ICO has the potential to be a strong force in the development of open-source blockchain technologies. ICOs could also prove to be a significant runner for financial access and inclusion by democratizing access to investments. ICOs are popular for many different causes.
Positive network effects.
The ICO model generates positive network effects that can be brought alive and make powerful decentralized applications that require big quantitive of users. Decentralized applications very often have significant network effects in which the experience of the user for each user improves upon the inclusion of additional users. When an organization provides a public and open ICO for the development of a decentralized application, the process can automatically generate a large user base that can sustain the operation, security, and life of the decentralized network. If the users are token holders, they will be invested in the growth and success of the network.
Fast and easy collection of Funds mechanism. Anyone can initiate an ICO. Customized tokens can be easily generated through a number of platforms, including Ethereum, Stellar, Omni, NXT, Waves, Counterparty, Bitshares, and RSK. Transaction costs associated with marketing and contribution settlement are significantly lower than traditional fundraising mechanisms.
Primarily online marketing. Tokens can be marketed over the internet to a large, general audience. Potential buyers can learn about the ICO through the organization’s website, online forums, blogs, online messaging applications, social media websites, news and other.
Settlements over the blockchain. Confirming contributions and distributing tokens simply requires monitoring and updating the distributed digital ledgers. This requires lower effort and resources compared to the traditional fundraising process of accepting checks and wire transfers, sending out standardized contracts, managing contracts and more.
The risk of ICOs
The absence of due diligence. There is no official process to audit ICO organizations. Many organizations conduct token sales before making significant progress in building out a functional product. The team may document its technology and business plans on a white paper, but there may be no evidence that the technology is built as specified or that the business will operate as expected. Flaws in certain technologies may not be discovered until significant amounts of money already have been invested. In addition, some of the organizations have a clause in their ICO terms that require contributors to accept the risk of project refinement.
The uncertain basis for token valuation. Token prices may not be based upon their fundamental value. Many buyers can be buying tokens for investment purposes on the expectation that market prices will increase. That is why they may value a token primarily based on expected resale profits instead of the underlying economic utility.
This may perpetuate bubbles and Ponzi schemes wherein older investors obtain trading gains primarily through the capital inflow of newer investors, rather than from legitimate increases in the fundamental utility of the token.