Initial coin offerings are all the rage. A large number of companies have raised nearly $1.5 billion using the novel fundraising mechanism this year. Celebrities from Floyd Mayweather to Paris Hilton have jumped on the hype train. But don’t feel bad if you’re still wondering: precisely what the hell is undoubtedly an ICO?
The acronym probably sounds familiar, and that’s on purpose-an ICO truly does work similarly for an initial public offering. Instead of offering shares in the company, though, a company is instead offering digital assets called “tokens.”
A token sale is like a crowdfunding campaign, except it uses the technology behind Bitcoin to ensure transactions. Oh, and tokens aren’t just stand-ins for stock-they may be setup to ensure that instead of a share of the company, holders get services, like cloud space for storage, by way of example. Below, we run along the popular practice of launching an ICO and its potential to upset business as we know it.
Let’s begin with 以特币, the most famous token system. Bitcoin along with other digital currencies are based on blockchains-cryptographic ledgers that record every transaction conducted using Bitcoin tokens (see “Why Bitcoin Could Possibly Be Much Over a Currency”). Individual computers worldwide, connected over the internet, verify each transaction using open-source software. Some of those computers, called miners, compete to resolve a computationally intensive cryptographic puzzle and earn the opportunity to add “blocks” of verified transactions on the chain. For work, the miners get tokens-bitcoins-in turn.
Blockchains need miners to work, and tokens would be the economic incentive to mine. Some tokens are made along with new versions of Bitcoin’s blockchain which were modified somehow-these include Litecoin and ZCash. Ethereum, a common 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 top of Ethereum’s blockchain.
But advocates of blockchain technology say the potency of tokens surpasses merely inventing new currencies from thin air. Bitcoin eliminates the requirement for a reliable central authority to mediate the exchange of worth-a credit card company or even a central bank, say. Theoretically, that can be achieved for other activities, too.
Take cloud storage, by way of example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of space for storage, a model which could challenge conventional providers like Dropbox and Amazon. The tokens in this instance are the approach to payment for storage. A blockchain verifies the transactions between buyers and sellers and works as a record of their legitimacy. Just how this works is dependent upon the project. In Filecoin, which broke records recently by raising over $250 million by using an ICO, miners would earn tokens by supplying storage or retrieving stored data for users.
One of the first ICOs to create a big splash happened in May 2016 with the Decentralized Autonomous Organization-aka, the DAO-which was essentially a decentralized venture fund built on Ethereum. Investors could use the DAO’s tokens to cast votes concerning how to disburse funds, and then any profits were supposed to come back to the stakeholders. Unfortunately for all 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”).
A lot of people think ICOs can lead to new, exotic methods for constructing a company. If your cloud storage outfit like Filecoin would suddenly skyrocket in popularity, for instance, it would enrich anyone who holds or mines the token, rather than 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 focused on policy issues surrounding blockchain technology.
Someone needs to build the blockchain, issue the tokens, and maintain some software, though. To kickstart a new operation, entrepreneurs can pre-allocate tokens for their own reasons in addition to their developers. And they can use ICOs to offer tokens to individuals interested in making use of the new service when it launches, or even in speculating about the future importance of the service. If the price of the tokens goes up, everybody wins.
Because of the hype around Bitcoin and also other cryptocurrencies, demand has become very high for a number of the tokens striking the market lately. A compact sampling of your projects that vtco1n raised millions via ICOs recently incorporates a Browser targeted at eliminating intermediaries in digital advertising, a decentralized prediction market, along with a blockchain-based marketplace for insurers and insurance brokers.
Still, the future of the token marketplace is very uncertain, because government regulators remain trying to figure out the best way to treat it. Complicating things is that some tokens will be more such as the basis of traditional buyer-seller relationships, like Filecoin, while others, like the DAO tokens, seem a lot more like stocks. In July, the United states Securities and Exchange Commission said that DAO tokens were indeed securities, and that any tokens that function like securities will be regulated as such. The other day, the SEC warned investors to watch out for ICO scams. In the week, China went up to now as to ban ICOs, as well as other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Many of the companies launching ICOs haven’t produced anything over a technical whitepaper describing a concept which may not pan out.
But Van Valkenburgh argues that it’s okay when the ICO boom is really a bubble. Despite the silliness in the dot-com era, he says, out of it came “funding and excitement and human capital development that ultimately generated the big wave of Internet innovation” we enjoy today.