This is where Ethereum, as stated by top Cryptocurrency Exchanges, comes in to play.
As things stand, something like 95% of ICOs has been conducted using the Ethereum platform. This is really for no other reason than it is the platform most suited to the process, both in the sense that you can create a smart contract-based DAO through the platform and create or issue tokens all in the same place.
So how does it work?
Considering the high-level technical concepts that underpin the system, it’s actually incredibly simple to set up, conduct or take part in an ICO.
The process that has been used most widely to date is as follows:
A company decides it wants to conduct an ICO and, logically, decides that it wants to do it through the Ethereum platform. Said a company needs to do two things to give itself a chance of success:
The first is to create tokens for the issue. The second is to make these tokens look attractive to buyers or investors.
The first part is easy.
The company uses the Ethereum platform to create what are called ERC20 standard tokens.
You can either do this at Ethereum itself, or there are numerous third-party trading platforms available that make the creation of these tokens simpler to people who aren’t familiar with Solidarity, which is the language (that is for the most part) used to code in Ethereum.
Phase 2 is more difficult. It is during this phase that you, as a company looking to conduct an ICO must convince people that what you’re trying to create is worth their investment in.
Or, to put that another way, and in line with our previous discussion on what these tokens are, that the symbols which represent your company and that the buyers receive in return for their cash are likely to increase in value over time.
The standard way of going about this right now is through the production of a white paper and the publishing of this white paper online as part of a website that – pretty much invariably – details the team, the concept and the history of the company (which is often relatively thin).
Once everything is live, you set a start and end date for the ICO, which is basically just a crowd sale that starts and ends as defined by the restrictions you’ve just created.
After that, you’re good to go.
So where does Ethereum come into all of this?
To buy tokens as part of the crowd sale, individuals need to send Ether (the token used as a reward on the Ethereum blockchain, as outlined above) to a particular Ether wallet (which is owned by the company in question).
On setting up the ICO, the company that is raising the money will have developed smart contracts that can register the receipt of Ether to the wallet in question and can execute on a return transaction that sends a predefined number of tokens (as defined by the amount of Ether sent to the wallet) to the initial sender.
What you should pay attention to is that the only actual smart contract that the company conducting the ICO needs to set up is the one that’s detailed in the previous paragraph – the one that deals with the receipt and issue of Ether and tokens respectively.
The underlying business, the operational activity, and company that the person buying the tokens are funding can be nonexistent.
This is why the ICO market is so risky right now.
Investors must rely on white papers, which in many cases are beyond the technical understanding of those reading, to make informed investment decisions. There is no real regulation (as yet), and there is no obligation on the part of the ICO company to actually execute on the strategy outlined in its white paper. No legal obligation that is.
Of course, this hasn’t stopped people from taking part in ICOs – nowhere near.
During the first six months of 2016 alone, technology startups raised close to $1.3 billion
Through the above-described mechanism. Records are being broken virtually every week, with the current highest amount of capital raised (as of August 2017) being Tezos‘ huge $232 million haul mid-July. Before that, the record was held by Bancor, which raised $153 million in just three hours in June and totaling a haul that came in at $51 million more than it sought to pick up.