How Does an ICO Work?

When a cryptocurrency project wants to raise money through ICO, the project organisers’ first step is to determine how they will structure it.

ICOs can be structured in a few different ways, including:

1. Static supply and static price: A company can set a specific funding goal or limit, which means that each token sold in the ICO has a preset price, and the total token supply is fixed.

2. Static supply and dynamic price: An ICO can have a static supply of tokens and a dynamic funding goal—this means that the amount of funds received in the ICO determines the overall price per token.

3. Dynamic supply and static price: Some ICOs have a dynamic token supply but a static price, meaning that the amount of funding received determines the supply.

Moreover, initial coin offering is a complex process that demands in-depth knowledge of technology, finance, and the law. The main idea of ICOs is leveraging the decentralised systems of blockchain technology in capital-raising activities that will align the interests of various stakeholders.

The steps in an ICO are listed below:

1. Identification of investment targets

The intention behind launching an ICO is to raise capital so companies identify the targets for its fundraising campaign and create the relevant materials about the company or project to attract potential investors.

2. Creation of tokens

The next step in the initial coin offering is the creation of tokens. Essentially speaking, the tokens are representations of an asset or utility in the blockchain, they are fungible and tradeable but should not be confused with cryptocurrencies because the tokens are just modifications of existing cryptocurrencies. Unlike stocks, the tokens generally do not provide an equity stake in a company. Instead, most of the tokens deliver their owners some stake in a product or service created by the company.

The process of the creation of tokens is relatively simple because a company is not required to write the code from scratch as in the creation of new cryptocurrency. Instead, existing blockchain platforms that run existing cryptocurrencies such as Ethereum allow the creation of the tokens with minor modifications of the code.