One of the hottest trends in the blockchain universe is the application of decentralized finance (DeFi) solutions. Today we will impartially review for our readers the Silicon Finance project, a new DeFi initiative aiming to solve a series of industry issues. The project’s team aims to achieve an increase in the safety of DeFi, with obvious benefits for the whole blockchain community. Furthermore, the initiative will look into a way to introduce more democracy and equality on Initial Dex Offerings…
An initial coin offering – or “ICO” – is a new fundraising method unique to the crypto industry. It is a digital asset-based variant of Initial Public Offerings, or “IPOs”. However, the company rewards investors with a unique cryptocurrency or token rather than raising funds through publicly selling shares.
This article will explain how ICOs work and address some pros and cons of the funding model. It will also cover how one starts his own ICO project while examining past examples.
How Initial Coin Offerings (ICOs) Work
In a highly saturated and emerging market, crypto startups need a way to accumulate funds for marketing and business. As such, the company allows investors to buy some of their project’s tokens using fiat or another cryptocurrency. The idea is that as the project grows, the value of each ticket will rise, similar to a company share.
The process of onboarding investors usually begins with releasing a whitepaper. A cryptocurrency whitepaper outlines a new cryptocurrency or blockchain network’s purpose, market niche, and functionality. This usually involves explaining the ‘tokenomics’ of a project. Also, it requires outlining how tokens will circulate throughout the network. An ICO project should contain all the necessary details in this area. Also, it should outline how many passes the founders will keep and the utility that each provides.
Each ICO project may require a minimum fundraising minimum to launch. If the project does not reach its fundraising, it will be unsuccessful. Also, the investors may get back their money.
ICOs differ from IPOs in terms of their flexibility. After all, every crypto token may provide different programmable benefits and also follow other monetary policies. For example, it may provide token holders with transaction fees from the network. They may also receive a more significant voting stake and influence over the web, making them more akin to shareholders.
However, to the culture of decentralization surrounding crypto, ICO founders may still be willing to distribute most of their tokens. This would put governance in the hands of their users, which is a core feature of many blockchain networks today.
Pros and Cons of ICOs
Initial coin offerings feature numerous advantages over other fundraising options, including:
- High Potential Profits: Like most other cryptos, ICO tokens have high volatility and present tremendous opportunities. Also, as an initial investor in a project, you’ll know you’re buying at the bottom rather than the top. Of course, this assumes that the ICO will be successful, to begin with.
- Accessibility: ICOs typically operate on non-exclusionary, neutral blockchain networks. That means they don’t restrict who gets to invest the way some IPOs do.
- Speed: The very creation of a cryptocurrency can take place within hours or even minutes. This is far faster than trying to take a company public.
Potential downsides to initial coin offerings:
- Price Crashes: The volatility of cryptocurrency isn’t all upside. Coins that rapidly appreciate value may just as quickly lose all weight in such a wildly speculative market. A great example of this was in late 2017, often called the “ICO boom”. Multiple projects saw rapid price accumulation before suffering a quick death by the year’s end.
- Lack of Regulation: As things stand, don’t expect many investor protections when evaluating ICOs. They currently have little regulatory oversight and are highly prone to scammy behavior. SEC chairman Gary Gensler recognizes that most of such products ought to be classified as securities.
- Knowledge Barrier: Though their networks may technically be open, crypto is still foreign technology for many. Many potential investors may lack the knowledge to purchase a wallet and invest in your ICO. On the other hand, they will be familiar with buying stock. This is one of the reasons a Bitcoin ETF has been such a sought-after product by crypto bulls.
Examples of Initial Coin Offerings (ICOs)
The second most popular blockchain network – Ethereum – actually began as an ICO. Upon release in 2014, it raised $18 million in less than two months to fund its developers. When the network launched in 2017, Ether was worth about $0.67. It is now worth over $4000 as of November 2021, providing a monumental return for early buyers. The network itself serves as the backbone for many other ICO projects to date.
Cardano began as an ICO as well. It raised over $60 million in January 2017 and is now a top ten cryptocurrency. Its developers still have ambitious goals ahead, aiming to onboard 1 billion users to their platform.
ICOs are a new and innovative way to raise money for a burgeoning blockchain project. They offer flexibility regarding how early adopters can benefit, whether through price accumulation, transaction fees, or governance rights. The model has even kickstarted the successes of multiple top ten cryptos, including Ethereum and Cardano.