What is an ICO?

 

What is an ICO? If you’re familiar with the stock market, you might think that it sounds similar to an IPO or Initial Public Offering. And you would be correct. In this article, we’ll explain what an ICO is, how they’re classified, and some of the interesting things that are being done with different cryptocurrencies.
 

Ethereum Smart Contracts and ICOs

Ethereum smart contracts and ICO

An Initial Coin Offering (ICO) is essentially just a crowdsale or crowdfunding event to help get a new cryptocurrency off the ground. Many new ICOs are designed to provide special functionality above and beyond basic cryptocurrency functionality (sending, receiving, and storing value). To cover development costs, they hold ICOs where interested users can trade coins from existing cryptocurrencies that have value in for coins on the new platform. This has the additional advantages of building the cryptocurrency’s initial value through increased interest and initial user base created by the ICO’s publicity.

While Ethereum is not the only platform that hosts ICOs, it is by far the most popular. In an Ethereum-based ICO, the creators of the new cryptocurrency set up a smart contract on the Ethereum platform that accepts Ether as payment for the new token at a fixed rate. Typically, the number of new tokens purchased per Ether decreases over time so that early investors have an advantage over latecomers.

 

ICOs and Premining

Some ICOs are designed to be completely premined. All that this means is that all of the coins that will ever be created are allocated during the ICO. Typically, the ICO has a target number of tokens that will be sold during the ICO. Once the target cap is reached, the ICO is completed and no more tokens are sold.

If an ICO is only partially premined, this will only be a fraction of the total number of coins intended to be part of the ecosystem. The remainder will be created as part of incentivizing cryptocurrency miners (see this section for more details on cryptocurrency mining).

If a cryptocurrency is completely premined, the tokens sold at the ICO are all that will ever be created. If the ICO target is not met, the remaining tokens are “burned” and the cryptocurrency will only have the reduced supply. From then on, the only way to get a token for the currency is purchasing it from someone who has one.

Any tokens that are premined (sold in an ICO or otherwise allocated before the coin’s launch) are assigned in the first or “genesis” block of a cryptocurrency’s blockchain. From there, owners can sell them or use them for any special functions of the cryptocurrency (see utility tokens below). More information on investing in ICOs is available in this guide.

 

Types of Ethereum Tokens

Types of Ethereum Tokens

On the Ethereum blockchain, all Ethereum tokens are treated the same. All of them are created using a smart contract and can be bought or sold for Ethereum. Beyond that, all interactions are internal to the smart contract and don’t affect the blockchain as a whole. They’re like currency in a mobile game, you can buy it for money but no-one outside the game cares how much gold or jewels that you have.

In the real world, Ethereum tokens are broken into three main categories that help describe their purpose: equity, securities, and utility tokens. While these definitions are legally meaningless (all cryptocurrency may be legally be considered securities one day) and a bit fluid (utility tokens are those that don’t pass the test for securities tokens), they provide a bit more structure to the space. In this section, we’ll give a simple definition of each of these types of tokens.

 

Equity Token

Equity tokens are one of the rarer types of tokens but some of the most understandable for those entering the cryptocurrency space from other investment areas. Most investors are more familiar with the stock exchange where people can buy stock in some company. The majority of cryptocurrency tokens do not provide stock in the company that created them.

Equity tokens are the exception to this. They are designed to let startups sell stock in their company and raise funds through an ICO rather than an IPO on the stock exchange. Currently, this type of ICO is fairly rare due to the lack of guidance from regulators unfamiliar with the cryptocurrency space. However, Delaware currently allows companies to maintain their shareholder lists on the blockchain, which means that equity tokens issued from Delaware-based companies could be used to manage stocks and shares in the company.

 

Security Token

In the United States, a “security” is a technical term for a “tradable asset”. They’re governed by the Securities and Exchange Commission and have several laws and regulations enforcing what they can and cannot do. The official way to determine if something is a security is called the Howey Test, which boils down to asking these three questions:

  1. Is there an investment of money?
  2. Is there a common enterprise?
  3. Is there the expectation of profit based primarily on the efforts of others?

