By James Gong
Updated on April 18, 2018, 23:35 PM

There is No Blockchain Without ICOs

What People Misunderstand about Initial Coin Offerings


Last year the immense heat of the initial coin offering market attracted the attention of many people, including regulators. As ICOs blossomed all over the world, authorities scrambled to react. The Chinese government declared ICOs an illegal form of financing and banned them entirely.

The explosion of ICO scams, government crackdowns and related media criticism has contributed to a widespread misunderstanding of what an ICO actually is. Many of the so-called ICO scams aren’t ICOs at all. As the founder of China’s largest ICO platform, which was shut down last year, I have had a chance to review ICO projects from all over the world. I would like to clarify the definition of ICOs, and explain why I believe they are integral to the future development of blockchain technology. 

So what exactly is an ICO?

Concepts like blockchain, digital currency, and ICOs are still very new, and are thus challenging for ordinary investors to understand. This presents a great opportunity for unscrupulous people. The large number of fraudulent projects that claim to be ICOs has led to the chaos in which we find ourselves today. 

Most simply, ICOs are blockchain technology projects that raise funds by issuing their own tokens. Some of us in the blockchain community have long believed that ICOs should only be issued by what are known as decentralized autonomous organizations (DAOs) or decentralized autonomous corporations (DACs). Unlike traditional corporations, DAOs/DACs have no centralized operating agency. There is no fixed central team or server, and anyone can participate. No single node is indispensable in blockchains supported by DAOs/DACs. By this definition, I admit that some so-called ICOs are not actually ICOs, but just another form of traditional financing.


Tokens issued by the ICO should be used within the DAO system. Take Ethereum, for example. Ethereum’s token, Ether, can be used to pay “gas,” the transaction fees on the Ethereum network. Tokens can be traded on the open market, and their value may fluctuate due to supply and demand. In 2014, Ethereum raised over 25,000 BTC in an Ether crowdsale. This is a good example of an ICO, because Ethereum doesn't belong to any single organization or company, and its community of developers, supporters, blockchain nodes, and Dapps  (decentralized apps) are distributed across the world.

Now, many projects have begun to issue tokens, but they are not necessarily ICOs. Some centralized cryptocurrency exchanges, for example, will allow people to buy their platform currency, and then those people can get a share of the exchange’s profits. I have also seen people attempting to issue coins that can be used as vouchers for auto repair. Both examples depend on a central entity, thus, I do not believe that these projects are ICOs. They are more similar to traditional financing, and the tokens resemble vouchers or securities.

A true ICO will use a blockchain-based, open-source system that accomplishes a specific goal. The project must also be decentralized; that is, the entire system is not controlled by a centralized team or institution, there is no one single server, and everyone has the opportunity to participate.

In addition, tokens that are sold or donated to the public should be an essential part of the decentralized organization that issues it. Without this token, the blockchain project wouldn't function. Ethereum and Bitcoin, for instance, need tokens as an incentive for verifying the blockchain.

The last and most important thing is that the tokens should be widely disseminated. In general, more than 50% of the tokens in the system should be released, not held by the issuers. This release process, if not completed immediately, should be planned and completed in multiple releases. Perhaps at the initial stage of the project, the core development team will hold a large number of these tokens in order to help launch the project. Ultimately, however, most of the tokens should be distributed to the community. If not, the project will remain partially centralized, and there is no guarantee that the blockchain will be fair and immutable.

So many people claim they are doing “ICOs” these days that it has become difficult for the average person to see these distinctions. It doesn’t help that many projects intentionally make their white papers difficult to understand. Regulators also have trouble distinguishing real ICO projects from fake ones, which is why some countries would prefer to ban them altogether. Other countries are considering strict regulation of ICO behavior, or in the case of the United States, putting them in the scope of securities regulation. To be clear, I am not against ICO regulation. In fact, I think some regulation is good for the industry. The key is to prevent scams and bad actors without suppressing innovation. Singapore, which issued ICO guidelines last year, is striking a good balance in this area. 

ICOs are the only good choice for blockchain projects

Many people think ICOs are just a variant of traditional financing behavior, or a form of traditional private fundraising on the internet. In fact, ICOs are different from all traditional financing methods, and are almost the only option for pure blockchain DAOs/DACs.

First of all, the DAO/DAC  is an open-source software system and has no concept of profitability. That means it can not be a legal entity similar to a company. We have absolutely no way to measure Bitcoin or Ethereum’s profitability in terms of income and expenditure. Similarly, in the industry, we often see development teams in the form of non-profit foundations to maintain projects. The ownership of these projects does not belong to these foundations. Anyone can participate in the project and investors become users as well. Even if you have different ideas, you can restart a brand new branch (or fork) based on that project.

