A dummies’ guide to ICO

Like it or hate it, the boom of cryptocurrencies such as Bitcoin and Ethereum has caused a global trend which brings about various buzzwords with it. One such acronym that keeps popping up time after time is “ICO”.

Introduction to ICO

ICO is an acronym for initial coin offering. It is a trending word bandied about in the cryptocurrency world. Just like the significance of IPO in the traditional investment banking system, ICO is a considered a milestone within the blockchain industry because it is not only a means to raise funds, but also allows a greater distribution of tokens for a cryptocurrency organisation.

ICO can also be considered as an alternate form of crowd-funding. In an ICO, a company offers their own tokens to people with the hope that when the project of which the coin or token is tied to finally launches, the token will be of commercial value – similar to popular cryptocurrencies like Bitcoin and Ethereum.

ICOs are not only used to fund projects, but it is also a convenient way to influence investors into adopting the project with its promises of gathering excellent investment value as the project succeeds. Just like how most investments go, not all ICOs end up victorious as promised at the start. Some ICOs are just another way to defraud investors of their investment capital.

It is always necessary that before the adoption and actual investment into any ICO, investors should diligently evaluate the project, weigh its projected value and see the market gap it is filling which had not already been filled by other established cryptocurrencies.

Whenever an organisation launches its ICO, everything that needs to be known about the project is made available through the ICO’s white paper. Now, you should know what a white paper means and see how it is significant to an ICO. Mind you, if a project created an ICO without any white paper, that’s the first red herring showing that the ICO is a blatant scam.

What is a white paper?

A white paper is a publication that explains everything about the ICO. The reason why an ICO is raised can be appropriately analysed in the white paper. The white paper describes a vacuum the project is trying to fill by creating its cryptocurrency.

Usually, the first question a white paper must answer is this: how does the project which the ICO supports benefits the world’s economic situation? The second question it should answer, which is pretty vital to investors, is how the investment derives value when the project finally commences.

In short, the white paper should be able to show a sustainable and scalable business system portrayed by the project. If the white paper does not mention all those, then investors may end up retracing their steps and ask themselves the feasibility of this investment. The white paper is usually the first stage to test the business worthiness of a project’s ICO.

Cryptocurrency, what is that?

A cryptocurrency is a digital currency that operates as a medium of exchange through a secured interconnected system, called the Blockchain, that verifies every transaction made. It is touted as being more secure than traditional currencies because the theft of a cryptocurrency is almost impossible unless a holder is careless with access to their cryptocurrency wallet.

If you take away the noise surrounding cryptocurrencies and break the seemingly colossal term down to a simple definition, you will find limited entries in a database that nobody can change without specific conditioned requirements. That may seem simple, but believe it or not: that’s how you define a currency.

Take the money in your bank account: what is it other than the entries in a database that can only be changed under certain conditions? You can even take physical bank notes: your money is a limited entry in a public physical database that can only be changed if they match the state that physically contains the coins and banknotes. Money is a verified entry into a database of accounts, balances and transactions.

How miners generate coins and confirm transactions

Consider the mechanism that governs cryptocurrency databases. A cryptocurrency like Bitcoin is a network of pairs. Each pair has a record of the complete history of all transactions and thus the account balance of each account.

Consider this, and a transaction is essentially a file that says “Bob gives Alice X Bitcoin” signed with Bob’s private key. This is basic public key cryptography, nothing special. After signing, a transaction is transmitted over the network, which is sent by a pair to each pair. This is a P2P technology. The transaction is almost immediately known throughout the network but only confirmed after a specific time.

Confirmation is a critical concept in cryptocurrencies. One could say that cryptocurrencies have to do with approval. If a transaction is not confirmed, it is pending and possibly forged. When a transaction is established, it is set in stone. By this, it means a transaction can’t be reversed or reproduced; it has become a part of an unchangeable Register of Historic transaction: or instead called the Blockchain.

Only miners can confirm transactions. They accept transactions, seal them as legitimate, and distribute them across the network. After a miner has established a transaction, each node must add it to its database.

That’s pretty much all you will need to know about ICOs and cryptocurrencies for now. Hope you found this article useful! If so, please remember to share it with your friends and family!

Related posts