The Good And The Bad Of ICOs

Despite the DAO failure, ICOs grew into an established form of startup funding.

Published on May 30, 2018 | Last update July 05, 2018 12:14:59 PM
Author · Hristina
BIO: Hristina of btxchange.io, the blog that debunks conspiracy theories around the most popular cryptocurrency in the world. ·

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What Are ICOs

Initial Coin Offerings (ICO) are fundraising mechanisms that operate based on the sale of crypto tokens in exchange for Bitcoin or some other high-value cryptocurrency. It is a mechanism used by startup companies to fund their projects. In some way, ICO is similar to IPO (Initial Public Offerings) where investors purchase the shares of a company. The main difference is in the lack of regulatory oversight of ICOs when compared to IPOs.

The Controversy

Compared to mining and Bitcoin exchanges, ICO is a newer concept, but it has attracted intense discussion and debate. Some view ICO as a fraudulent scheme because it is unregulated and allows startups to raise unjustifiable amounts of capital.

On the other hand, some view ICO as a welcome development in fundraising campaigns. In the US, for example, ICOs are not subject to restrictions imposed by the Security and Exchange Commission (SEC). As a result, investors are quite divided on whether to engage in ICO projects.

Regulatory Issues

As regards who can or cannot participate in an ICO, there are no restrictions, because ICO tokens are not securities. The funds are gotten from investors scattered over the globe, meaning the funds raised can be enormous. The way it works is that investors send funds in the form of Bitcoin or Ether to a smart contact who stores and distributes the funds in equal value to a new token at some time in the future.

The Biggest ICO Failure So Far

With ICO, the funds are raised before the product is available, making the investment highly risky and speculative. This is why it is subject to fraudulence, thefts, and failures. For example, consider the DAO ICO token.

DAO was the first attempt made to raise funds for a token on Ethereum. In 2016, DAO was poised to create an organization that was decentralized and would fund other projects based on the blockchain technology. Token holders would make governance decisions themselves without oversight or regulation.

DAO was indeed successful and raised over $150 million, but an unknown attacker capitalized on the technical vulnerabilities of the organization and drained up to $60 million from the organization. That’s about 40% of the funds raised.

ICOs Are Here To Stay

Despite the tragic outcome of the DAO ICO, other ICOs have recorded successes and led to the growth of startups. A typical example is that of Brave, the web browsing company.

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