Initial Token Offering (ITO) Explained [2023]

Initial coin offerings may feel like a thing of the past, but that’s because the blockchain industry has moved on. You can still get in on the ground floor of exciting blockchain start-ups, and one of the best ways to do it in 2023 is via an initial token offering.

There are many different vehicles that blockchain start-ups use to raise funds, and many of them now involve the sale of tokens rather than coins. Not every new project needs its own blockchain anymore!

So, what is an initial token offering, and how does it differ from an initial coin offering? Perhaps even more importantly, how do you find and take part in an ITO?

Read on for all that and more!

What is a Token?

The difference between a token and a coin in cryptocurrency is often misunderstood. The two terms are even used interchangeably!

For context, a coin refers to a cryptocurrency that is native to a blockchain and is used for transactions, fees, and everything else. It’s the primary digital asset on that blockchain, such as BTC on Bitcoin, Ether on Ethereum, ADA on Cardano, and so on.

A token, on the other hand, is a digital asset that resides on a particular blockchain. You could argue that ETH and BTC are native tokens when it comes to their respective blockchains, but the word “token” is better used to refer to the many thousands of ERC-20 tokens that live on the Ethereum blockchain.

The ERC-20 standard is crucial to the history of tokens because it has allowed developers to create their own tokens atop Ethereum. These tokens could then be used for different purposes within different dApps or protocols.

For example, the LINK token powers the Chainlink decentralized oracle network. USDC is a wrapped token called a stablecoin, representing actual fiat dollars held in a bank vault. UNI is the governance token of the Uniswap protocol. These tokens allow all sorts of different use cases for services, platforms, or dApps that are built atop other blockchains (in this case, all of the above are Ethereum tokens).

These tokens are easy to create and sell because they don’t require their own blockchain.

What is an Initial Token Offering?

An initial token offering harks back to the initial coin offering model that came to the fore in 2018, although there are some subtle differences between the two.

Both models offer a route for a project to raise funds at an early stage in its development. This could come before seeking funding from venture capitalists but also after.However, the ITO model places more emphasis on the intrinsic utility of the token in question than the ICO model used to.

That said, the fundraising component of an ITO can’t be discounted. Many parties will try, most likely, to underline the difference between ICOs and the many scams that have plagued the industry since their advent. Regulatory interest in past ICOs is another reason for modern fundraising models to differentiate themselves from the ICOs of the past.

However, the fact remains that, in an ITO, tokens are created and then sold by the project team to whoever is interested and permitted to purchase them. This raises valuable early-stage capital for the project while also demonstrating the use and utility of the project’s token.

Investors may be interested in initial token offerings for various reasons. Many still remember the ICO craze, which involved the danger of losing it all but also offered the tantalizing prospect of huge gains in a short period of time.

ICOs were largely limited to this demographic, but the ITO model pulls in early adopters too. Plenty of folks are willing to buy in early in order to be the first to explore the boundaries of what Web 3.0 can do, and the possibility of selling the tokens later for a profit is simply icing on the cake.

For start-up blockchain firms, the early days are challenging. Not every developer has the requisite sales, marketing, or networking skills to persuade investors to back them. Even if they do, the VC route has major pitfalls.

For one thing, venture capitalists often require a disproportionate amount of control over the company and tend to make decisions focused on their own gains. The ITO model gives a project team the freedom to bypass these traditional early investors and seek backing directly from the community in exchange for utility tokens.

These utility tokens are designed to provide some sort of use case within the project’s platform rather than providing a share in the company or any other feature that could classify them as a security.

Types of ITO

While the focus of an initial token offering is on the utility of the token being sold, the economic factors involved do play a part. The project team that mints their tokens could decide to do so in several ways:

• Static supply, static price. A fixed funding goal is set, and the team issues a set number of tokens for sale at a set price. All investors can get in at the same price, with the goal of the ITO being to raise a certain amount of money.
• Static supply, dynamic price. Some teams will allow the price to float or even choose to sell tranches of tokens at different prices.
• Dynamic supply, static price. It’s also possible to set a static price per token and then mint a certain volume of tokens based on the amount of funding received.
• NFT offerings. The use of non-fungible tokens in an initial token offering is also possible and can be sold based on other factors such as quality or rarity.