Since the DAO/DAC is neither a corporate entity nor a legal owner, it means that traditional investors and finance institutions can not really participate in the ICO process. There is no “equity” to be allocated; no traditional contract to be signed. Traditional investment and financing any type of investment, even if it is a private fundraising approach, require parties to sign certain written or electronic contracts, and these contracts are subject to the traditional legal system. But these traditional contracts generally do not exist in the blockchain world. So ICOs remain the only option for blockchain projects to release tokens in a transparent way and to attract enough participants. 

The ICO approach is also a very important way to reward developers of open-source software for their contributions. For a long time, developers of open-source software were unable to reap financial rewards, only fame. ICOs can change that, because open-source developers can receive tokens for their work. As open-source developers improve their projects, the project will attract more users. If there is a fixed number of tokens, then the law of supply and demand dictates that everyone’s tokens will go up in value. 

ICOs are the lowest risk investments

ICOs have a striking characteristic. The investors participating in them don't appear to have any strict agreement with the party that is issuing the project. They simply follow the white paper and risk notifications provided by the issuing party. This often means that the project may not need to promise anything, or even if it is promised, it may not be able to do it. We are seeing more and more of these situations. So does that mean that investing in ICOs entails almost unlimited risk? A lot of regulators seem to think so, as do many investors who have suffered from failed ICOs. And it’s true that compared to traditional investment and financing methods, the risks of ICOs appear excessive. That’s why some regulators want ICOs to be limited to qualified investors. 


However, my point of view is just the opposite. For ordinary people, ICOs are sometimes the safest form of investment. Why? First of all, let’s look at how we define safety. I believe that the safety level of an investment should be measured by the investment threshold, the difficulty of fund withdrawal, the liquidity of assets, and the transparency of the project.

Compared with traditional financing methods, including venture capital, private equity crowdfunding and IPOs,  ICO investment thresholds are very low. Sometimes all you need is a penny to participate. In contrast, it is not possible for small investors to invest in venture capital or private equity deals. ICOs are often far more liquid, because their tokens can sometimes be traded on digital currency exchanges almost immediately. With traditional equity, withdrawing funds is far more difficult. The withdrawal schedule of VC/PE is generally calculated on a yearly basis. 

A true ICO project is also transparent, compared to other financing methods. The source code is open. You just need to be willing to take the time to understand the details of a project, or to find someone technically proficient that can help you. 

If the security of investment = investment threshold + ease of withdrawal of funds + liquidity + transparency, then ICOs are a relatively safe bet. 

This conclusion may sound counterintuitive, especially if you have lost a lot of money investing in an ICO. That’s why in addition to doing due diligence on ICO projects, you also need to diversify your investments.  One of the characteristics of ICOs is that the investment threshold is very low. You could invest USD $20 in 100 projects. This is unthinkable in traditional financing. Even if you are a millionaire, you are probably only investing in a few projects. Yet in investment, diversification is one of the most important methods of risk control. If you divide your investment enough, you are essentially investing in the entire industry. And as long as the industry is going strong, then you will probably get high returns. To be clear, distributing your investments does not mean investing randomly. Even if you do not do in-depth due diligence, at least avoid projects that appear to be suspicious, or guarantee specific returns, as these tend to be risky.

Blockchain is still in its early stages, with high probability for future development. The industry is a good bet.

The future of ICOs

In discussing the many advantages of ICOs, it must also be acknowledged that there are still many bad actors in the ICO space. How do we maintain the integrity of ICOs? Most importantly, we must find a way to address the inaction or irresponsibility of projects after they have raised funds. This will be the core determinant of whether or not ICOs will succeed or fail in the future.

The blockchain community is experimenting with community supervision and step-by-step release of funds. This may be a new and interesting road. Funds raised by ICOs are basically digital currencies, which can be managed through smart contracts. If we can both monitor the development of the project through the strength of the community and release funds to project teams in a step-by-step manner, we can eliminate investment losses caused by the irresponsible projects.

The title of this piece is “There is no blockchain without ICOs.” Some people will find that to be a bit over the top. After all, Bitcoin, the ancestor of the blockchain, had no ICO. But not everyone is capable of the genius of Bitcoin creator Satoshi Nakamoto. Furthermore, not everyone would be so willing to disappear from the face of the earth after the launch of their project, thus abandoning fame and fortune. The fact that ICOs allow developers of open-source software to make money is a great innovation.

We should absolutely make our greatest effort to remove scams from the blockchain space, but we shouldn’t give up on ICOs. Doing so would cause the blockchain industry to lose its vitality.