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Despite their relative frequency these days, ICOs remain an esoteric concept to many. So let’s take a few moments to try to understand this phenomenon.
Financial authorities around the world are showing more and more interest in ICOs (Initial Coin Offering) during the last few years.
If the ICO concept is obvious to those who regularly handle cryptocurrencies, it is a bit more complicated for the rest of the world. Given the importance of this issue in the coming years, with the regulatory impulses of the authorities worldwide, we have decided to explain it to you.
In the beginning, it was Ethereum.
The first notable ICO is that of Ethereum in 2014. The organizers sought to finance the development of a new blockchain, different from that of Bitcoin, implementing the famous Smart contracts.
Instead of simply launching a kickstarter or canvassing traditional investors, the team behind Ethereum decided to offer anyone interested in the project to exchange bitcoins for Ether, the future cryptocurrency tied to the Ethereum blockchain. More than 18 million dollars were raised in a few weeks, with an exchange rate of 0.4 dollars per Ether.
In this context, an ICO can be defined as the early sale of a new cryptocurrency by raising funds in cryptocurrency in the form of a crowdfunding campaign. But this definition does not cover all possible cases.
Smart contracts and The DAO
As a reminder, a smart contract is a small piece of code. Automatically executes a given task when certain pre-planned conditions are met.
To give a very specific example of your interest, the insurer Axa makes easy use of this function with its Fizzy insurance. If a plane arrives more than two hours late at its destination, the insured must receive compensation. The smart contract then scans a database indicating the arrival time of the planes and triggers a payment when a sufficient delay occurs.
However, it is possible to take the concept a little further with more complex tools. Thus was born The DAO, the first Decentralized Autonomous Organization that came to life on the Ethereum blockchain. It is, in fact, an autonomous group, without physical reality or legal form, which only exists through its presence on a blockchain.
A DAO can interact with the outside world by sealing smart contracts with external providers. If a DAO wants to embark on the production of boards, it is enough to sign a contract with a woodcutter to buy the raw material, a transporter and a sawmill to transform it.
Within three weeks, The DAO (despite its subsequent resounding failure) raised around $150 million through an ICO in another way. This time, the participants did not receive cryptocurrencies in return. But they received a token, entitling them to one vote in the polls organized by the DAO.
These tokens are then assimilated into shares of a company and can be traded through the Ethereum blockchain. The operation as a whole can be seen as a “bastard” form of IPO. Except here the shares are only tradable through a blockchain.
The ICO is increasingly attracting the curiosity of financial regulators around the world. And for good reason. Currently, few nations have established clear rules for the management of ICOs. The result is a kind of far-west where the very serious is mixed with the most doubtful initiatives. Therefore, as an investor, you should absolutely take a look at the ICO calendar, compare and analyze the details of the project before investing. Keep in mind that scammers are not uncommon in this industry.
Regulatory authorities are now trying to jump on the bandwagon. And put a legislative framework that is a little more reassuring for investors. Meanwhile, some countries like South Korea have decided to ban this type of operation on their territory.