What is a Cryptocurrency?

A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use cryptography to verify and secure transactions, hence their name. There are currently well over one thousand different cryptocurrencies in the world and many people see them as the lynchpin of a fairer, future economy.

At its simplest a crytocurrency works by logging transactions into a database to work out how much of that currency each individual, or their address, is holding. In that sense, the system is not so different to how banking currently works. For example, the money you spend online follows similar principles: you send money from your bank account to another account by deducting from a digital figure that you have associated with your account, that being your balance. This is nothing more than information being logged on a database, no physical exchange takes place.

Each cryptocurrency work on the same basis in that it is a large data log of information, namely transactions, that are used to determine how much of a cryptocurrency each address has attributed to it. The difference being that cryptocurrencies are purely digital, there is no option to take out a cryptocurrency in paper or coin form.

The major difference between cryptocurrencies and traditional financial models is in the decentralized nature of cryptocurrencies. What this means is that when you spend a cryptocurrency, the approval of the transaction does not come from one central authority, like a bank or PayPal, but rather from a Peer to Peer network of computers, coming to a consensus that your transaction is legitimate. Many people regard this to be one of the most appealing and disruptive aspects of cryptocurrencies, this distribution of authority is ushering in a new age where money is controlled by the people rather than huge corporate organisations like banks. Most cryptocurrencies also offer the guarantee of privacy as the identity of each individual is concealed behind state of the art cryptography, meaning everyone’s privacy remains intact.
Cryptocurrencies function like the fiat currencies that we use today in that they can be used to pay for goods and services. Whereas in the past the amount of businesses that accepted cryptocurrencies was very limited, it is now continuously growing as awareness spreads and becomes more mainstream. The most commonly one is Bitcoin as it was the first one created and as such is the most widely in the world. However, businesses are starting to see the limitations of only accepting Bitcoin and as such are starting to explore other cryptocurrencies too.

The History of Cryptocurrencies

The first time most people tend hear about cryptocurrencies will be when coming across the first cryptocurrency created, Bitcoin. However, when Bitcoins mysterious founder, Satoshi Nakamoto, created the world’s first viable cryptocurrency, he wasn’t actually aiming to invent a currency at all.

Digital money is a concept that has long existed before Bitcoin. The prime example being a company called DigiCash Inc. founded in 1989 trying to create the world’s first widely used digital currency. DigiCash was an electronic money corporation, creating an anonymous payment protocol built on crytography. However, after failing to gain mainstream adoption, amongst several other problems, DigiCash was forced to file for bankruptcy in 1998.

Ten years later, possibly as a reaction to the economic crash of 2008, an unknown developer, only known to this day as Satoshi Nakamoto, published a whitepaper about a decentralized, peer-to-peer electronic cash system, which went live as an open-source project (meaning any developer could contribute to it) in 2009. This project was known as Bitcoin and was the first example of a functional cryptocurrency.

Since then thousands more cryptocurrencies and utility tokens have sprouted, ranging from serious projects aiming to change the world by enabling the adoption of blockchain technology, such as Lisk, to currencies created purely as jokes, such as Dogecoin. This has led to a booming industry built on trading this currencies.

How are Cryptocurrencies Valued?

One of the most common questions in our industry is in regard to how cryptocurrencies are valued. The perception is that somehow they have less value because they cannot be held in physical form, despite the fact that cash is slowly becoming obsolete regardless. Or that they are not “backed” by anything despite the fact that fiat currencies are no longer backed by physical commodities either.

The main difference between cryptocurrencies and fiat currencies is in that they are not supported by governments in the same way fiat currencies are. Despite the nature of money evolving to no longer having its value backed by physical commodities, like gold in a national bank, they are still supported by the government that issued them. As a result, the value of fiat currencies is generally based on the stability of the government that issued that currencies.

The value of cryptocurrencies derives from the network upon which they are built. This is further influenced by a variety of factors, such as:

Supply and demand: For example, there will only ever be 21 million Bitcoins, released at a steady rate, meaning inflation should not affect the value of the currency, assuming a consistent demand exists. Although such a system is not employed by all cryptocurrencies.

Price of Bitcoin: all other cryptocurrencies are based on and pinned to the price of Bitcoin, meaning changes in Bitcoin price can affect other currencies.

Energy/electricity required to validate transactions and mine coins: Proof-of-Work, the consensus protocol used by Bitcoin, consumes a lot of electricity, whereas Delegated-Proof-of-Stake, used by Lisk, consumes considerably less, which has a factor on the price.

Difficulty level: Similarly to the electricity required, the difficulty level faced by miners in securing a cryptocurrencies network can affect the price of each token.

