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What is An Initial Coin Offering?

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October 2, 2017 in Economics


It is a new method where a company based on cryptomonedas and with a project defined in a blockchain requests financing only through cryptomonedas revenues, they want to obtain capitalization for their project with the entrance of digital assets.

The offers are of two types:
1.- Request a minimum amount of coins for example 10 ethereum per share, in order to become a partner of the company and to be able to receive benefits from it. They make investors the project partners.
2.- Request cryptomonedas for later use in the blockchain project and thus be able to use them. It is the initial coin sale without mines.
ICO List discounts are a way to apply business marketing to sales and thus create an initial capital attraction. Varian 50% – 25% – 10% usually, although there are various types of discounts.

Investment in an ICO
The number of coins issued and the possible conversion into fiat or legal tender (EUR, USD …) has made this system of capitalization quick and efficient.
To invest in an ICO project you have to read the whitepaper very well (Project description).
It is necessary to draw conclusions that is the project and thus to decide if the investment deserves the risk to assume.
In our opinion, the usual thing is that a blockchain project because of its complexity is a good investment in the long term.
One has to be very cautious in that cryptomoneda or project is reversed, not all cryptomonedas are good investment. There are some projects that only have behind the creation of a cryptomoneda without more and in the long run only profit in the trading (speculation of value of cryptomoneda in the exchange market).
What we have to study is the project itself, not only the cryptomoneda or tokens, the value of the project is based on the blockchain and its long-term utility.
Bytcoins in a project based on a blockchain system public own in English with its own cryptomoneda without intermediation.

The following scheme simplifies why the CIO boom: why are ICOs so popular?

1.- Democratic access. It can participate all over the world and have no geographical limit.
2.- Opportunity to invest the cryptomonedas accumulated during years of mining or purchase.
3.- The ease of movement of tokens. They are changing at the moment and do not require negotiation or intermediaries.
4.- The passion for technology and the new democratic systems blockchain.

The relevance of mining in an ICO of criptomonedas

There are two main mining methods, Proof of Work (PoW) and Proof of Stake (PoS), which are relevant so that we can understand the operation of an ICO. On the one hand the mining model work test ( Proof of Work ) is used in Bitcoin, litecoin or ethereum protocol to name just a few. Although in the case of Ethereum, its developers are considering changing to Proof of Stake in the future.

The Proof of Stake is a model in which the owners of criptomonedas are progressively rewarded – in a lottery among the holders of criptomonedas -, with new tokens of the same type. In this model, holders of more units of account or currencies are more likely to increase their holdings with new cryptones.

The Proof of Stake model , unlike the Proof of Work model , allows for a distribution of cryptoneses or tokens based exclusively on the protocol developers’ priorities, which has allowed the creation of ICOs with a fraudulent or unworthy tone. The advantage of the PoS system is that it does not consume energy to secure the system unlike the Labor Test model, but unlike the PoW the distribution of the coins can be imbalanced.

The prelude of cryptones in the ICO
In the Proof of Stake model, there have been many cases in which the pre-order has been used, which simply means that the protocol developers distribute a fixed amount of cryptones to an initially small group of investors. Later – already open distribution to the general public – these try to inflate the prices of this new criptomoneda to be able to sell them with great benefits to the new investors. Of course, the promotion or marketing campaign must be successful and attract new capital.

Obviously, this does not mean that all models of Proof of Stake are all fraudulent, but it is true that they favor them, unlike the Proof of Work system in which the developer of a protocol can hardly control the distribution of coins. That said, a curiosity, some people speculate that Satoshi Nakamoto owns at least one million bitcoins out of the 21 million that will be broadcast on the Bitcoin protocol. But not by a preminado operation. In the dawn of technology, only Satoshi found, between useful and fascinating, to mine bitcoins.

But to understand the economic significance of an ICO in the world of protocols let’s mention, then, some of the best-known ICOs.

The ICO of Ethereum
Ethereum raised 31,531 bitcoins ($ 15 million at the time) during its launch campaign, with a pre-order system, in the summer of 2014. Investors had to wait a year to be able to trade their ethers in the market because that was stipulated in the investment agreement of the ICO. A measure is taken to curb initial speculation. To date, 31,531 bitcoins have a market value of 26 million dollars.

The launch of the ether was, at the time, one of the most successful crowdfunding campaigns registered in any protocol and positioned Ethereum and its cryptomoneda – ether – as a serious competitor that could receive attention from developers and investors in the market. the criptomonedas, in comparison with the Bitcoin protocol. Some of the more sound and important ICOs of new decentralized protocols have used Ethereum as reference protocol as we will see in the following examples.

The ICO of TheDAO
Ethereum’s ecosystem made history again in the world of cryptomonedas and in the crowdfunding campaigns in 2016. On April 30, the startup of the ecosystem Ethereum Slock.it announced the launch of TheDAO articulating a campaign of collective financing that put on sale for the first time the tokens of DAO (Decentralized Autonomous Organization), raising 12.07 million ETH (ETH is the ethers code as BTC is that of Bitcoin).

This crowdfunding campaign raised more than $ 150 million, boosted by the spectacular revaluation of the ether since its launch and the high expectations of the Ethereum community to be present in one of the first invertible projects presented to them. TheDAO was an open venture capital fund where anyone in the world could participate, to invest in projects based on the automated Ethereum protocol with intelligent contracts, without the need to have a management structure.

TheDAO failed because a hacker managed to block 3.6 million ether and although this problem was solved weeks later caused a break in the Ethereum community by how it was resolved. This situation led to a split in the Ethereum community, which led to the creation of Ethereum Classic (its token is called Ether Classic or ETC) and Ethereum (ETH) that changed its initial system, branching into two separate protocols.

TheDAO crisis and a series of other technical problems throughout 2016 caused the ether price to fall from its highs of $ 21.50 per ether at the height of TheDAO to the current price of $ 7. Despite this significant fall, the evaluation of the other only in 2016 has been of 700%.

In the first six months of 2016, the price of ether was revalued by 2,000%, trading at a price of $ 0.93 per token to the high of 21.50 recorded in mid-June.

The ICO of Z-Cash
The Z-Cash project received the support of more than 30 investors who contributed $ 3 million to their development. The monetary base is the same as for bitcoin, 21 million units. Z-Cash did not use the preminado to compensate its investors.

The protocol specifies that miners can only be made with 90% of the coins because the remaining 10% is intended for investors (1.65%), founders and employees of the company (5.72%) and corporate investments (2 , 65%). That 10% of the coins will be refunded in the first 4 years of the life of Z-Cash. In this way, the partners’ commitment to the project is sought and to ensure the stability of the company in the early years.

The weeks prior to the launch of Z-Cash (the unit of account is ZEC), the price was warming up in the futures market to settle, at the end of October, at 3,300 bitcoins per ZEC (about 2 million dollars). as part of the promotional work of some of the initial investors. In the same week, the price fell to 1 BTC. The reason for reaching such high prices is none other than the law of supply and demand itself. In the initial market there were very few ZECs, by design, reaching prices as high as unreal but as they were mining and generating more coins the price dropped to 60 dollars.

Z-Cash’s main value proposition is that it assumes that it can be really anonymous in transactions, using a new, untested cryptographic technology known as zero-knowledge proof.

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