Before we even begin understand the pros and cons of ICOs, we need to have a basic idea of what they are. ICO, or Initial Coin Offering, is the blockchain version of a peer-to-oeer crowd sale. This is basically how it works:
The team that is developing a project asks for funding through an ICO. The funds are paid via Ethereum or Bitcoin and in exchange for these funds, the investors get back tokens. The token can either be used as native currency or it can also give the holders various powers within the project.
In fact, over the last 12 months ICOs have raised an astonishing $331 million as compared to $140 million raised by venture capitals.
Examples of ICOs
The Ethereum ICO is easily one of the biggest ICOs of all time, both in terms of the fund raised and the potential of the project itself. The Ethereum ICO ran from 20th July 2014 to 2nd September 2014 for 42 days and raised $18.4 Million in the process. From then on Ethereum has gone on to become one of the most innovative and powerful cryptocurrencies in the world.
So ICOs are great right?
ICOs have done a lot of good for blockchain technologies, but then why are so many people criticizing them? Why is there so much negative media about them and why are they accused of being Ponzi schemes? As with anything, there are two sides to this coin as well, so let’s explore the Pros and Cons of ICOs.
Pros of ICO
- Gives opportunities to promising projects: Think of what Ethereum has accomplished in the last year. From becoming the second most powerful cryptocurrency in the world to providing a platform for DAPP creators to create their projects. It is truly becoming the “platform where the future will be built”. All this got started because of an ICO.
- Doesn’t require unnecessary paperwork: Many projects don’t get executed because they get caught up in the red tape. For raising funds through IPOs or crowdfunding the project developers need to go through a lot of paperwork and more often then not, they just don’t get the documentation required to collect funds for their project. On the other hand, all that you need to do take part in an ICO is create a “white paper” (The white paper contains all the details of your project.) After that anyone can read the white paper and choose to invest in the project if it interests them.
- Community building: It gives the project creators an opportunity to build a community around their projects. Having a healthy community gives a product immense credibility. Plus, the members of the community can have real say in the direction of the projects and keep the creators accountable.
- Exposure for projects: The hype that surrounds an ICO can do wonders for the exposure of the project. The more the exposure, the more the people will know about the project. This increases the number of potential investors.
- Early access to potentially valuable tokens: Some tokens have the potential of becoming truly valuable cryptocurrencies. ICOs give investors an opportunity to invest in tokens, with potential, for dirt cheap. Eg. During the Ethereum presale, 1 Ether cost 35-40 cents. Right now, as of writing, 1 Ether costs ~$277.
- Incentive for innovation: The roaring success of various ICOs over the last 12 months has given extra incentive to various developers to innovate and develop more exciting projects.
Cons of ICO
- Attracts a lot of scammers: Because there is so little paperwork involved in ICOs it attracts many scammers who can simply create a bogus white paper and make off with a lot of money. Some developers also purposefully omit certain important details from their white paper to make their projects look more appealing than they actually are. The biggest consequence of all these scams is the decreased faith of the public in blockchain technology which can potentially spell absolute disaster.
- Based on pure speculation: When you are investing in a project in an ICO you are investing in the idea of the project. You read the white paper and if you think that the team is credible and the project has promise then you invest. So, basically you have no idea whether the project will even be successful or not. Over 90% of the startups fail and blockchain projects are not immune to that as well. Plus, the developers may get lazy and not even bother to finish what they have started. And, let’s not forget, there is always the possibility of a project getting ruined because of hacks and attacks. The DAO is perfect example of that.
- Whaling time: Let’s take the example of what happened in the, now infamous, BAT ICO. The ICO got over in just 24 seconds and they were able to raise 35 million USD! The shocking part was, not a lot of people were able to take part in the ICO at all as major chunks of the tokens were bought by certain individuals. In fact, a quarter of the BAT tokens are owned by one person!
These people are called whales. Basically people who have a lot of money and resources and they rig the ICO game in their favour. The way they do it is by paying extremely high mining fees which helps them “cut in line” and get first preference during ICOs. In the case of the BAT ICO, whales paid as much as $2220 in transaction fees to make sure that they take the first bite of the pie. Afterwards, they mostly sell these tokens at a premium to turn in a profit.
- Network Congestion: The increased amount of activity during ICOs causes a huge strain in the blockchain and may result in a bottleneck. During the Status ICO, when they raised a $100 million, there was so much backlog in the network that many people, who wanted to invest in Status, saw their transactions fail.
- Storing the tokens: There is a chance that you will not be able to store some of the tokens in any of your crypto-wallets. You can store any tokens made in Ethereum in your ether wallet but tokens made outside of Ethereum can be very complicated to store.
- Government intervention: This is where it gets scary. Because of the increased number of scams and huge amount of unregulated money, various governments may simply decide to start regulating the ICOs. If this happens then this truly could be the death of cryptocurrency. The whole point of cryptocurrency is the idea of decentralization and being outside of government control.
ICOs are going to continue being a part of cryptocurrency and blockchains. We simply cannot overlook the good that they have done. From giving birth to innovative technologies like Ethereum and Golem to giving DAPP developers, around the world, an incentive to innovate and come up with newer and more exciting technologies, their contribution simply cannot be understated.
Having said that though, there is not doubt that ICOs can be a “necessary evil”. Human tendency is to exploit any loopholes for their selfish benefits and ICOs seem to be the tool of choice for many corrupt individuals. Looking forward, what we can all do is act more responsibly and do our own research. Study the white papers, interview the team involved with the specific projects that are up for ICOs and then invest your money.