Over the past few years, it seems that 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), is hoping to revolutionize the crypto world. Today we are going to explore Initial Coin Offerings (ICOs) and Security Token Offerings (STOs).
What Are ICOs and How Do They Work?
An initial coin offering, or ICO, is the process by which most new cryptocurrencies are released onto the market. The goal of most ICOs is to raise money for a project. The process is similar to an initial public offering (IPO), which is the process of a company becoming public. However, ICOs differ from IPOs in a few ways.
For starters, ICOs face almost no regulation and the issuers are given many choices in regards to how they would like 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 dynamic supply may allow the project to raise more money as the ICO can keep releasing as many tokens as are demanded.
ICOs can also provide some benefits and utility for the users that purchase them. For example, owning a certain token could give the user rights to stake their tokens and earn rewards. This contrasts IPOs, which typically only give owners voting rights.
Benefits of ICOs
ICOs are the most popular way of releasing tokens as it is an extremely simple process. For a small investment and some basic coding experience, virtually anyone can put their own token out onto the market. This ease of offering allows more projects to receive funding that traditional venture capital firms may have overlooked.
Another benefit 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.
Lastly, ICOs can provide high returns for investors. Some see ICOs as getting in on the ground floor of a new project and potentially buying the token at its lowest. While this may be true for some tokens, there is also a possibility that the token could completely flop and funds are 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 that are representative of some sort of stake in the company. This can mean anything from direct ownership of the company to a stake in the company’s net income.
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 a response to ICOs as some were fraudulent and many lost money on deceitful ICOs.
One example of a successful STO is INX. They are a crypto platform that raised over $85 million from an STO in early 2022. Each token from the STO represents a stake in the company’s net operating cash flows. This is a unique use of STOs that attracted lots of investment as it could provide even higher returns than ICOs or IPOs.
Benefits of STOs
The 2 main benefits of STOs are regulation and creativity. The offerings are regulated, so the risk of investing in a fraudulent project is extremely slim. A project must first complete legal filings and other documents to prove the legitimacy of the project.
STOs also allow for lots of creativity. By using the blockchain, processes can be automated and issuers can come up with new ideas for raising capital. Some examples include giving up equity in the company, providing asset-backing, and even structuring terms for a debt-based token. STOs leave lots of discretion up to the issuer to create a mutually beneficial experience for both investors and issuers.
Lastly, INX makes launching your own STO an extremely simple process. With full customer support and a legal team to aid in your own STO journey, getting your token listed has never been easier. If you are interested in launching your own token via STO, a good place to start maybe with the experts who already completed a successful STO and now provide the tools to others.
Overall, ICOs and STOs can be useful tools for raising money in a digital age. ICOs were somewhat of a beta test for unregulated token issuances, whereas STOs were created to improve upon the idea. However, both are extremely useful tools and can help projects gain the capital needed to grow.
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