If the answer to all three of these questions is yes, then the asset is considered a security. There is a lot of discussion in the cryptocurrency space whether all cryptocurrencies or some subset of them are securities and what that means for cryptocurrency exchanges, digital wallet programs, etc. that operate in the United State.

Regardless, some cryptocurrency tokens are inarguably securities tokens under the definition enforced by the SEC. All this really means for investors is that the appropriate laws and regulations must be adhered to when investing in and trading these cryptocurrencies.

 

Utility Token

If you’ve heard about all of the cool things that Ethereum can do and read about the power of smart contracts, you may be a bit confused at this point. So far, the two types of tokens we’ve discussed do things that you can easily do outside the blockchain: buy stock and trade securities. Utility tokens are the type of Ethereum token that let you tap into all of the interesting things that different cryptocurrencies linked to the Ethereum blockchain are offering. Legally, utility tokens may still be securities since regulators haven’t provided clear guidelines yet but their intention is to provide access to a service rather than being targeted simply at turning a profit. This doesn’t mean that you can’t turn a profit by trading utility tokens since supply and demand says that tokens for a successful service will increase in value since the supply is capped but that is not the primary goal. In the next section, we’ll talk about some of the blockchain-based tools and services that managed using Ethereum utility tokens.

 

Special Purposes of Ethereum Tokens

Now that we’ve covered the basics of what an ICO is, it’s time to talk about some of the interesting things that people are doing with them. The versatility of the Ethereum platform means that smart contracts have all of the capabilities of a normal computer coupled with the advantages of the blockchain. Here, we’ll discuss a few of the applications of Ethereum smart contracts, but it’s obviously not a complete list since there are thousands of them on the blockchain already.

 

Content Management

Currently, online content is under the control of a small number of big platforms. How many people do you think currently get all of their news off of Facebook and Twitter? Of those that don’t, how many go anywhere except big news outlets? The centralization of content management means that what people see is under the control of organizations who are incentivized to show you whatever they can to keep you on their platform longer in order to get more in ad revenue.

The Tron cryptocurrency intends to change this dynamic. Using blockchain technology, Tron’s goal is to directly connect content creators (writers, movie makers, etc.) to content consumers while cutting out the middleman of content platforms (Facebook, Twitter, etc.). By creating these direct connections and moving revenue from advertising to direct payment (with Tron tokens), people will be able to read and watch what they want rather than what news and entertainment platforms want them to watch.

 

Distributed Computing

The goal of the Golem is to take allow people to make money off of their computer while they’re not using it by providing it to people who need it. For example, if you own a computer with a lot of processing power or a good GPU, it’s probably sitting unused at least eight hours a day while you’re sleeping.

With Golem, you can remotely rent out your computer’s processing power to people while you’re not using it in exchange for Golem cryptocurrency. This is done using virtual machines running on your computer, which give renters access to your processing power without being able to access your actual computer. This distributed computing system makes it possible for users to access resources when they need it and owners to make money off of their unused equipment.

 

Distributed Storage

Most people are familiar with cloud storage, where you buy access to some amount of external storage where you can put your files without storing them on your own computer. This is typically done through a centralized company like Amazon, Dropbox, or Google, who operate massive datacenters for the purpose of storing your data so that you don’t have to. This provides flexibility, simplicity, and access since you can buy only as much space as you need at the moment, don’t need to manage a ton of external hard drives, and can access your data from anywhere with internet access.

ICOs like Filecoin aim to decentralize file storage using the blockchain. In the previous example, Golem lets users rent out their unused computational cycles on their computer. Filecoin does the same with unused computer hard drive space, creating a decentralized cloud storage system. By cutting out the middleman, the goal is to decrease cloud storage prices while taking advantage of existing unused storage.

 

Internet of Things

Slock.It (famous for The DAO hack) is using Ethereum smart contracts to revolutionize the Internet of Things and the “sharing economy”. Slock.It’s goal is to apply blockchain to automating the sharing of Internet-connected devices. By giving each device an identity on the Ethereum blockchain and allowing it to have smart contract code controlling how it can be used, their technology aims at a sharing economy where each device manages its own sharing, payment, and maintenance.

