Maybe you've been hearing about the rapid increase in funding for Initial Coin Offerings (ICOs). It's more than a trend, it's a phenomenon.
ICOs have become the darling of the investment world. In 2016, there was $256 million in new ICO funding. Less than nine months into 2017, new ICO funding to date already has topped $2 billion. In fact, not only has ICO funding surpassed venture capital funding for blockchain-based companies this year, but ICO funding actually has surpassed angel and seed-stage VC funding for all internet companies globally.
This growth has many investors, startups and consumers wondering whether to get involved, how to do it and where to get started.
What is an ICO?
Think of an ICO as sort of a Kickstarter campaign for blockchain-based companies. As Dr. Michael Yuan, Chief Scientist of CyberMiles, a decentralized blockchain protocol for optimizing business transactions, explains, "An ICO is a crowdfunding mechanism by which projects can raise money. The money an ICO raises is typically in cryptocurrencies such as bitcoin (BTC) or ether (ETH)." A cryptocurrency is a digital currency that uses encryption to regulate the currency and verify the transfer of funds.
As a practical example, Dr. Yuan says, "Consider bitcoin: it started from nothing and grew to $70 billion in about 10 years. What if the bitcoin inventors could have issued some bitcoin 10 years ago to give to early supporters? The theory is that those early supporters would have been incentivized to jumpstart the bitcoin ecosystem and make it grow much faster because of the network effect. That is the idea behind the ICO: to create a community of early supporters who are vested in the success of the network."
Tokens and the jumpstart effect of the ICO
To invest in an ICO, buyers purchase tokens. Tokens? The best way to think of these 'tokens' is as specific amounts of digital resources that you control, and you can make payments by reassigning control of your tokens to someone else.
Two common types of tokens are usage (or utility) tokens and securities tokens. Usage tokens are not securities offerings with underlying equity and ownership. Rather, the intention of a usage token is to allow holders to access and pay for the use of a blockchain software service. (In other words, a utility token holder is often an active participant of the network.) Securities tokens provide a return on investment based on the income or valuation of some entity, like the startup itself.
The ease of crowdfunding with ICOs is a core reason for the growth in investments in ICOs. According to Dr. Yuan, "A network startup is a network of non-cooperative individuals who work together and create products and services according to certain rules, (for example, the blockchain technology's consensus engine)."
Put simply, an ICO provides an easy way to create an initial group of users who are vested in the success of the network from the beginning.
Centralized vs. decentralized network platforms
A core tenet of blockchain technology is its decentralized nature: it is governed by, created by, and maintained by an open-source community of users and service providers. (For example, the bitcoin network is maintained by "miners," who are paid bitcoins for their services in maintaining the integrity of the network.) This allows networks of individuals to collaborate and establish trust without a central authority. Because the blockchain stores ledgers across a network, where every transaction is "etched in stone," hacking or altering transactions is virtually impossible.
On the other hand, a centralized network (like banks) has many challenges that aren't seen in decentralized networks. Security and privacy, for example, become an issue with a central authority (think of the recent-;and still widening-;Equifax hacking). In addition, censorship, unfair economic distribution, and the high cost of doing business (because trust is built over time by personal relationships) all lead to a more expensive, less secure, and less trustworthy system.What an ICO looks like
What an ICO looks like
ICOs typically are organized by nonprofit organizations building network communities based on blockchain technology (thereby giving rise to the concept of "network startup"). According to Dr. Yuan, "A network startup is a network of non-corporative individuals who work together and create products and services according to certain rules (the blockchain technology's consensus protocol, for example)." For-profit companies, for their part, typically work in tandem with the nonprofit to create ICOs and, in turn, receive payments by providing software and network services.
Inevitably, the ICO, like its predecessor the IPO, will transform over time. The SEC will look at regulations for securities tokens, and the ICO market will mature. For now, there are no signs that the velocity of ICO funding growth is slowing. It may very well become the standard for the future for jumpstarting a digital business.
Note: CyberMiles' own ICO officially begins on Nov. 21 at 9 a.m. (PST), with registration ending the previous day. Learn more about the CyberMiles ICO at cm.5miles.com.