Benefits of Initial Token Offering

Initial token offerings can be extremely beneficial for both the project issuing the tokens and its buyers. Here’s how:

• Funding. The funds raised from an ITO can pay the bills and provide the capital needed to get the project on track in those crucial early days. This is the most critical time for a start-up, and early funding can be decisive.
• Price appreciation. The primary motivation for many ITO investors is significant and often rapid gains from the tokens they buy.
• Early platform access. The main point of the tokens being offered is to provide these same early participants with access to the services that may be offered by the project’s platform. Enthusiasts can get in early for a cheap price and decide later on if they’d prefer to hold the tokens and keep using the service or cash out for a profit.
• Simplicity. ITOs are extremely easy to carry out if you have a little bit of skill with technology and some programming basics. It’s even easier to take part, and participation tends to be permissionless and anonymous.
• Control and fees. There are crowdfunding platforms in the Web2 sphere that could help with early-stage funding, but these charge prohibitively high fees compared to a bespoke ITO.

Risks Associated With Initial Token Offering

Initial token offerings can be risky in some cases because they’re so easy to carry out. Here are some of the main pitfalls to keep in mind:

• Soundness of investment. According to the US Bureau of Labor Statistics, 20% of businesses fail in their first year, and 50% fail within five years. While a lack of funding is a good reason for this, the fact remains that investing in a start-up is risky. Even if the project is good and the platform does well, the token itself may be a bust.
• Scams. Given how easy it is to set up and run an initial token offering, you can bet plenty of scammers are doing it.
• Shills. On a somewhat related note, some crypto firms try to employ “shills” to drum up hype and buzz around the upcoming ITO. While this is viewed by some as a legitimate marketing tactic, the more unscrupulous firms will pay their shills with pre-allocated tokens, allowing the shills to sell those tokens to the public.
• Transparency. As a rule, the more shady a project is, the more opaque it’ll try to be regarding everything from the details of the project to the identities of the team involved.
• Volatility. Contrary to popular opinion, the market doesn’t only go up. Cryptocurrencies are especially volatile, and a sudden bear trend in the market could send the token you buy crashing even if its fundamentals and utility are solid.
• Liquidity. An ITO tends to be one of the first steps in the life of a nascent cryptocurrency. It may not be as easy to transact as a more mature coin or token in these early stages, meaning that you may not be able to sell it easily if you want to.
• Custody of funds. Cryptocurrencies and blockchain technology have given rise to smart contracts, through which custody of funds is not required to participate in something like an ITO. If the offering requires that you give your funds over to someone else’s custody, that’s a bit of a red flag.
• Regulation. One of the reasons ITOs are distinct from ICOs and tend to emphasize the utility of the tokens involved is because of regulators’ interest in ICOs. There’s a risk that regulators will subject ITOs to securities law in the years to come.

How to Participate in an Initial Token Offering

Many initial token offerings are done by the time you’ve heard of them, so the first thing you need to do is put yourself in a position where you can hear about these things ahead of time.

Some would suggest that influencers are one way to do this, but that’s a dangerous path, given that the distinction between influencer and shill is extremely blurry in many cases. Rather, you might get more genuine mileage from getting involved with the community of a smart contract-capable blockchain.

Being on the subreddit of a popular ecosystem like Cardano, for example, allows you to scan posts about what community members are trying to build and develop. These efforts can often turn into ITOs when sufficiently developed.

Better still, if Cardano as an ecosystem doesn’t strike your fancy, you can just tune in to the Polkadot community. Or Ethereum. Solana. Cosmos. The list goes on!

When you finally hear about an exciting project in the works, get involved. At this stage, team members are happy to talk about their vision and will probably set up and actively invite interested parties to a Discord server.

Through this, you can keep an eye on developments, see how things are progressing, and develop a feel for the project and the team behind it. They’ll release a whitepaper, or even multiple versions of one, so you should devour as much literature as you can.

Finally, when the initial token offering is announced, and you’ve decided that you want to participate, you’ll need a wallet and some network coins for the foundation chain that the project’s on—be it Ethereum, Cardano, etc.

Along with the announcement of the ITO will be instructions on how you can participate. After all, the project team wants you to participate just as much as you want to be a part of the ITO!

Initial Token Offering vs. Initial Coin Offering

The initial token offering, like many other fundraising models, is descended from the initial coin offerings of 2017 and 2018. The initial coin offering itself, however, harks back to the initial public offering that takes a company’s stock to the public via the stock market.

The main difference between the initial token offering and the initial coin offering is what’s sold. With the ITO, the focus is on a utility token, generally one that provides its owner with some sort of access or ability to do something that they wouldn’t otherwise.

On the other hand, in an initial coin offering, the focus at the time was on the economic properties of the coin being sold. Every project wanted to be the new Bitcoin, and since Bitcoin’s allure lay within its tight supply, ICOs advertised their own attractive “tokenomics.”