One example of this is the rental platform Airbnb. Currently, users and owners of a rental property need to negotiate a method for handing over keys upon checkin and checkout. Additionally, all interactions and payments are through the Airbnb company, which takes a cut of the sale and increases the cost of the rental. In Slock.It’s proposed system, the property will have an address on the Ethereum blockchain that handles its rentals. By sending cryptocurrency and important data (rental dates, etc.) to the smart contract, a renter can gain access to the property via a door that will automatically unlock itself when the renter requests it. Upon termination of the rental agreement, the renter will no longer have access to the property without requiring a handover of keys, etc.

This same system can be applied to carsharing, sports equipment rentals, shared office space, etc. By integrating IoT equipment with the blockchain, Slock.It even proposes that technology could schedule and pay for its own maintenance using smart contracts and funds from its account on the blockchain.

 

Prediction Markets

Augur is the oldest ICO on the Ethereum blockchain and is designed to let users participate in prediction markets in a decentralized manner. Want to bet on the outcome of the next football game? Or on the future of a company’s stock? Augur plans to have you covered. While not fully released yet (due to the complexity of the contract), Augur is moving toward a launch in 2018. Their first option for users to bet upon at launch is whether or not the Augur smart contract will be hacked. They plan to run a bug bounty program in parallel with the launch so that confident and competent hackers can win big by betting on themselves and then earning rewards for locating any bugs in the system.

 

Product Reviews

With online shopping, products reviews have become a big thing. Most people don’t have the time or money to buy one of everything to try it out before picking out the one that they actually want to keep. Theoretically, product reviews will provide an unbiased look at the pros and cons of a product and help buyers in their decision making process.

In practice, the centralization of product reviews make them prone to falsification, with an estimated 20-60% of reviews being fake. Platforms like Yelp have the ability to hide or delete reviews at will, giving them control over the public perception of the companies reviewed on their site.

Revain is attempting to remove this bias from online reviews through the use of blockchain technology. By placing reviews on the blockchain, Revain decentralizes the reviewing process and ensures that organizations cannot hide or remove reviews after the fact. Reviews’ AI-based two-step reviewing process first filters out spam, offensive, and fake reviews and then sends the reviews to the reviewed company for approval or rejection. All reviews that pass the first level of vetting will be posted to the blockchain but the second stage allows companies to add comments explaining why a review was rejected.

Using Revain tokens, users are incentivized to leave reviews, hopefully increasing the volume of reviews included on the Revain blockchain. To fight spammers, reviewers will be limited to five reviews per day. While Revain plans to start by allowing reviewers to review other ICOs, since they have varying levels of success and scams exist, over time they will expand to allow reviews for products, restaurants, etc.

 

Proof of Location

The XY Oracle (XYO) Network is a recently launched ICO whose goal is to decentralize location tracking systems. Currently, if you order something from Amazon, you have to trust Amazon and the delivery service that your package is in processing, en route, etc. Essentially, you never actually know where your order is until its been delivered and in your possession. The XYO Network is trying to change this using blockchain technology.

In a nutshell, the XYO Network works by having GPS-enabled tracking devices talk to one another when they’re close together. When two devices on the XYO Network are in proximity to one another, they mutually agree on their locations and the time and add this information (signed by both of them) to their individual blockchains. Eventually, these chains are passed up to higher levels in the XYO ecosystem until they’re stored in a distributed archive for later use. On the Ethereum blockchain, a user can interact with the XYO smart contract requesting the location of one of the tracking devices (like one attached to your Amazon order). This request is handled by a Diviner that collects information from the distributed archive and returns the best available answer to the question (based on how recent the data is and how much of the network was involved in creating it). This answer is provided to the Ethereum user in exchange for some Ethereum tokens used to pay the XYO Network nodes.

 

Supply Chain Management

When shopping for online, it is sometime difficult to differentiate between a great deal and a knockoff scam. Some cryptocurrencies, like VeChain Thor, are working to change this by using the blockchain to track a product throughout its lifecycle from creation to final consumer. Since the blockchain is easily updated but impossible to change after the fact, consumers of commonly-faked luxury products can be easily protected against knockoffs by the inclusion of a chip that tracks the creation and shipping process from end-to-end and uploads data to the blockchain.