An Initial Coin Offering (or ICO) is a fundraising method for startup projects in the cryptocurrency space. With these token offerings, teams generate crypto tokens to sell to early investors and community members. ICOs serve as a crowdfunding phase whereby investors receive the project’s tokens and the project receives capital to fund its development and launch.
ICOs can be a viable fundraising alternative to traditional funding for tech startups where new entrants struggle to secure capital without an already functional product. In the blockchain space, established venture capital firms rarely invest in projects on the merits of a white paper alone and a lack of government regulation may deter many traditional investors from considering blockchain startups. The ICO allows the blockchain startup to attract a new, broader cohort of investors to help them get off the ground.
How does an ICO work?
The most common method for conducting an ICO is to issue tokens on a smart-contract-capable blockchain such as Ethereum, BNB Chain, or Cherry Network.
The ICO is announced ahead of time with guidelines on how it will progress. The rules will outline a timeframe that it will run for, introduce a hard cap for the maximum number of tokens to be offered, or provide both a timeline and a hard cap. There is often a whitelist that participants must register on before the ICO occurs.
After the whitelisting period, users send funds to the specified address stated in the ICO guidelines. Investors provide a crypto wallet address to receive the purchased tokens or tokens are automatically sent to the wallet address from which the payment was made.
ICOs received considerable hype in 2017 with the launch of Ethereum smart contracts; however, they quickly became a haven for scams and rugpulls as investors had to put blind faith into the team performing the fundraising. It quickly became obvious that other solutions were necessary, enter IEOs and IDOs.