crypto currencies ICO

Introduction

ICO, the new kid on the block, everybody wants to follow, admire, and like it.

So, what is an  ICO?

ICO is short of Initial Coin Offering, though rightly it should be renamed to Initial Token Offering, I will explain later.

Although I am not an expert at ICO’s, the content in this post is a result of research in this area.

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).

 

bitcoin ICO

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 legers 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

ethereum ICOAs 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 basic framework to implement use cases without a lot of heavy lifting.   Ethereum introduced ether as the crypto currency 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 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 crypto currency, 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 through out 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 collected KYC information from users be protected?

How will the tokens be issued?

How long will the ICO be offered for?

 

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

How many of the total tokens being issued are held by the ICO issuer?

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. How often are changes being committed?

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