Ever since its inception, Initial Coin Offerings have changed the cryptocurrency and blockchain fundraising ground completely. They have come a long way from an esoteric form of fundraising to popular (a little) financial instruments, both for fans and regulators. In this article, we take snippet of the how it all began and where the ICO ecosystem is now.

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Origins of ICOs

ICOs began in 2013 with the launch of Mastercoin, which raised funds by selling tokens that promised future returns. This approach brought a new innovative way to backed blockchain startups which just eliminate traditional venture capital route and come directly access the cryptocurrency community for funding. The earliest was Ethereum in 2014, which pulled $18 million and led to the smart contracts.

Major Milestones

The Rise of Ethereum

Ethereum’s success demonstrated the potential of ICOs, leading to a surge in projects seeking funding through token sales. By 2017, the ICO market went wild and numerous projects received record capital with by their standards of those times. This was because Filecoin’s ICO in 2017, raised $257 million and also showed the inspirational financial response.

The ICO Boom of 2017

The year 2017 is often referred to as the “gold rush” period for ICOs. The fundraising brought billions with no accountability, as hundreds of projects like this started. But with the rise in popularity emerged a dark side of fraud. BitConnect and OneCoin scams were revealed to be Ponzi schemes, cheating investors of their money and sparking investigations from different regulatory bodies.

Regulatory Challenges

The lack of regulation in the early days led to a surge in scams and fraudulent projects, tarnishing the reputation of ICOs. As regulators (e.g. the SEC) targeted ICOs for selling unregistered securities, many utility tokens (tokens that bought access to goods or services offered on a company’s platform) were also subject to classification as such. This resulted in more regulatory obligations and an era of increased transparency and compliant means of raising funds.

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Evolution of ICO Models

Security Token Offerings (STOs)

To address regulatory concerns, the concept of Security Token Offerings (STOs) emerged. Unlike ICOs, STOs have tokens that represent stake in real assets (company shares or property). This made it more secure, and therefore compliant enough to attract institutional money. As a STO, you are bound by federal securities regulations which are there to protect investors from fraud.

Initial Exchange Offerings (IEOs)

The next progression in the ICO model is Initial Exchange Offering (IEO). In an IEO, the ICO process is performed by a renowned cryptocurrency exchange. This acts as a certain level of authenticity, since before being listed on exchanges the projects are vetted. This kind of exchange ensures the safety which is why IEOs have been quite popular as investors always trust such exchanges.

Current Trends in the ICO Landscape

Decentralized Finance (DeFi)

The rise of decentralized finance (DeFi) has influenced the ICO landscape significantly. DeFi projects frequently raise money via token sales to develop their platforms that provide unique financial services such as lending, borrowing, and revenue farming. These projects are using blockchain technology to enable open and permissionless financial systems.

Non-Fungible Tokens (NFTs)

Non-fungible tokens (NFTs) have also become a popular use case for ICOs. NFTs are unique digital assets (art, music and virtual real estate). The accomplishments of OpenSea, and recent sales of digital art by high profile artists have made NFT-related ICOs appealing to investors in a new field.

Regulatory Compliance

With the growing maturity of the ICO market, regulation has become a hot topic. Across the globe, governments are creating guidance in attempts to regulate token sales for investor protection and market stability. This has led to the adoption of practices like (AML) Anti-Money Laundering and (KYC) Know Your Customer checks in ICO processes.

Key Considerations for Investors

Due Diligence

With such a history of scams and failures, due diligence is all-important for ICO investors. Risk can be easily mitigated in such obvious scams with proper evaluation of the team, whitepaper and technology involved. Investors should also be aware of the project’s tokenomics, including token distribution and use of funds​.

Market Volatility

ICOs remain highly speculative and volatile. The value of tokens can fluctuate significantly, influenced by market trends and project developments. Investors should only invest amounts they can afford to lose and diversify their portfolios to spread risk​.

Conclusion

ICOs have evolved well with the progression of the ever-expanding cryptocurrency and blockchain sector. Though, over time starting from the early days of Mastercoin and Ethereum to more complex mechanisms such as STOs at IEOs ICO have changed in order to comply with market needs or legal regulations. 

While they have also been a source of fraud and scams, along with the targets for numerous regulators around the world in favour or against them, ICOs have fuelled innovation sparking fundamental ideas that would not be plausible through traditional fundraising methods. The future of ICOs will be shaped by the market, regulation changes and technological progress in blockchain.