Initial coin offerings are all the rage. Lots of companies have raised nearly $1.5 billion via the novel fundraising mechanism this year. Celebrities from Floyd Mayweather to Paris Hilton have jumped about the hype train. But don’t feel bad if you’re still wondering: just what the hell is an ICO?
The acronym probably sounds familiar, and that’s on purpose-an ICO does indeed work similarly to an initial public offering. As an alternative to offering shares within a company, though, a company is instead offering digital assets called “tokens.”
A token sale is sort of a crowdfunding campaign, except it uses the technology behind Bitcoin to ensure transactions. Oh, and tokens aren’t just stand-ins for stock-they can be create to ensure rather than share of a company, holders get services, like cloud storage area, as an example. Below, we run along the increasingly popular practice of launching an ICO as well as its potential to upset business as we know it.
Let’s start out with 以特币, the most popular token system. Bitcoin along with other digital currencies derive from blockchains-cryptographic ledgers that record every transaction conducted using Bitcoin tokens (see “Why Bitcoin Could Possibly Be Much Over a Currency”). Individual computers all over the world, connected online, verify each transaction using open-source software. Some of the computers, called miners, compete to fix a computationally intensive cryptographic puzzle and earn possibilities to add “blocks” of verified transactions on the chain. For work, the miners get tokens-bitcoins-in exchange.
Blockchains need miners to operate, and tokens are the economic incentive to mine. Some tokens are made on top of new versions of Bitcoin’s blockchain which have been modified in some way-these include Litecoin and ZCash. Ethereum, a popular blockchain for companies launching ICOs, is a newer, separate technology from Bitcoin, whose token is known as Ether. It’s even easy to build completely new tokens on the top of Ethereum’s blockchain.
But advocates of blockchain technology say the effectiveness of tokens goes past merely inventing new currencies from thin air. Bitcoin eliminates the requirement for a trusted central authority to mediate the exchange of value-a credit card company or even a central bank, say. In theory, that could be achieved for other stuff, too.
Take cloud storage, for example. Several companies are building blockchains to facilitate the peer-to-peer buying and selling of space for storage, one that could challenge conventional providers like Dropbox and Amazon. The tokens in this case are the approach to payment for storage. A blockchain verifies the transactions between sellers and buyers and works as a record of their legitimacy. Exactly how this works is dependent upon the project. In Filecoin, which broke records last month by raising a lot more than $250 million with an ICO, miners would earn tokens by offering storage or retrieving stored data for users.
The first ICOs to produce a big splash happened in May 2016 together with the Decentralized Autonomous Organization-aka, the DAO-that was essentially a decentralized venture fund built on Ethereum. Investors can use the DAO’s tokens to cast votes concerning how to disburse funds, and any profits were supposed to come back for the stakeholders. Unfortunately for everyone involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of vast amounts in digital currency (see “$80 Million Hack Shows the risks of Programmable Money”).
Some people think ICOs can lead to new, exotic means of constructing a company. When a cloud storage outfit like Filecoin were to suddenly skyrocket in popularity, as an example, it will enrich anyone who holds or mines the token, as opposed to a set number 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 centered on policy issues surrounding blockchain technology.
Someone has got to build the blockchain, issue the tokens, and keep some software, though. In order to kickstart a brand new operation, entrepreneurs can pre-allocate tokens for themselves in addition to their developers. Plus they can make use of ICOs to promote tokens to the people considering using the new service whenever it launches, or maybe in speculating about the future value of the service. If the price of the tokens increases, everybody wins.
With the hype around Bitcoin and also other cryptocurrencies, demand has been very high for a number of the tokens hitting the market lately. A tiny sampling from the projects that vtco1n raised millions via ICOs recently features a Web browser geared towards eliminating intermediaries in digital advertising, a decentralized prediction market, and a blockchain-based marketplace for insurers and insurance brokers.
Still, the future of the token marketplace is very uncertain, because government regulators continue to be trying to figure out how to address it. Complicating things is some tokens tend to be more such as the basis of traditional buyer-seller relationships, like Filecoin, and some, such as the DAO tokens, seem more like stocks. In July, the Usa Securities and Exchange Commission said that DAO tokens were indeed securities, and therefore any tokens that function like securities will likely be regulated as a result. A week ago, the SEC warned investors to take into consideration ICO scams. In the week, China went up to now with regards to ban ICOs, along with other governments could follow suit.
The scene does seem ripe for swindles and vaporware. A lot of the companies launching ICOs haven’t produced anything more than a technical whitepaper describing an idea that could not pan out.
But Van Valkenburgh argues that it’s okay when the ICO boom is a bubble. In spite of the silliness in the dot-com era, he says, from it came “funding and excitement and human capital development that ultimately triggered the important wave of Internet innovation” we enjoy today.