Updated on 10th February 2018
Introduction
Crypto market hit an all-time high on January 7 when it reached $835.69 billion. Earlier today that number was at $438.88 billion, representing about a 50% drop.
Cryptocurrencies took 2017 by storm and the main catalyst in this meteoric rise was the advent of an
ICO, which stands for Initial Coin Offering.
ICO’s are also known as ITO, Initial Token Offering, and TGE, Token Generation Event.
Venture Funding
Since the dot-com days, when teams had ideas and needed funding to carry out their ideas, they would go to Venture Capitalists to get the necessary funding. This was a very painful exercise, and you had to present to many folks before you got the funding you needed or sometimes you got much less than what you asked for. Sometimes you would have to give your investors shares in your company.
Crowd Funding
Then came crowdfunding, which although had been in existence since late 1850’s, was embraced by the tech industry. The attraction of crowdfunding was that anybody with capital could invest in the idea, and as a result of investing you would get an early release of the product before it becoming available. Some of the first crowdfunding sites were:
DonorsChoose (2000), GlobalGiving (2002), and ArtistShare (2003). As the model matured, more crowdfunding sites started to appear on the web such as Kiva (2005), IndieGoGo (2008), Kickstarter (2009), and Microventures (2010).
Then, in 2008, came Bitcoin (aka Cryptocurrency), as an idea, and it went live 2009. Bitcoin’s main attraction was a mechanism of value transfer without any central authority controlling it and without any fees to conduct the transfers (initially fees were much less, pretty much negligible, now they are increasing). While the idea of borderless value transfer itself was revolutionary, the icing on the cake was the underlying framework, which was an implementation of the distributed ledger technology, called the Blockchain. The key ingredients of the Blockchain are(my thought):
Users: Entities generating transactions when they send/receive bitcoin.
Distributed Ledger: All transactions are written all active nodes participating in the network
Miners: Entities with distributed ledgers who are using their computers to package x number of transactions into blocks.
Proof of Work: To generate a block, the miners are given a range, within which the hash of their block should be in if the hash is within the range, the miner gets a reward, which is a bitcoin. This activity of finding the hash value within a certain range is very resource intensive and requires multiple miners working together to solve this problem. Once this block is generated, the miner announces it to the network of nodes running the distributed ledgers that the problem has been solved and they can move to solving another block. Proof of work algorithm addresses the issues with multiple miners announcing that they have solved the problem.
Malleability: Transactions written to the Blockchain cannot be changed as everyone has the same copy, no one party can change a transaction on their own unless they own 51% of the hashing power.
Altcoins
Riding on the Bitcoin’s coattails, came other mechanisms of value transfer, and as a whole, this ecosystem started to be called alternative coins to Bitcoin. Each Altcoin used their implementation of distributed ledger technology to allow users to start using them.
Ethereum
As the success of Bitcoins and Altcoins took a stronghold, the idea of, new use cases started to emerge on how to use the distributed ledger platform. Every time a use case needed to be implemented on the Blockchain, everything needed to be coded and set-up from scratch. In late 2013 Vitalik Buterin proposed Ethereum as a platform that would provide the basic framework to implement use cases without a lot of heavy lifting. Ethereum introduced ether as the cryptocurrency to be used on the platform by the users. It also introduced a programmable environment called the Ethereum Virtual Machine (EVM), this would allow users implement logic when engaged in an exchange of services, this logic was called smart contract. In addition to EVM, the platform also introduced the ERC-20 standard, which would allow anyone to create their own cryptocurrency, called a Token on top of the Ethereum platform.
It is this ability to easily issue tokens has fired up the whole ecosystem of ICO’s.
ICO
ICO’s should not be confused with IPO’s or venture funding where the life cycle for a particular startup was:
Regular funding cycle:
Idea —> Angel Funding (<$1Mil) or Venture Funding (>$1Mil) —> Operate the product, show profitability —> if further funding required –> IPO
Distributed Ledger funding cycle:
Idea —> ICO —> Operate the product, show profitability —> if further funding required –> ICO
| Feature |
ICO |
IPO |
Angel/Venture funding |
| Security |
No |
Yes |
No |
| Investor Ownership of the organization |
No |
Yes |
Yes |
| Profit sharing with investors |
No |
Yes |
Yes |
| Regulated |
No |
Yes |
Yes |
As per The Economist, In July America’s Securities and Exchange Commission said that the tokens issued last year by the DAO, one of the first ICOs, constituted securities—signalling to future ICOs that they may be subject to securities law.
Now if a team has an idea that uses a distributed ledge technology and they need funding, they have two choices, and they both use ERC20 as a mechanism to fund implementation of their idea:
Build everything from scratch
Use Ethereum platform
Key considerations when planning to issue an ICO
Following are the key considerations when issuing an ICO:
Smart contract in Solidity
Name of the token
Token Initials, a short name
Exchange rate of this token in reference to ether
Number of tokens to be issued
Contract security framework
Admin stuff
Of the tokens created, how many are available to the team vs public
What is the value of the token?
Will the value of the token remain the same throughout the ICO?
Generate awareness in general publication
User registration before the ICO. Ethereum Wallet Address, User details like Name, address, DOB, National ID’s, etc. How will the:
- KYC information of users is being protected?
- Tokens be issued?
- ICO duration be determined?
Smart contract development tools
Mist Browser: https://github.com/ethereum/mist , included Ethereum Wallet.
Ethereum Wallet: https://github.com/ethereum/mist/releases
Metamask: https://metamask.io/
Remix Solidity Editor: http://ethereum.github.io/browser-solidity/#version=soljson-v0.4.11+commit.68ef5810.js
Solidity Development Secure Framework: https://openzeppelin.org/
Evaluating an ICO
These are some of the key considerations when evaluating an ICO(my thoughts)
- What is the token trying to achieve/solve/distupt
- The number of tokens the issuer(s) will hold
- Which individuals are part of the ICO issue core team? What are their backgrounds, what is their track record in this space
- If there is a GitHub page, review the various repositories and see how many people are supporting it, and what percentage are active, because you could have one hundred people listed, and only five are active, not a good sign. The frequency of changes also should be the key consideration.
- How long does the ICO run for?
- What does the ICO issuer plan to do with the capital raised?
- Check for information on http://reddit.com in terms of interest amongst the community
- Check https://www.smithandcrown.com/ , what they are saying about this ICO
- If the ICO has already been issued, check http://coincap.io for its details.
- Check other news sites about info on the ICO
Contact me:
If you have questions or find inaccuracies, contact me via Twitter: http://twitter.com/secunoid
References:
https://en.wikipedia.org/wiki/Crowdfunding
https://en.bitcoin.it/wiki/Main_Page
https://en.wikipedia.org/wiki/Ethereum
