An ICO or Initial Coin Offering is, as highlighted elsewhere on this website, basically a way for developers to raise funds to continue working on their blockchain-based project – with cryptocurrency tokens given out to investors as a reward. This does not seem so different from the way in which other, non-cryptocurrency-related businesses have been using the Internet to raise money to develop products and services in recent years; through crowdfunding, many budding companies raise funds in return for early, free access to the particular product or service. This article will attempt to explain some of the ways in which ICOs are different from traditional crowdfunding campaigns.
Which platform is used?
Firstly, there is a difference in terms of the platforms used. Traditional crowdfunding campaigns will use platforms like Gofundme or Kickstarter; once the project has raised sufficient funds, the money will be transferred to whoever started the campaign. ICOs, however, are not tied to any specific platform, and exist on independent websites, where the money you pay goes directly to the developer. This means less transaction fees, but also implies extra trust in the developer, and more opportunity for fraud.
This is particularly the case because crowdfunding is subject to a number of regulations, sometimes on a government level, for example in countries like the US and France. ICOs, on the other hand, often exist completely outside of any particular legal boundaries and are therefore riskier. It is for this reason not unlikely that more strictly regulated ICOs will be seen in the near future.
How much information is available?
Additionally, the types of information presented by crowdfunding campaigns versus ICOs are quite different. Crowdfunding campaigns will usually either be able to show a prototype of their intended product, or a test version of their planned service; there is some sort of tangible proof that they are able to carry out their plan. Because ICOs are unregulated and run via their own websites, however, there is no clear definition of how much information is necessary in order to raise funds – and this information usually takes the shape of a whitepaper which, even if it is extensive, still need to be able to put into practice. At the same time, however, for investors willing to take a leap of faith for a project they feel genuinely enthusiastic about, this means an ICO can be much more ambitious in scope than a traditional crowdfunding campaign.
Which rewards can investors expect?
In terms of the rewards offered, crowdfunding campaigns tend to offer much more limited rewards to their investors. Sometimes, investors receive nothing at all, whereas other times, they are given a reward such as a T-shirt, a thank-you-card or, in the best-case scenario, one or more copies of the product that is being crowdfunded. Investors thus know exactly what they will be receiving and can really consider whether it is worth their money for them. ICOs are much more unreliable, since the rewards offered are tokens; depending on the success of the project, these can become worthless or more than the investor originally spent on them. Once again, ICOs carry more risk, but can also lead to greater profits.
How much money is raised?
Finally, then, the amount of money raised differs greatly. Whereas crowdfunding campaigns are increasingly popular and can be very useful in raising money to fund a product or support a cause, their profits pale in comparison to what ICOs can raise. For example: the total amount of money raised by Kickstarter since 2009 is more than 3 billion dollars – whereas ICOs can raise as much as 2 billion in a single year. For the developers, too, therefore, the profits tend to be greater… even if, perhaps, the risks are, too.