Public perception: how investors perceive the blockchain space as well as each individual currency will directly affect its price. For example, if media reports positively on the blockchain space then prices can increase. Similarly, if a cryptocurrency is a caught up in a scandal, the price of that token will fall.

Large investors: an investor holding a considerable amount of a cryptocurrency and deciding to sell it all at a low price will result in the price of that currency dropping considerably. Such investors are sometimes referred to as “whales” as their investments have ripple effects on the rest of the market.

Utility of the currency or product: what product is the company that issued the currency providing and is it useful? Where can the currency can be spent? What does the currency allow you to do? All of these factors affect the price of a currency.

Due to all of these factors the price of cryptocurrencies can be volatile, which is why some investors regard them as opportunities to make money. Whereas the value of a dollar or euro generally tends to remain relatively stable this is not the case with cryptocurrencies.

How to Trade Cryptocurrencies?

One of the most widely discussed and appealing aspects about cryptocurrencies is the combination of volatile prices and the fact that they can easily be traded, meaning that money can be made in doing so. However, cryptocurrencies can be high risk investments and it is important to have a solid awareness about how to safely invest as well as an understanding of what you are investing in. In this segment we will examine the fundamentals of cryptocurrency trading.

Trading crytocurrency works on a very similar fundamental principle to trading stocks. The aim is to acquire a coin before its value grows, or alternatively while its value is in a dip. The main difference between trading stocks and trading cryptocurrencies is that while stocks are acquired with fiat currencies, such as euros or dollars, cryptocurrencies are generally bought with Bitcoin, or less commonly Ethereum. This means that in order to buy tokens such as LSK a potential investor would need go to through a Bitcoin broker to buy the currency before then transferring it to an exchange in order to use.

Do I have to buy a whole Bitcoin?

No, you do not. A lot of people worry that they cannot begin using cryptocurrencies because they cannot afford the thousands of dollars that single one costs now. This is entirely untrue and is an unnecessary psychological barrier for people investing in crytocurrencies.

Bitcoins can be broken up into fractions known as Satoshis (after the founder of Bitcoin) and any amount of these Satoshis can be bought.

In developed and progressive countries the answer is resoundingly yes, Bitcoin is very much legal and there are no laws against owning any cryptocurrency. However, it is advised to do your own research on the exact legal standing of Bitcoin and cryptocurrencies as it can be subject to change and varies considerably from country to country.

It is also very important to consider that there may be tax implications from buying, owning or trading cryptocurrencies. Tax evasion is never encouraged and despite the relatively anonymous nature of cryptocurrencies there are still ways to track someone who is making money from them.

A lot of tax systems also act retroactively, meaning if tax laws suddenly change, people are eligible to pay tax on the transactions that happened before the law came into place. If you are unwilling to keep precise track of all cryptocurrency dealings, it can sometimes make sense to open up a separate bank account for this purpose, as this can help to avoid any confusion. Should you have any concerns, please discuss further with a qualified and trustworthy accountant.

Different countries have different Bitcoin brokers of choice. It is worth researching which is best suited as prices can dramatically vary between brokers. As with everything in cryptocurrency, extensive research is always recommended. Similarly, buying Bitcoin can work in many different ways, be that bank transfers, cash or other forms of transacting. It is always important to only go through legitimate sites and always prioritize safety over everything.

How to Keep Your Cryptocurrency Safe?

Cryptocurrencies can sometimes get an unfair and inaccurate reputation for being insecure. This is not the case at all. However, as with anything valuable precautions do need to be taken to keep them safe. In this section of the Lisk Academy we will advise how to keep your cryptocurrency safe by sharing all best practices.

Write Everything Down

First and foremost, the most important thing to remember when using cryptocurrencies and blockchain is to note down anything you think may be of importance. Passphrase and private keys cannot be recovered once lost, it is simply impossible. In that regard, it is better to be safe than sorry.

In Lisk Hub for example, there are numerous reminders and time delays, ensuring users note down their passphrases appropriately. This is done solely for the benefit of the user to ensure that they take their time with the process of creating a Lisk ID and can guarantee access to their funds.

Naturally, there are some risks associated with having sensitive information written down anywhere. For example, it can be destroyed or accessed by another party. However, taking suitable precautions, such as using a safety box and making more than one copy, can help negate such problems. When setting up any account on the blockchain, please take your time and take all necessary steps as a precaution. It is worth doing so to avoid problems at a later stage.

Do Not Store Cryptocurrencies on Exchanges

Some people are skeptical about the security of cryptocurrencies due to the fact that mainstream media will report on hacks that happen to cryptocurrency exchanges. However, this is a problem that you can easily avoid.

