What is an Initial Coin Offering?

Introduction to ICO

ICO stands for Initial Coin Offering. As the name suggests, it refers to launching a crypto coin for the first time in the market to be able to be bought and sold. In the world of web3, whenever a crypto-based project or a company is looking to raise funds, they can do so via ICO by launching their own coin. The believers and investors of the project can buy the launched token at a very low price. The token may or may not be utility-backed or may only represent ownership of the project. 

It is one of the most popular methods of raising funds which is very similar to the concept of Initial Public Offering (IPO). Though IPOs are highly regulated and are a product of mature money markets, ICOs are not at all regulated. The project/company is still in the developing stage and the concept is very new. 

How does an ICO work?

Although there are multiple ways tokens have been launched in the past, broadly, they all follow the same blueprint to launch and scale

Step 1 - The first step in launching an ICO is to draft a whitepaper which shall contain all the information about the project, the team, the requirements of funds, how the project is different, and short-term goals, and long-term goals to name a few. 

Step 2- Now, select the platform for the launch such as coindesk.com, etc. 

Step 3 - Build a community of users and adopters via Reddit, discord, or any other relevant channels. 

Step 4 - Finally, market your product and ICO to attract investors and believers. 

Types of ICO

There are broadly 3 different types of ICO mechanisms out there.

1. Fixed Supply and Fixed Price ICO
2. Fixed Supply and Dynamic Price ICO
3. Dynamic Supply and Fixed Price ICO

Fixed Supply and Fixed Price ICO

In Fixed Supply and Fixed Price ICO the amount of token in circulation is fixed at a specified price. For eg 100 tokens at $50. The total funds would also remain fixed.

Fixed Supply and Dynamic Price ICO  

In Fixed Supply and Dynamic Price ICO the amount of token in circulation remains fixed but the price keeps on changing on the basis of demand and supply. The total funds raised depend upon the market demand. 

Dynamic Supply and Fixed Price ICO

In Dynamic Supply and Fixed Price ICO the supply keeps changing as per the market conditions but the price remains fixed. 

Importance of tokenomics in an ICO 

Whenever a project/ company is launching their ICO, it helps them to get capital to put their plans into action. On the other hand, an investor gets a token as a contribution to the offering. The value of the token plays an important part in deciding the success of the ICO. An investor, by holding a particular token should be clear with the ‘why’ and ‘what’ of the token i.e the usage and the value of the token. 

For eg. In some cases, a token may represent access to the network of the project.

On the other hand, a token with no fundamental utility may only be used for speculation and may not attract many potential investors. 

Risks Involved In ICO 

1. Most of the launched ICOs are not regulated and hence carry the risk of “rug pull” i.e developer/ founder of the project running away after taking in the funds. 
2. As said, ICOs are not regulated by any authority and hence there is no obligation on the developer/founder to complete or continue the project after raising funds. 
3. The value of tokens issued might be speculative and can devaluate anytime in the market. 
4. For the investors, there’s no transparency as to what’s happening inside the project/company until the project becomes mainstream. 

Things To Check Before Investing In ICO 

1. An investor should thoroughly read the issued whitepaper to understand the project and differentiate between the original project and the scam project. 
2. If possible, an investor should have direct interaction with the developer/founder of the project to understand the team, their history of working, and their capability to pull off the project. 
3. Check how the funds are going to be stored in the project (Escrow or not)

Conclusion 

In the decentralized world, ICO is one of the most preferred ways to raise capital for projects. Identifying a good ICO early on can prove to be a gold mine for an investor. On the other hand, most ICOs are risky and can degrade the investor’s capital. It is always advisable for one to spend considerable time researching about the tokenomics of the project before planning to invest in one.