") from gobbling up huge swaths of the market, and also prevent a lot of buyer's remorse. >>- 10 1 vote
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If you are in the startup ecosystem — or just a casual reader of tech sites — I’m sure that the majority of the fundraising stories you must have heard in past few months had a new term attached to them — ICO.
The fundraising didn’t happen by selling out the equity of the company but by selling something called ‘tokens.’It might be hard to believe for some, but companies have actually raised more money through ICOs than from VCs in 2017. Getting money for your business is of course awesome, but I believe that ICOs are more than just a tool to raise some capital.
To explain the economics and incentives behind the ICOs, I’ve put together this ultimate guide for you to understand ICOs. Unfortunately I won’t be able to cover how you can carry out your own ICO, or how to participate in ICOs, but fear not because those might be coming soon.The C in the ICO
While the world calls it “an unregulated means of crowdfunding via use of cryptocurrency,” I believe it’s much more than that for business because of the implications it brings along. The acronym ICO stands for Initial Coin Offering. Just from the name, we can easily figure it out that companies can raise money by offering the initial (and/or the only) set of coins.
Sounds simple enough, but what are these ‘coins’ that are being offered?In this guide, we’re going to delve into the coins first, and then move up the ladder to understand the initial offering of the said coins. It’s time to understand the C in the ICO.
To get the most out of this article, it really helps to understand how a blockchain works. To make this whole thing easier, I suggest we create an imaginary scenario to shed some light on the ICO process.Let’s say you want to build a business — an app store just for mobile games.
Through your cool new app store, gamers will be able to download free and paid games. They can upgrade the power-ups or unlock bonus levels in the games they’ve bought through your app store. Whatever money the gamers would spend playing the games, you would pass it to the game developers after deducting your commission.
Seeing that you’re a great entrepreneur, your app takes off and becomes a thriving ecosystem of gamers and game developers. The biggest game development companies would start releasing their games, and the world’s most hardcore gamers would play them on your platform. Truly, a dream come true.
But that’s just it, it’s just a dream — certainly beautiful, but ultimately not yet a reality. In order to make your app store really happen, you’d have to hire engineers to build up the platform, hire people to get game developers on the platform, and spend loads of money to evangelize the platform to gamers.
You realize there’s a long road ahead, but your pockets are empty.And even if we’d allow us to imagine that you’d somehow manage to put together the app store with all it’s amazing features features — you’d still have problems. Game developers would need to start upload their games, so the gamers could buy them, but why would the developers do that?
Without any gamers already using the platform, ready to pay for the games, developers won’t make any money. That’s not a situation they would like to be in because they need to feed themselves and their teams too.To fix it, we go back to the whiteboard to plan out something to bring in a desperate mob of gamers on the platform to lure the developers.
But why would they come when there aren’t any games readily available to download and play? Gamers won’t come till the games arrive and games won’t arrive till the gamers come. Our newly released platform will become a victim of the typical catch 22.
Realizing all these hurdles ahead on your journey, you could either let it overwhelm you and give up — or find a creative solution to realize the imaginary app store. You aren’t a quitter. Smart entrepreneurs find a solution.
Answers to profound questions are never obvious. Recently, we found a solution that would fix all of the above problems, powered by blockchain tech — the C in the ICO.C is for coins
In the above example, you, being a smart entrepreneur, think of something unusual. A lightbulb goes off above your head and you realize that you can introduce your own game coins in the ecosystem. Instead of asking gamers to pay in dollars or euros, you would ask them to pay you in your own game coins.
On the other side of the spectrum, instead of paying the developers in dollars or euros, you would pay them in your own game coins. The coins can be utilized to derive some value from the ecosystem, therefore, giving the coin owner a privilege. The coins with a utility attached to them are also known as ‘tokens’ — that’s the term you’d get to hear about when reading more about ICOs.
Introduction of your own instrument to exchange value in the ecosystem lets you use it to solve all the problems we listed above. The accounting of your own coin/token won’t be done by you alone in an opaque database; instead, it would be done on a public blockchain where anyone can verify their ownership of the token and can transfer it to anyone else freely.
Even before one creates and markets their platform, they can set up and sell a bunch of these coins at a fixed nominal price. And this brings us to the other two letters of the ICO — I and O.Initial Offering
As an entrepreneur, you build a business plan with all the economics of your coin/token taken care of on the platform, and you announce an initial offering of the coins. You convince the world by telling a story about how credible and capable you are to pull off building such a platform for gamers and developers.
You also narrate the story of your coin and how it would be valuable to the world. You offer potential buyers to purchase your coins at a fixed discounted price right now — even before the platform is built — to allow you to raise enough capital to go ahead and actually build it.