It must be mentioned that tokenomics weren’t the only focus of ICOs, but they held a prominent place. They hold far less prominence in ITOs, at least in the marketing mix, but certainly aren’t neglected.

6 Alternatives to the Initial Token Offering

An initial token offering does two things.It raises funds for a project but also puts a utility token into the hands of platform users, who may view them not as financial instruments but as access keys to a service.

So, let’s look at some of the other ways that start-ups in the blockchain industry can achieve both or at least one of these goals.

#1. Token Generation Event

Practically the same thing as an ITO, just with a different name, a token generation event also focuses on the utility of the token being generated and then sold. However, the name and abbreviation “TGE” are a greater departure from the ICO than the ITO. This is part of a conscious effort to distance the TGE from ICOs, which are under regulatory scrutiny and have a muddy reputation thanks to many scams in the past.

#2. Initial DEX Offering

This is an initial token offering that’s conducted with the aid of a decentralized exchange to enhance liquidity right from the get-go. Keeping a finger on the pulse of the top DEXs is a good way to hear about IDOs ahead of time.

#3. Initial Exchange Offering

Same as an IDO, but on a centralized exchange rather than a decentralized one. IEOs have an advantage in that they expose the token to a wider audience and significant liquidity from day one, but the exchange may wish to play a VC-like role in exchange for playing host.

#4. Initial Stake Pool Offering

An innovation originating on the Cardano blockchain, the ISPO model is compelling because you don’t actually need to spend money and buy any tokens.

Instead, the project team runs a Cardano stake pool that you can stake your ADA to. They earn the ADA from the pool, thereby gaining funding, and give you their tokens (or a split of the ADA and their tokens) as a reward for joining their stake pool.

#5. Initial Public Offering

A blockchain-based start-up could take the traditional route and aim for an IPO down the line. This generally means seed funding in the traditional manner as well, and it could be years before the stock hits the market.

It could be argued that the stock market isn’t a safe option for a small firm either. This decade-old documentary examines the case of Viragen, a cutting-edge biotech firm destroyed by a practice called “naked short selling.” An offense that, as a $15 million US SEC fine for Goldman Sachs shockingly details, can be committed with the press of a single key.

#6. Token Airdrop

While the adage “there’s no such thing as a free lunch” often holds true, early crypto adopters have been beneficiaries of several very lucrative airdrops in the past.

Essentially a free token gift, these airdrops do a good job of putting tokens in the hands of platform users but don’t tend to earn the platform much in the way of funding. That said, they do create immense buzz and can send actual active usage through the roof in short order.

Future of Initial Token Offering

While initial coin offerings are disappearing, at least by name, blockchain is a booming industry, and the number of projects taking flight is increasing exponentially.

All of these projects require early-stage funding, and not every one of them is happy to settle for the tried and tested but demanding and often risky VC route. While ITOs and other decentralized means of early fundraising have to deal with the possibility of scams in the space, they remain a viable alternative.

The fact that an initial token offering can put a utility token right into its users’ hands can’t be discounted, either. By participating in an ITO, the investor is not just a project backer but also an early adopter, even a beta tester. This draws people into the project, involving them in multiple ways.

For this reason, it’s likely that the future of the initial token offering remains bright. It may be couched in different nomenclature from time to time, but whether in the form of a TGE, an IDO, an IEO, or even an INO, it’s likely that the model as a whole will live on.

Key Takeaways

Initial token offerings put a project’s utility token into the hands of investors interested in it, either in the capacity of early adopters or simply speculators.

The differences between an ITO and an initial coin offering are slim, and some argue that they differ in name only. However, initial coin offerings make no claim of being anything other than a vehicle for enrichment via investment, whereas an ITO is meant to be a way to get a utility token into public hands.

ITOs are also very easy to take part in, generally requiring only a blockchain wallet and some native coins with which to buy tokens. Hearing about them is often more of a challenge, but this can be accomplished via social media channels such as Reddit and Discord.

Initial Token Offering FAQ

• Is Initial Token Offering legal?

  Initial token offerings are legal in most places, although the views of regulators could change in the future following the investigation of past ICOs. This may be one reason that the name “token generation event” is gaining traction despite both ITO and TGE being practically the same thing.

• What is the difference between ITO vs. ICO?

  ICOs were used to sell coins to the public, many of which underpinned their own blockchains. However, the emphasis in ICOs was on how good of an investment they were designed to be, whereas ITOs are focused on token utility.

• What is ITO used for?

  ITOs are used for early-stage funding but also to get blockchain-based tokens into the hands of users who may be early adopters or enthusiasts.