Cryptocurrencies themselves are distributed and decentralized, as well as highly encrypted. This makes them extremely secure. However, many exchanges are CEX. This means that the crytoassets that are sent to them are kept in a centralized wallet. Meaning should a hacker gain access to that particular wallet, they will have access to all the funds stored in that particular wallet, making them an appealing target. Generally, exchanges are safe however it is very much advised to keep funds, especially those which are not used to trade on a regular basis, off exchanges and in wallets, such as Lisk Hub.

Undeniably the future of exchanges is the DEX. A decentralized exchange is an exchange market that does not rely on holding customers funds in a centralized wallet. Instead, trades occur directly between users through an automated process. 

Passwords

Certain aspects of blockchain and cryptocurrency trading require passwords, such as logging into an exchange. In order to ensure the safety of crytoassets there are a few best practices that are very important to follow.

Always use different passwords on different accounts. This way if one account is somehow compromised this does not put all of your assets at risk.

Do not use personal information as a password. Use a combination of uppercase and lowercase letters, numbers and symbols.

Use long passwords, as they are harder to hack. A minimum of 15 characters is recommended.

Using a Password Manager tool makes carrying out these steps possible and easy and it is highly advisable, even at a cost. It is simply not worth risking having your cryptoassets stolen. Such practices in regards to password are recommended outside of the cryptocurrency space too.

Enable Two Factor Authentication

Two Factor Authentication is a system wherein two different forms of identification are required to confirm a user’s identity. The first is knowledge based, this being an email and password, the second being rooted in the physical, like having access to a device associated with that user, such as their smartphone.

There are different applications that offer this extra layer of security, including one created by Google. The system works by having the user scan a QR code. This gives the device it’s distinct identity and makes it generate a different 6 digit number every few seconds. These six digits will now be required to log in to the particular account where 2FA is set up.

This extra layer of security means that in order for a hacker to gain access to an account, they would need to get access to the users’ email and password, as well as compromising their device, and in particular 2FA app. It makes it considerably harder, if not impossible.

Phishing Sites

A phishing site is a website designed to look like a legitimate site, one that a user is possibly looking for. However, the phishing site is solely there to steal private information or convince a user to transfer money to an illegitimate account. Such scams are relatively common within cryptocurrency and it is very important to be wary of them.

When searching for a website ensure correct spelling at all times and be cautious when following any link that is clearly an advert. Furthermore, always look for the green padlock by the URL. Once you are certain you are on a legitimate site, bookmark it.

What is an Airdrop?

The basic idea behind an airdrop is to distribute crytoassets to investors, entirely for free, to encourage the adoption of that particular token. However, the concept often leaves investors confused. Surely giving out something valuable for free makes little sense? Why do companies do it? What does an investor need to do to receive these free tokens? What is the catch? In this part of the Lisk Academy all of these questions will be clarified and explained.

In short, an airdrop involves a cryptocurrency being dispensed to cryptocurrency wallet addresses. Investors will normally log into their wallet to find that they suddenly hold a certain amount of tokens, usually a token that they have never heard of, that they did not have the last time they checked their wallet. It can sometimes be a confusing and uncomfortable surprise the first time that it happens to an unaware investor. However, there is really nothing to worry about.

The first, and most important, thing to know is that if a cryptoasset is in a wallet, it is indisputably the property of whoever owns the private key to that particular wallet. Therefore, once a cryptocurrency has been airdropped to a wallet it belongs to the owner of that wallet. Therefore, should that individual decide to sell the tokens straight away, take the profits and invest them elsewhere, they are free to do so.

How to Receive an Airdrop?

The reasons dictating which address receives an airdrop can greatly vary. It can by all means be entirely random, based on no defining factor and sent to randomly selected addresses. However, other factors can come into play for those who are actively seeking to receive airdrops.

For example, an address might sometime need to be registered on the company’s website so that it is known where to send the airdrop or whether the the holder of the address is a supporter of the project, which can sometimes be a requirement for an airdrop. The company can use the address to take a snapshot of the accounts holdings to ensure that the address is holding their particular cryptoasset.

What are the Benefits of Airdrops?

The benefits of an airdrop from a receivers perspective are clear. They are receiving tokens, which have tangible value, for free. To some extent, it can almost be regarded as “free money”. However, the benefits of carrying out an airdrop can sometimes be less obvious from the standpoint of the company doing so.

The foremost reason a company will willingly carry out an airdrop is to encourage the adoption of their particular utility token or cryptocurrency. They will do so because it is extremely difficult to stand out in such a dynamic and densely populated environment. There is a new cryptocurrency sprouting almost every day and with over 1500 cryptocurrencies in circulation it is a serious challenge for any aspiring projects to stand out and garner the attention of potential users.