You tell them that because your ecosystem would thrive in years to come, the coin, which is in limited supply would appreciate in value.
Then, they could either use the coin themselves to pay for the games or sell them to the gamers at an appreciated value.The initial coin offering happens on top of a public blockchain like Ethereum, NEO or Waves to provide the trust of ownership and transferability.
So in reality you wouldn’t be creating an entirely new coin. Instead, you built your own coin on top of another coin. Interesting! If you don’t realize it yet, money or any digital value is actually just an entry on a ledger. (Mind blown?)
If enough people believe in your story and buy your coin/token, your earlier empty pockets would now be bursting at the seams with cash — giving you enough leverage to go and build the platform. But we know building the platform wouldn’t be enough. We would eventually have to face the catch 22 deadlock which threatened to make our platform a ghost town.
Interestingly, because how our minds work, there’s an interesting side effect of making people own your token before it’s usable in the ecosystem. Individuals who own your token want it to become usable and appreciate in value.
During the coin offer, you promised them that the value of the token would appreciate, but after the coin offer, the token owners would evangelize your token and platform so that the value really appreciates.
That’s how, by making people vested in the success of your platform, you would be incentivizing them to build and play games on your platform. Thus, solving the catch 22 deadlock.Token owners not only become your investors but they also become your potential customers.
Fraud, lies and despair
Like with any new fancy thing, there are going to be people that find loopholes in the entire process and exploit them to favor themselves. ICOs are no different. You can find bad actors telling the fake stories of what they would build if enough people buy their tokens — while in reality they’re not planning to put the money to good use.
They will encash it and fade away or let them sit idle and appreciate in value forever. Not all stories are rosey. Not all stories will be. There’s a skill that one has to develop to identify bad ICOs from the good ones. If you want me to do an ultimate guide on that, let me know on Twitter.Doesn’t the law protect the investors?
Short answer: not much right now. Most of the ICOs label themselves as utility tokens — something that can be used to get some utility on a software platform. They sideline the definition of ‘securities,’ and therefore the law.
Some argue that it’s good because lack of regulations will help keep the innovation and development faster. It’s a valid argument, but it allows thieves to prey on investors who don’t fully understand how ICOs work.
There are ICOs out there that include regulatory measures in their token sale to provide more trust to the investors.
One common practice is to put in a functionality that says that if the target amount isn’t raised during the ICO, the raised money will be refunded to the investors — sounds fair, right?
Because of how economies work, companies doing ICOs might start to regulate themselves in the Smart Contracts through which they sell their tokens.Conclusion
I don’t find it a flawed analogy to think of tokens as fuel. Tokens to a platform are what fuel is to a vehicle.An ICO is a way to create the fuel (that is, utility token) that will be used in the vehicle (that is, the platform) that you’ll be creating. If enough people buy the fuel, you get money to build the vehicle.
And when the vehicle actually gets built, there would be an audience ready with the fuel to ride the vehicle. Therefore, an ICO is not just a new way to raise money. It’s also a new way to get customers and create network effects in business.
Tokens are fantastic, and when you understand what they are capable of accomplishing, you’ll have your mind blown. When a company sells a token in a crowdsale, they get three things in return — investors, customers, and evangelizers. What else, as an entrepreneur, could you possibly want?
Read next: The ultimate beginner's guide to trading online
Discover even more stories like this one on TNW here:
https://thenextweb.com/contributors/2017/09/22/everything-need-know-icos/#.tnw_pevQUEPv-
Jose Ojeda Portillo Adviser at Blockchain Company / Water Health Environment / Biosphere University << ...an ICO is not just a new way to raise money. It’s also a new way to get customers and create network effects in business. >>
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The drive to discover alternate ways for a new company to raise money has birthed many experiments, but none more prominent than the 2017 rise of so-called Initial Coin Offerings, or ICOs.
The decades-old, tried-and-true way for a technology company to raise cash:
A company founder sells some of his or her ownership stake in exchange for money from a venture capitalist, who essentially believes that their new ownership will be worth more in the future than is the cash they spent now.
But over the last year — and especially over the last four months — a new craze has overtaken some influential subsets of the technology industry’s powerbrokers:
What if companies had a more democratic, transparent and faster way to fundraise by using digital currency?So as the first ICOs surpass the $1 billion marker that typically jettisons a company to some Silicon Valley stardom, let’s explore what is going on.What exactly is an ICO?
An ICO typically involves selling a new digital currency at a discount — or a “token” — as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value — often based on speculation, just as stocks do in the public market — the investor has made a profit.
Unlike in the stock market, though, the token does “not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends,” explained Arthur Hayes of BitMEX, one bitcoin exchange.
