In the world of cryptocurrencies or cryptocurrencies, an instrument known as ICO (Initial Coin Offering) is used to finance the development of new protocols. This expression, literally translated into Spanish, means Initial Currency Offer.
The reasons why investors are willing to invest in an ICO I explained in my article ” so today it is time to list and delve into some of the main ICOs that have been placed on the market. To do this, we will equate an ICO with an IPO, and we will define the characteristics that a quality ICO must have compared to others, which have become “frauds”, which have also existed.
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The relevance of mining in a cryptocurrency ICO
There are those that are relevant for us to understand how an ICO works. On the one hand, the Proof of Work mining model is used in the Bitcoin, Litecoin or Ethereum protocol to mention just a few examples. Although in the case of Ethereum, its developers are considering switching to Proof of Stake in the future.
The Proof of Stake (Proof of Stake) is a model in which the owners of cryptocurrencies are progressively rewarded -in a lottery among the cryptocurrency holders themselves-, with new tokens of the same type. In this model, holders of more units of account or currencies are more likely to increase their holdings with new cryptocurrencies.
The Proof of Stake model, unlike the Proof of Work model, allows a distribution of cryptocurrencies or tokens based exclusively on the priorities of the protocol developers, a circumstance that has allowed the creation of ICOs with a fraudulent or dishonest tone. The advantage of the PoS system is that it does not consume energy to secure the system unlike the Proof of Work model, but unlike PoW the distribution of coins can be unbalanced.
The pre-mining of cryptocurrencies in ICOs
In the Proof of Stake model, there have been many cases where pre-mining has been used, which simply means that the protocol developers distribute a fixed amount of cryptocurrencies to a small initial group of investors. Later -once distribution is open to the general public- they try to inflate the prices of this new cryptocurrency in order to sell them at great profits to new investors. Of course, the promotion or marketing campaign must be successful and attract new capital.
Obviously, this does not mean that all Proof of Stake models are all fraudulent, but it is true that they favor them, unlike the Proof of Work system in which the developer of a protocol can hardly control the distribution of coins. That said, a curiosity, some people speculate that Satoshi Nakamoto owns at least one million bitcoins out of the 21 million that will be issued on the Bitcoin protocol. But not for a premining operation. At the dawn of technology, only Satoshi found mining bitcoins somewhere between useful and fascinating.
But to understand the economic meaning of an ICO in the world of protocols, we are going to mention some of the best-known ICOs below.
The Ethereum ICO
Ethereum raised 31,531 bitcoins (15 million dollars at the time) during its launch campaign, with a pre-mining system, in the summer of 2014. Investors had to wait a year to be able to trade their ethers on the market, because that was stipulated in the ICO investment agreement. A measure taken to curb initial speculation. As of today, 31,531 bitcoins have a market value of $26 million.
The launch of ether was, at the time, one of the most successful crowdfunding campaigns on record in any protocol and positioned Ethereum and its cryptocurrency – ether – as a serious competitor that could receive attention from developers and investors in the ether market. cryptocurrencies, compared to the Bitcoin protocol. Some of the most notorious and important ICOs of new decentralized protocols have used Ethereum as a reference protocol, as we will see in the following examples.
TheDAO ICO
The Ethereum ecosystem once again made history in the world of cryptocurrencies and crowdfunding campaigns in 2016. On April 30, the Ethereum ecosystem startup Slock.it announced the launch of TheDAO by articulating a crowdfunding campaign that put DAO (Decentralized Autonomous Organization) tokens up for sale for the first time, raising 12.07 million ETH (ETH is the code for ethers like BTC is for Bitcoin).
This crowdfunding campaign raised more than 150 million dollars, encouraged by the spectacular revaluation of ether since its launch and the high expectations of the Ethereum community to be present in one of the first investable projects that were presented to them. TheDAO was an open venture capital fund where anyone in the world could participate, to invest in projects based on the automated Ethereum protocol with smart contracts, without the need for a management structure.
TheDAO failed because a hacker managed to lock up 3.6 million ether and although this issue was resolved weeks later it caused a rift in the Ethereum community because of how it was resolved. This situation led to a division in the Ethereum community, which led to the creation of Ethereum Classic (its token is called Ether Classic or ETC) and Ethereum (ETH), which changed its initial system, branching into two separate protocols.
The TheDAO crisis and a series of other technical problems throughout 2016 caused the price of ether to drop from its highs of $21.50 per ether at the height of TheDAO to the current price of $7. Despite this significant drop, the revaluation of ether in 2016 alone has been 700%.
In the first six months of 2016, the price of ether appreciated by 2,000%, trading from a price of 0.93 dollars per token to a maximum of 21.50 registered in mid-June.
The Z-Cash ICO
The Z-Cash project received the support of more than 30 investors who contributed 3 million dollars for its development. The monetary base is the same as for bitcoin, 21 million units. Z-Cash did not use the premine to compensate its investors.
The protocol specifies that miners will only be able to get hold of 90% of the coins because the remaining 10% is destined for investors (1.65%), company founders and employees (5.72%) and corporate investments (2 .65%). That 10% of the coins will be repaid in the first 4 years of Z-Cash’s life. In this way, the commitment of the partners to the project is sought and to ensure the stability of the company in the first years.
The weeks before the launch of Z-Cash (the unit of account is ZEC) the price was heating up in the futures market to reach, at the end of October, 3,300 bitcoins per ZEC (about 2 million dollars), I assume that as part of the promotional work of some of the initial investors. In the same week, the price fell to 1 BTC. The reason for reaching such high prices is none other than the very law of supply and demand. In the initial market there were very few ZEC, by design, reaching prices as high as unrealistic, but as more coins were mined and generated, the price dropped to 60 dollars.
The main value proposition of Z-Cash is that it is supposed to be able to be truly anonymous in transactions, using a new unproven cryptographic technology known as zero-knowledge proof.
ICO speculators
Historically, ICO speculators have investigated and followed the launches of new cryptocurrencies in specialized forums, trying to anticipate market movements. The first investors thus seek to benefit from the subsequent revaluation that may occur in the face of a successful marketing of the new token.
One of the characteristics of any ICO so that it can quickly increase its price is the lack of liquidity and supply in the market of the token in question. Any speculator who dares with this market is aware of this situation to be able to operate in that type of environment.
I have described the fundamental basis of this economy in although it is necessary to know how ICOs work to have a better vision of the most speculative aspect of this market. Currently the two main protocols with their own blockchains are Bitcoin and Ethereum and it is expected that by now we will see the main real value creation activity with new functional protocols operating on top of these two blockchains.
In my next article I will explain in greater detail the distribution of value in the decentralized economy, which is, ultimately, the basis of market speculation.
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