Should You Use an ICO to Fund Your App Project?
NOVEMBER 20, 2017
According to CoinDesk ICO Tracker, organizations have raised over $1.8 billion through initial coin offerings (ICOs) since January 2017, exceeding the amount of money raised through traditional venture capital investment as of June 2017. This method of raising funds for app startups has gained popularity lately in the cryptocurrency world because company issued cryptocoins offer a number of useful features by providing the same anonymity as ordinary cryptocurrency, the potential for subdivision or consolidation, as well as, the ability to be bought and sold on cryptocurrency exchanges. However, an ICO comes with substantial risks of which security and regulatory compliance are major concerns. Here are a few things to consider to help you decide if you should use an ICO to fund your next app project.
What Is an ICO?
The ICO, short for initial coin offering, is in some ways similar to an initial public offering. The main difference is that in an ICO, a company sells cryptocurrency tokens, also called cryptocoins or Altcoins, instead of stock. Generally, there is a set number of tokens that is sold and a time limit for the sale. Once the company has reached the set limits, the sale is complete and the owners can then use the tokens to make investments in the company. Tokens can be traded amongst investors and they also have a value that can decrease or increase after the ICO. If the ICO is successful the value of the tokens increases and the largest investors can reap the most benefits, which is similar to the boost in share price that occurs after an IPO. However, unlike stocks, tokens don’t give their owners an ownership stake in the company that issued the tokens. Instead, each token is actually a smart contract that can have other benefits according to the company’s terms. For example, Storj — a decentralized storage solution — which completed a successful ICO in May 2017, opted to make its tokens exchangeable for storage space on its platform.
Security is a major concern if you plan to launch an ICO with the best example of a major security failure being the disaster that occurred during the crowdsale of decentralized VC fund, DAO. When this ICO took place, a hacker managed to exploit a bug in the code stealing a large chunk of the funds that had been raised to support the development of more than 50 projects on The DAO. As a result, Ethereum was forked into a new software version in order to restore the funds, which lead to a large drop in the price of Ethereum following the fork. In addition, many lawyers argued that the way in which this ICO was set up could make the creator, token holders, exchanges, miners, and even The Ethereum Foundation itself liable for the hack. They also believe that the ICO was not in compliance with the securities laws of several countries.