Over the past few years, it seems like a new cryptocurrency is popping up every day, seemingly out of nowhere. However, there is a unique process by which tokens can become tradable assets. Additionally, a new form of token, called a security token (aka digital security), hopes to revolutionize the crypto world. Today we are going to explore Initial Coin Offerings (ICO) and Security Token Offerings (STO).
What are ICOs and how do they work?
An Initial Coin Offering, or ICO, is the process by which most new cryptocurrencies are brought to market. The goal of most ICOs is to raise funds for a project. The process is similar to an initial public offering (IPO), which is the process by which a company goes public. However, ICOs differ from IPOs in several ways.
For starters, ICOs face almost no regulation, and issuers have many choices when it comes to how they want to price the coin and the circulating supply. The issuer of an ICO can set static or dynamic prices and supplies. For example, having a static price and a dynamic supply can allow the project to raise more money because the ICO can continue to release as many tokens as are requested.
ICOs can also provide certain benefits and utilities to users who purchase them. For example, owning a certain token could entitle the user to stake their tokens and earn rewards. This contrasts with IPOs, which typically only give owners voting rights.
Benefits of ICOs
ICOs are the most popular way to release tokens as it is an extremely simple process. For a small investment and some basic coding experience, virtually anyone can bring their own token to market. This ease of supply allows more projects to receive funding than traditional venture capitalists might have overlooked.
Another advantage of an ICO is that it can reach a large audience. Many promising projects are able to attract large communities that support the project and want to invest in the ideas. These communities can supply projects with anything from pennies to hundreds of millions.
Finally, ICOs can offer high returns to investors. Some see ICOs as entering the ground floor of a new project and potentially buying the token at the bottom. While this may be true for some tokens, it is also possible for the token to fail completely and funds to be lost.
What are STOs and how do they work?
A Security Token Offering (STO) is similar to an ICO. The process involves a company issuing tokens representing some sort of stake in the company. This can mean anything from direct ownership of the business to a stake in the net income of the business.
STOs differ from ICOs in that they are subject to government regulations. All STOs must register with the government before release and are often held to a higher standard than ICOs. In fact, STOs were created in response to ICOs, as some were fraudulent and many were losing money on misleading ICOs.
An example of a successful STO is INX. It is a crypto platform that raised over $85 million from an STO in early 2022. Each STO token represents a stake in the net operating cash flow of the company. This is a unique use of STOs that has attracted a lot of investment as it could offer even higher returns than ICOs or IPOs.
Benefits of STOs
The 2 main advantages of STOs are regulation and creativity. As the offers are regulated, the risk of investing in a fraudulent project is extremely low. A project must first complete legal filings and other documents to prove the legitimacy of the project.
STOs also allow for a lot of creativity. By using blockchain, processes can be automated and issuers can come up with new ideas to raise capital. Some examples include dropping company equity, providing asset-backing, and even structuring the terms of a debt-based token. STOs leave a lot of latitude to the issuer to create a mutually beneficial experience for investors and issuers.
Finally, INX makes launching your own STO an extremely simple process. With full customer support and a legal team to help you on your own STO journey, registering your token has never been easier. If you are interested in launching your own token via STO, a good place to start might be with the experts who have already completed a successful STO and are now providing the tools to others.
All in all, ICOs and STOs can be useful tools for raising funds in the digital age. ICOs were sort of a beta test for unregulated token issuances, while STOs were created to enhance the idea. However, both are extremely useful tools and can help projects get the capital they need to grow.
Image from Unsplash
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investment advice.