Last updated on March 13th, 2018 at 12:40 am
Initial Coin Offerings (ICOs) have become extremely popular ways to raise funds while avoiding the regulatory restrictions of fiat financing. In 2017, ICOs raised around $6.5 billion. And as of March 2018, they’d already raised $2 billion this year.
The majority of ICOs are based on Ethereum as a platform, and more specifically on Ethereum’s smart contracts. Shares in ICO projects are usually sold for ETH or BTC, and awarded in the form of tokens (also known as ERC-20 tokens).
So while we’re used to seeing and dealing with ERC-20 tokens, few people know exactly what they are, how they work, or even what ERC-20 means. (In case you’re wondering, ERC stands for Ethereum Request Comment, and 20 is the arbitrary number assigned to the proposal.)
The ERC-20 Basics
As the name implies, the native currency of Ethereum blockchain is ether (ETH). But ERC-20 tokens also act as coins on Ethereum. Ethereum is the heart and mind of ERC-20 tokens. Its blockchain processes their transactions, and its virtual machine runs their smart contracts.
Ethereum.org’s depiction of an ICO or “trustless” crowdsale:
1) Customers pay the smart contract (the robot in the center).
2) The robot forwards the money to the contract owner.
3) The robot returns the owner’s ICO tokens to the customers. Neat!
Remember that these tokens aren’t independent. They reside on Ethereum’s blockchain, and depend on its distributed computing abilities.
Smart Contract Risks
While smart contracts are very efficient, they do come with risks. For instance, a smart contract can’t be changed once it’s initiated by the ICO’s developers. If a smart contract contains bugs or vulnerabilities, you could easily lose your funding, tokens, or both.
Such misdeeds have frequently occurred throughout Ethereum’s history. The most notable example was the $55 million DAO hack, and correcting it