Since the introduction of Bitcoin in 2009, cryptocurrencies and the blockchain technology behind them have grown in popularity. A new funding mechanism has emerged from blockchain technology, referred to as Initial Coin Offering (hereafter abbreviated as ICO). Recently, this instrument has been increasingly used to finance blockchain-based projects and represents a new alternative to traditional forms of capital raising such as venture capital financing.
Although the investors often receive neither co-determination rights nor a share in the profits of the project in return for their financial resources, the organizations implementing the ICOs manage to collect millions of euros within a few hours. The venture capital raised through ICOs has grown from around $300 million to around $19.4 billion since January 2017 to June 2018. Due to the rapidly increasing popularity of ICOs, the new financing mechanism is the focus of this bachelor thesis. This serves as introductory literature for the reader and gives him an understanding of the new form of corporate financing. In addition, it should be examined whether the recent success of the ICOs can be justified.
Table of Contents
1 Introduction
2 Blockchain technology
3 Introduction to the Initial Coin Offerings
3.1 Definition
3.2 Development
3.3 Roadmap
3.4 Design
3.5 Token typology
3.6 Legal considerations
4 Assessment of the new financial mechanism
4.1 Opportunities of ICOs
4.2 Risks of ICOs
5 Conclusion
Objectives and Research Themes
This thesis investigates the Initial Coin Offering (ICO) as a novel instrument for financing blockchain-based projects, aiming to provide introductory literature and assess whether its rapid success can be justified by its underlying structure and benefits for organizations and investors.
- Examination of the blockchain technology foundation.
- Analysis of the ICO process, design options, and token typology.
- Evaluation of opportunities, including capital raising efficiency and network effects.
- Critical assessment of risks, specifically due diligence deficits, market volatility, and legal uncertainties.
Excerpt from the Book
3.4 Design
The organization's project team has various options for structuring the sale of the tokens. Before the ICO is conducted, the organization decides whether to limit the issuance volume of the tokens and how to set the token price. Furthermore, a token pre-sale can be carried out to finance the start-up costs of the organization. The start-up should also not sell some of the available tokens as part of the ICO and reserve it for later financing needs. By using a milestone tracker, the risk for investors and the executing organization of the ICO can be reduced. In the following, the design options of the implementing organization are listed.
Limitation of the issue volume
As a rule, the issue volume of the ICO is limited, distinguishing between a hard cap and a soft cap. It is referred to as a hard cap if the issuing organization does not accept any further payments from investors after a certain investment volume. In the case of a soft cap, purchase bids are only accepted for a limited period of time from the time the cap is reached. In some cases, the restriction on the volume of output is not published in advance.
Summary of Chapters
1 Introduction: Provides the context of the rise of cryptocurrencies and blockchain, introducing the ICO as a new corporate financing mechanism and outlining the thesis structure.
2 Blockchain technology: Explains the foundational features of decentralized blockchain networks, cryptographic procedures, and the role of platforms like Bitcoin and Ethereum.
3 Introduction to the Initial Coin Offerings: Defines the ICO mechanism, details its historical development, standard process, design variations (e.g., caps, pre-sales), token types, and the current legal environment.
4 Assessment of the new financial mechanism: Critically evaluates the benefits of ICOs—such as reduced cost of capital and positive network effects—against substantial risks including information asymmetry, operational vulnerabilities, and legal instability.
5 Conclusion: Synthesizes the findings, concluding that while ICOs offer significant flexibility and capital-raising potential, their current implementation is characterized by high speculative risks that necessitate further long-term monitoring and research.
Keywords
Initial Coin Offering, ICO, Blockchain, Token, Cryptocurrencies, Venture Capital, Corporate Financing, Token Sale, Smart Contracts, Due Diligence, Market Volatility, Legal Regulation, Investment, Fundraising, Decentralized Ledger
Frequently Asked Questions
What is the primary focus of this thesis?
The work focuses on characterizing the Initial Coin Offering (ICO) as a newly created instrument for financing blockchain-based projects, serving as introductory literature on the subject.
What are the main thematic areas covered?
The thesis covers the technical foundations of blockchain, the process and design of ICOs, the categorization of tokens, and a critical assessment of the opportunities and risks involved in this financing method.
What is the central research objective?
The primary objective is to provide an understanding of this new form of corporate financing and to examine whether the recent success and popularity of ICOs can be justified.
Which scientific methods were employed?
The study relies on an analytical approach, synthesizing existing literature, empirical data on ICO volumes and returns, and legal assessments to evaluate the mechanism's performance and associated risks.
What topics are discussed in the main part of the thesis?
The main part details the blockchain technology basics, the operational roadmap of an ICO, token typologies, and a comprehensive risk-benefit assessment, including legal considerations in Germany.
Which keywords define this work?
Key terms include Initial Coin Offering (ICO), blockchain technology, token typology, venture capital, information asymmetry, and regulatory environment.
Why is the "Milestone Tracker" significant for ICO design?
The milestone tracker is a smart contract mechanism designed to reduce execution risk for both investors and organizations by releasing funds only after verified project milestones are achieved.
How does the information asymmetry between organizations and investors impact ICOs?
The lack of standardized information in white papers makes thorough due diligence nearly impossible for investors, leading to speculative decision-making and potential market bubbles.
- Citation du texte
- Simon Kröger (Auteur), 2018, Initial Coin Offering. New form of corporate financing, Munich, GRIN Verlag, https://www.grin.com/document/1196222