Buyers can range from established venture capitalists and family offices to less wealthy cryptocurrency zealots.Investing in a digital currency is extremely high-risk — more so than traditional startup investing — but is motivated largely by the explosive growth in the value of bitcoins, each of which is now worth around $4,000 at the time of publication. That spike helped introduce both fanatics and professional investors to ICOs.How big a deal are ICOs?
We’ve seen over $2 billion in token sales in about 140 ICOs this year, according to Coinschedule, quieting arguments made by some that ICOs are merely a flash in the pan likely to fade any minute now when a new fad emerges.It can feel like ICOs are everywhere — at least a few typically begin every day.
Buyers during a presale period might email a seller and personally conduct a transaction. Later on, a purchaser tends to use a website portal, hopefully one that requires an identity check, explained Emma Channing, general counsel at The Argon Group.
“The froth and the attention around ICOs is masking the fact that it’s actually a very hard way to raise money.”
“I don’t think that there’s been an obsession of Silicon Valley that has overtaken seed and angel investing in a single year,” said Channing, who helps companies execute ICOs. She argues: “I don’t think Silicon Valley has ever seen anything quite like ICOs.
”Channing said it is possible that more than $4 billion will be raised through ICOs this year. But she advises that ICOs are typically only successful for the very small number of companies that have “blockchain technology at their heart.”
ICOs commonly fail when that’s missing or when the marketing and message are poor, she warned.“The froth and the attention around ICOs is masking the fact that it’s actually a very hard way to raise money,” Channing said.Who are its biggest proponents?
A number of more forward-thinking venture capitalists, such as Fred Wilson at Union Square Ventures and Tim Draper at Draper Fisher Jurvetson, have been some of the most vocal believers in ICOs.
Draper earlier this year participated for the first time in an ICO, buying the digital currency Tezos, a rival blockchain platform, in what was a $232 million fundraising round.
Wilson has not proclaimed it to be a panacea.“Contrary to the hype machine working on ICOs right now, they are not simply a funding mechanism. They are about an entirely different business model,” Wilson wrote on his blog this summer.
“So, while ICOs represent a new and exciting way to build (and finance) a tech company, and are a legitimate disruptive threat to the venture capital business, they are not something I am nervous about.
”Other leading ICO investors include Chris Dixon at Andreessen Horowitz and entrepreneur and self-described “crypto capitalist” David Sacks.“Any startup that can ICO will ICO (barring a regulatory intervention),” Sacks tweeted last month.What are its risks?
There are certainly some losers if and when ICOs win.One group, as Wilson knows: Venture capitalists. Much of investors’ power derives from their supposedly superior judgment — they fund projects that are deemed worthwhile, and if the VC industry decides your startup isn’t promising, you’re left with little choice beyond bootstrapping or crowdfunding.
ICOs offer another option to founders who are skittish about handing control of their baby over to outsiders driven above all else by financial return. “Every VC firm is going to have to take a long hard look at the value they bring to the table and how they remain competitive,” said Brian Lio, the head of Smith & Crown, a cryptocurrency research firm.
“What do they have other than prestige? What are they offering to these companies that are more advantageous than going to the community?
”But Lio noted that buyers are also possibly in peril and should be cautious: Risk is higher than buying stock, given the complexity of the system. And it can be difficult to vet an investment or the technology behind it. Other experts have long worried about fraud in this largely unregulated space.Is the government okay with this?
That’s TBD. In the U.S., the Securities and Exchange Commission requires private companies to file a disclosure whenever they raise private cash. After largely letting the ICO market develop with no guidance, the SEC this summer warned startups that they could be violating securities laws with the token sales.How governments choose to regulate this new type of transaction is one of the big outstanding questions in the field.
The IRS has said that virtual currency, in general, is taxable — as long as the currency can be converted to a dollar amount.
Some expect the SEC to begin strictly clamping down on ICOs before the cash is raised. That’s already happened in other countries, most notably China — which this month banned the practice altogether.
ICOs, while hosted in a certain country, are not confined to a certain jurisdiction and can be traded anywhere you can connect online.
“Ninety-nine percent of ICOs are a scam, so [China’s pause on ICOs] is needed to filter the crooks out,” tech investor Chamath Palihapitiya tweeted this month. “Next phase of ICOs will be real.”
Discover more stories like this on ReCode here: https://www.recode.net/2017/9/19/16243110/initial-coin-offering-ico-explained-what-is-money-bitcoin-...-
Francisco Gimeno - BC Analyst I have read several articles on this website about what an ICO is. I have learnt a lot from these. This article puts forward the idea of the ICO as a new business model and not just another way to get funds. Barring extreme regulatory clampdown ICOs are here to stay.
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