ICO Basics, To Invest or Not? Cutting Through The Bullshit Part 2

The exact procedure behind an ICO can be broken down into the following steps: -

Firstly, the developers will announce their intention of making the project to generate hype and interest in the project. This step is very important because first impressions are everything.

Then, the developers will create a white paper. A white paper is a document issued by the developers which highlight their project and the specific features of that project that makes it enticing for the potential investors. While it is true that white papers are supposed to be a sales and marketing tool, it is nowhere near as flashy and over-the-top as a brochure or a sales letter. Whitepapers are written in an academic manner and the specific purpose is to entice the investors by showing its potential and features. They are at least 2500 words long and are meant to be purely informational.

After that, they will run the white paper through prominent members in the blockchain community to get their backing. Getting this backing is critical because this is where they will gain the credibility required to carry forward with the project.

Now, they will need to create the tokens which they are going to exchange for Bitcoin or ETH in the token sale. The process of token creation has already been covered above. Developers will have to decide the limit to the number of tokens and the amount that they want to charge for each token. Usually, the price of these tokens is very low at the start of the ICO. Setting a cap on the number of tokens is necessary because having a limited supply of tokens automatically increases their demand (according to the law of supply and demand).

Along with the cap on the number of tokens issued, developers will have to decide a time at which they want to hold their ICO. Selecting the time, and the amount of time it runs for is CRITICAL and this will be covered in detail later on. Along with that they also need to decide on the cap for the amount of money they will be taking in.

Once all these are decided, the developers choose a platform where they can advertise their ICO. Earlier it used to be tough to do so because developers had to convince people to come to their websites to gain more information about the ICO. But now, there are a number of websites which provide the platform for developers to address this particular need. Some of the best ones are:

a. Waves.
b. ICONOMI.
c. State of DAPPS (for Ethereum Tokens only).
d. TokenMarket.

Think of these websites as Kickstarter or Indiegogo of the crypto world. Once the ICO has been advertised the developers can then actually do the ICO.

So to summarize:

a. Firstly, the developers declare their intention of making the project.
b. Then, the project developers create a white paper which includes the details of their project explained in a descriptive way.
c. They get the backing and confidence from certain prominent members in the cryptocurrency world who act as “advisors”.
d. They then create the tokens and decide on various caps such as a token cap, money cap, and time cap.
e. Advertise the ICO using one of the platforms mentioned above.
f. Hold the ICO.

In the broad spectrum of things there are two different kinds of ICOs:

a. Currency ICO.
b. Project ICO

Currency ICO

A currency ICO is when developers bring in a new currency system. The developers give out tokens which become new cryptocurrencies in exchange of the older more established coins such as Bitcoin and Ethereum. The reason why people are drawn to these ICOs are that of investment opportunities. One of the best examples of these kinds of ICOs is the Ethereum ICO.

In later 2013, a young programmer named Vitalik Buterin was working for Bitcoin as a developer and was getting increasingly frustrated. He realized that the blockchain technology had more potential than being a mere currency system. His vision was to make an alternate form of the internet. This vision was Ethereum, a platform where people not only will have access to a new form of currency (Ether) but they will also be able to create and develop a newer form of DAPPS on the platform itself.

The Ethereum ICO lasted for 42 days and went on from July-August 2014 and raised >$18 million. Back then it was the biggest crowdfunding even in human history. The early birds got a humongous ROI. In the beginning, if you invested just 1 BTC you would get 2000 ether in return. The current valuation of those 2000 ether is ~$420,000. Not bad for a $2500 investment! But more than the ROI the biggest thing that makes this particular ICO so important in crypto history is the concept of the project itself.

If you want an advertisement for why ICOs are so important, just read up on the Ethereum ICO. This was one man with a vision who got a dedicated and talented team around him, got the white paper out, convinced people to invest in his project and then ultimately made one of the most important platforms in crypto history. This is what ICOs should be like.

Project ICO
Along with the currency ICO we have the project ICOs which issue “work tokens”. When you buy these tokens in the crowd sale you gain certain rights and votes inside the environment of the DAPP itself. One of the most famous, and consequently, infamous examples of this kind of ICO is the DAO.

The DAO aka the decentralized autonomous organization was a decentralized venture capital fund which was going to be used to fund future projects made in the Ethereum eco-system. This how it was supposed to work. People invest money in the DAO by giving ether and they get “DAO Tokens” in return. These DAO tokens made the holders part of the DAO community. So, suppose Jill wanted a project to be funded by the DAO, she would introduce the project to the DAO community. The token holders will then hold a vote and if Jill gets the majority vote then she would gain the required funding from the DAO itself.

This was a revolutionary idea and was getting mainstream press exposure as well. The ICO went down in history as one of the biggest ever. The ICO raised $150 million in ether, that was the 14% of the total ether issued at that time and everything was looking up. Unfortunately, that is when the infamous DAO Attack happened and a total of $50 million worth of ether was taken away. This attack had huge repercussions because this was what caused the Ethereum hardfork and resulted in two different Ethereums: Ethereum and Ethereum Classic.

Another great example of the “Project ICO” is Augur, a decentralized market prediction system.

ICOs nowadays are raising a ridiculous amount of money, the Brave ICO, an Ethereum based browser raised in $35 million in 30 seconds. That’s ~$1.2 million per second!! The Tezos ICO recently became one of the largest ICOs of all time by raising more than $200 million. SO the question that you are probably thinking of right now is,
“How do you make sure that the funds that you are investing is going to be used properly by the developers?” What if they just run away with it? Let’s answer that question.

What steps should be taken to ensure the safety of the funds aka how to not get scammed?

Unfortunately, because of the unregulated nature of the ICOs and the sheer amount of money to be made in this space, it does attract a lot of scammers. If you are investing in an ICO then you would want some assurances on your end that all the funds that you are going to invest are going to be used in a right way. So what should you be looking into when you are about to invest to make sure that you are not going to get scammed?

(i) The project developers should be able to clearly define the purpose of their project using simple and short sentences. If they are taking too much time and beating around the bush, then that either means: their agenda is not clear or they are hiding something. Both of which are not that encouraging scenarios.

(ii) Make sure that the developers are not anonymous. There should be 100% transparency when it comes to their names, business plans, locations etc. You should be able to contact them regarding any and all information that you need to get from them.

(iii) There should be a legal framework between the developers and the contributors including terms and conditions set for the ICO.

(iv). Lastly, and most importantly, you need to make sure that the ICO funds are being stored in an escrow wallet. An escrow wallet is basically a multi-sig wallet which needs multiple keys to be opened. One of those keys must be held by a neutral third party.

If you keep these 4 points in mind, then you will be able to spot the scammers with relative ease and invest in projects which have real potential.