Important facts

ICO - Inital Coin Offerings

An Initial Coin Offering - ICO is a way of crowdfunding centered around cryptocurrencies which can be a source of capital for startup companies.

To clarify for those who are not that aware about cryptocurrencies, those are basically any form of currency that exists only digitally, not physically. Another characteristic of those currencies is that instead of a central authority to issue or regulate about them, there is a decentralized system where all transactions involving cryptocurrencies are recorded and new units are issued. The decentralized system offers security because it uses cryptography to prevent frauds.

The ICO can also be defined as a fundraising tool that trades future crypto coins in exchange for cryptocurrencies of immediate, liquid value. Finally, it's an event in which an organization sells part of its digital tokens to early adopters and enthusiasts, in order to obtain public capital to fund software development, business operations and development, community management, or other purposes. Those digital tokens represent a set of rights, for example right to vote in the organization's matters, acquire products or services that this organization offers, receive a share of future earnings.

Before releasing ICOs, organizations usually write a whitepaper explaining with more details about the team behind it, main goals and strategies, the technology used, how the earnings from ICO sale will be used to develop the organization, and other relevant information. This is not currently an obligation, unlike it is when companies put IPOs - Initial Public Offering - for sale. However, it is an efficient way to obtain trust from the users that will potentially buy ICOs.

Contribution value caps

The organization can set either a hard cap, a soft cap, or both when issuing an ICO. The hard cap is basically a maximum value of tokens that will be sold, so once this contribution value is achieved, no more tokens will be sold.

The soft cap, on the other hand, is a total contribution amount which, once achieved, will trigger a time limit on the remaining token offering period. In this case, if the value set by the organization was, for example, 5 million tokens and this value was achieved in sales, more tokens can still be bought as long as it happens in the next 24 hours for example.

Smart contracts

A smart contract is very similar to a normal written contract, with terms and conditions previously agreed by two parties that are directly interested in the agreement. However, instead of being drafted in the presence of lawyers and/or signed in a formal intermediary institution - for instance a notary's office - the smart contract is programmed and doesn't need a third impartial party accompany the agreement. Therefore, smart contracts can be used to transfer money, shares, property or other things that have a predefined/agreed value in a fast, secure and transparent way.

The two parties involved in the transaction can be anonymous, while the contract written in code is public and can be seen by anyone in the blockchain platform. A triggering event is defined, for example an execution date for the contract, and when this event takes place the contract is self-executed according to the terms established. To exemplify, suppose one party wants to rent her apartment to another party for 10 days at a certain price. It's then established in the smart contract that the second party will receive a digital entry key to unlock the apartment when he transfers the value agreed in the contract. In case the key doesn't come until a certain date, a money refund will take place. This system works on a if-then premise.

It is important, however, to warn that even though smart contracts are secure and accurate, they can also fail. In a real case scenario, if any contractual condition changes during the execution of the normal contract, the parties can consult their lawyers and meet to agree on different conditions. In a smart contract, on the other hand, it is not possible to change the terms pre-agreed by the parties due to its immutability.