Initial coin offerings are all the rage. Many companies have raised nearly $1.5 billion via 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: just what the hell is undoubtedly 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 inside a company, though, a firm is instead offering digital assets called “tokens.”
A token sale is sort of a crowdfunding campaign, except it uses the technology behind Bitcoin to verify transactions. Oh, and tokens aren’t just stand-ins for stock-they are often put in place to ensure that rather than a share of any company, holders get services, like cloud space for storage, for example. Below, we run along the increasingly popular practice of launching an ICO as well as its potential to upset business as you may know it.
Let’s get started 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 completed using Bitcoin tokens (see “Why Bitcoin Could Possibly Be Much More Than a Currency”). Individual computers around the world, connected online, verify each transaction using open-source software. A few of these computers, called miners, compete to fix a computationally intensive cryptographic puzzle and earn chances to add “blocks” of verified transactions on the chain. For work, the miners get tokens-bitcoins-in return.
Blockchains need miners to run, and tokens are definitely the economic incentive to mine. Some tokens are constructed on top of new versions of Bitcoin’s blockchain that were modified for some reason-these include Litecoin and ZCash. Ethereum, a common blockchain for companies launching ICOs, is really a newer, separate technology from Bitcoin, whose token is called Ether. It’s even possible to build brand-new tokens on the top of Ethereum’s blockchain.
But advocates of blockchain technology say the strength of tokens goes beyond merely inventing new currencies from thin air. Bitcoin eliminates the demand for a reliable central authority to mediate the exchange of value-credit cards company or even a central bank, say. In theory, that can be achieved for other stuff, too.
Take cloud storage, for example. Several companies are building blockchains to facilitate the peer-to-peer selling and buying of storage space, one that could challenge conventional providers like Dropbox and Amazon. The tokens in such a case are the way of payment for storage. A blockchain verifies the transactions between sellers and buyers and functions as a record of the legitimacy. How exactly this works depends upon the project. In Filecoin, which broke records last month by raising over $250 million by using an ICO, miners would earn tokens through providing storage or retrieving stored data for users.
The first ICOs to create a big splash happened in May 2016 with all the Decentralized Autonomous Organization-aka, the DAO-that 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 any profits were supposed to come back on the stakeholders. Unfortunately for anyone involved, a hacker exploited a vulnerability in Ethereum’s design to steal tens of millions of dollars in digital currency (see “$80 Million Hack Shows the Dangers of Programmable Money”).
A lot of people think ICOs may lead to new, exotic ways of constructing a company. If your cloud storage outfit like Filecoin would suddenly skyrocket in popularity, as an example, it might enrich anyone that holds or mines the token, rather than a set number of the company’s executives and employees. This may be a “decentralized” enterprise, says Peter Van Valkenburgh, director of research at Coin Center, a nonprofit research and advocacy group dedicated to policy issues surrounding blockchain technology.
Someone must build the blockchain, issue the tokens, and maintain some software, though. To kickstart a brand new operation, entrepreneurs can pre-allocate tokens by themselves along with their developers. Plus they can use ICOs to sell tokens to folks interested in making use of the new service whenever it launches, or even in speculating about the future worth of the service. If value of the tokens rises, everybody wins.
With the hype around Bitcoin along with other cryptocurrencies, demand is very high for a few of the tokens striking the market lately. A tiny sampling of your projects that vtco1n raised millions via ICOs recently features a Browser targeted at 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 highly uncertain, because government regulators continue to be trying to figure out the best way to address it. Complicating things is some tokens will be more much like the basis of traditional buyer-seller relationships, like Filecoin, although some, just like the DAO tokens, seem more like stocks. In July, the United states Securities and Exchange Commission claimed that DAO tokens were indeed securities, and therefore any tokens that function like securities is going to be regulated as such. The other day, the SEC warned investors to watch out for ICO scams. This week, China went so far with regards to ban ICOs, and other governments could follow suit.
The scene does seem ripe for swindles and vaporware. Lots of the companies launching ICOs haven’t produced anything more than a technical whitepaper describing an understanding that could not pan out.
But Van Valkenburgh argues that it’s okay when the ICO boom is really 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 generated the important wave of Internet innovation” we enjoy today.