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What Is ICO And How Does It Work?

Published: 26/04/2018
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Up-to-date Blockchain and cryptocurrency news. Be the first to know!

What is it for?

Many development teams suffer from the lack of start-up capital for the new projects. One of the best ways to raise funds is to issue shares. However, this method usually costs an issuer a lot of money. Fortunately, the development of blockchain technologies gave people an alternative way of fundraising — the initial coin offering (ICO). During an ICO, a company sells cryptographically protected digital tokens which may be exchanged for services and products in the future.

 

But the hype around tokens and ICO has provoked many myths and misunderstandings. The purchase of tokens is nothing like investments in stocks, bonds or other valuable products. Instead, investors actually buy the idea in the form of a digital asset. Therefore, before you decide to invest in a particular project, you should figure out what you expect to buy and what benefits you will get in the future.


What affects the price of a token?

 

Tokens exist as a part of the abstract economy, so they are influenced by various economic factors, such as supply and demand, falling and rising costs, etc. Even if an ICO is successful and the value of a token keeps growing, it's necessary to know the purpose of its issuance and what benefits an investor can get. Any investment is built on the idea that some tokens will be more expensive than others. And before making any forecasts, you need to clarify all features of the selected project and the motives of its developers.

There are several factors that affect the price of tokens. For instance, coins can be released to the market in full, or it can be a multi-stage process with a pre-established limit. Consequently, it has an influence on their deficiency.

In addition, the price is initially set by developers and varies depending on demand.

 

The cost of a token is also determined by the level of user trust — after all, startups are often not provided with anything but the idea and plans for its implementation.

 

To make it more clear, let's try to analyze the marketing strategies of two popular projects.

 

OPEN Platform

 

This platform is designed to help software developers integrate applications into the blockchain. The platform supports purchases in the application through the standard REST API, providing users with a purchase receipt that is stored in the blockchain with the help of the OPEN State technology.

 

OPEN decided not to develop its own blockchain system and took the Ethereum network as the basis. A developer who wants to use the platform as a payment system to purchase a product has to sell a certain number of tokens to form OPEN Scaffold (scaffolding is the creation of programs that generate web applications for databases processing; scaffold is a smart contract that works with a specific information). As soon as the scaffold stops being active, tokens are returned to the developer.

 

Users who pay with OPEN tokens receive a discount. Still, clients can make payments in any cryptocurrency. Some of these payments (about 3%) go to the exchange and are converted into OPEN tokens, which are used to develop the platform. These publicly converted tokens also help support cryptocurrency development pools, ensuring that there are enough tokens for new applications.

 

As a result, we get a stable ecosystem with a constant need for OPEN tokens. At the same time, application developers always have enough resources.

 

SuchApp

 

SuchApp is both an application for working with cryptocurrencies and a messenger. The cryptocurrency is based on SPS tokens, which can be used In different ways. Users can purchase premium services in the application, make e-commerce transactions, pay at local enterprises through loyalty programs, send and receive payments from friends, relatives, and colleagues.

 

In addition, SuchApp actively offers a referral program in order to attract new users. Thus, the project seeks to obtain the status of one of the most universal and useful distributors of tokens in the market.

 

Conclusions

 

You need to carefully study a startup and evaluate its chance to make a successful project. Each investor is interested in getting profit. So the main task is to objectively assess the potential of tokens, to find out where the collected funds will go, and what benefits token holders will receive. All these questions must be detailed in the white paper of the project.

 

It is worth remembering that legal mechanisms do not operate at full strength in the cryptocurrency market, and regulative rules still require thorough development. Therefore, when choosing a project for investment, it is crucial to rely on the professionalism of the development team, an advertising strategy, and user feedback. At the same time, try to avoid the products that appeal to emotions and make countless pledges that cannot be actually verified.

 
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