An ICO (Initial Coin Offering) is a public offering in the world of cryptocurrency.
When a project wants to launch its own currency or DApp, it can open an ICO to attract investors to its ecosystem. The beauty of ICOs is the lack of bureaucracy and formality. Most of the time, a company simply has to submit a Whitepaper to qualify for an ICO. Companies were able to raise millions of dollars in seconds, thanks to the ICOs: in 2017 they raised a total of 5.6 billion dollars. You may think they are optimistic numbers, due to the crypto boom of 2017. Well, in 2018, in just 4.5 months ICOs have raised $ 6.3 billion.
ICOs are basically an on-chain crowdsale, i.e. the crypto version of crowdfunding.
ICOs have been truly revolutionary: they have traced the easiest path through which DApp developers can get the necessary funds for their project.
Anyone can invest in a project they are interested in by buying tokens for that particular DApp and become part of the project itself.
It was July 2014 when ICOs caught the public’s attention. It was then that Ethereum raised $18.4 million and ushered in a new era.
Since 2013, ICOs are often used to finance the development of new cryptocurrencies. The pre-created token can easily be sold and traded in any crypto-exchange if there is demand.
With the success of Ethereum, ICOs have become in fact the method to finance the development of a crypto-project by releasing a token that is somehow integrated into the project.
Ripple was probably the first coin distributed with an ICO. At the beginning of 2013 Ripple Labs started to develop the Ripple payment system and minted about 100 billion XRP tokens. The company sold these tokens to finance the development of the Ripple platform.
Later, in 2013, Mastercoin promised to create a layer on Bitcoin to run smart contracts and tokenise on Bitcoin transactions. The developer sold several million Mastercoin tokens created on Bitcoin and got about $1 million.
Several other cryptocurrencies have been funded through ICOs, but the most significant case is Ethereum. In mid-2014, the Ethereum Foundation sold ETHs for 0.0005 Bitcoins each (€0.5) and ended up raising nearly $20 million, the greatest crowdfunding result yet, which served as the starting capital for the development of Ethereum.
One of the simplest applications of the Ethereum smart contract system is to create a token that can be transacted on the Ethereum blockchain instead of Ether. This type of contract has been standardised with the ERC20 protocol. This has made Ethereum such a successful ICO host that one can safely say that Ethereum has found its Killer App in being a distributed platform for crowdfunding and fundraising.
ICO, ITO and IEO: what are the differences?
The ICO phenomenon spread on the market between 2017 and 2018, but only a few operators thought that ICOs (initial coin offerings) were different from ITOs (initial token offerings). However, most of the projects that took on the title of ICOs did not offer coins, but tokens. Therefore, before launching a currency, a project must first decide what it is – a coin or a token.
To distinguish between ICO and ITO, it is important to understand that only coins have a value like the money we all know, while tokens are limited to a certain project and only allow access to its goods or services.
A new version of these models is the IEO, which stands for Initial Exchange Offering, a fundraising event that is managed by a cryptocurrency-exchange. Unlike Initial Coin Offerings (ICO), where the project team itself administrates the fundraising, in an Initial Exchange Offering the fundraising will be conducted on the fundraising platform of a well-known exchange, where users can purchase tokens with funds directly from their wallet.
For a user, it is easy to participate in an IEO because it is not necessary to manage on-chain transactions with multiple wallets on different blockchains. The investors only need one account on the exchange and some funds deposited on it: they can do all the operations needed directly from the interface of the exchange.
The exchange that hosts and sponsors the fundraising selects the projects very carefully, thus guaranteeing their reliability, since its reputation is at stake.
For a project that seeks to raise funds, however, an IEO is beneficial because it offers the promise of an immediate userbase, great visibility to their product, and, depending on the size of the exchange audience, reduces the workload associated with promoting the fundraising, allowing the project team to focus solely on product development.