A airdrop acts as an incentive for those who are receiving a token to research the project behind it. The hope is that a potential investor will like the project and be inclined to support it further, by buying more tokens for example. Furthermore, an airdrop can be seen to demonstrate the value or capabilities of a network, to a degree. Successfully delivering tokens to multiple addresses can be seen to demonstrate that the network itself works and that transaction fees are low enough for this to be practical.

Carrying out airdrops can also help blockchain projects maintain the loyalty and engagement of their community. Blockchain projects tend to be actively developing a promised product over time and during that period it can be a vital challenge to keep their community actively interested and engaged in their vision.

Is there a Catch to Receiving an Airdrop?

As mentioned earlier, the cryptocurrencies in any particular wallet are the sole and indisputable property of the owner of that wallet, namely whoever has the private key associated with that wallet. Therefore, a fee or some sort of catch cannot be applied to allow a user access to the airdropped funds in their wallet. In that regard, once the tokens are in a wallet they are the property of the wallet owner.

However, an indirect catch can be that tokens that are airdropped will not be traded on the larger, more commonly used exchanges. Therefore, an investor will need to dedicate some time signing up to a smaller, lesser known, exchange to have any chance of selling the airdropped tokens that they have received.

Similarly, some investors might simply not want to receive airdrops. More often than not, the value of the tokens that are being airdropped will be negligible and in that regard receiving unwanted tokens that are not worth the time it takes to sell can frustrate some individuals.

What Should an Investor do upon Receiving an Airdrop?

At the end of the day, the final decision is the investors. On the one hand, it can be worthwhile for an investor to research a project whose token has been airdropped to them. It could theoretically be a hugely successful project.

On the other hand, dedicating time to researching a project is the purpose behind an airdrop and in that regard an investor is doing exactly what the sender intended for the receiver to do.

This could end up being a waste of time, so it is important to carefully pick and choose which projects are worth investing effort into researching. In that regard airdrops have been dubbed by some as the equivalent of spam emails in the blockchain space. They are sent to capture the attention of users without necessarily guaranteeing tangible value. To some extent it can also be assumed that the biggest, or most likely to succeed, projects will not need to carry out airdrops. Awareness and belief in what such projects are trying to achieve will exist organically, based on the quality of their team and product. However, respectable projects have been known to sometimes carry out airdrops too.

Whether airdrops are an effective marketing tool, free money or the equivalent of spam emails is entirely up to each user to decide for themselves. Irrespective, they are a prominent feature of the cryptocurrency space. As always, the most important aspect with arriving at a conclusion, or engaging with any project is carrying out extensive and thorough research before doing so.

Token Burn Explained

Why Burn Cryptocurrencies?

The main reason for burning a cryptocurrency is to increase the value of the other tokens that are in circulation. Many cryptocurrencies have a finite total number that can exist and therefore, assuming the demand for the token remains the same, the value should theoretically go up if there are less in circulation. This idea stems from the notion that there are fewer tokens to satisfy the overall demand for that particular cryptocurrency making the one that do exist more desirable and therefore valuable. An increase in the demand for a cryptoasset can be noted by a consistent rise in the price of that particular token combined with growing volume.

Following this logic, some cryptocurrency platforms will buy back the tokens that are already in circulation and burn them, rather than pay out dividends to holders in return for their investments. In theory, this should lead to an increase in the value of the tokens that the investors are already holding, rewarding them for their faith and investment.

A similar method can also be employed to pay transaction fees to the miners who maintain the network through their nodes. Certain cryptocurrencies will burn a miniscule amount of every amount that is transacted, which should marginally raise the value of that currency. However, when this is done on a large scale the transactors, and network as a whole, benefit from the usage of that particular cryptocurrency. So, instead of paying the transaction fee to a miner or any one party, the transactors pay the entire network.

ICO Token Burn

An ICO will normally define the amount of tokens that it intends to sell before the sale begins. However, not all ICOs will necessarily sell all the tokens that they have made available to investors. In this scenario many ICOs will burn the unsold tokens. The alternative to this being that the founders keep the remaining tokens for themselves or possibly airdrop them. However, the disadvantage of doing so is that it could lower the value of the tokens that have been bought and are in circulation, especially the former which is also doing so to the sole benefit of the founders.

To avoid the negative publicity that doing so would cause, it has become a relatively common practise for an ICO to assure potential investors that it will burn any unsold tokens. It is advisable for any potential investor to check whether a project that they are considering investing in makes this assurance.

Equally, burning cryptocurrencies can allow for the creation of further tokens. Mining or forging can generate new tokens in the form of reward for the miners who are validating blocks of transactions. However, this inherently creates more tokens, which could theoretically reduce the value of those that are already in circulation. ICOs prepare for this circumstance by withholding tokens and burning them to ensure a consistent and stable supply of coins.

What is Proof of Burn?

Cryptocurrencies are burned by being sent to an invalid and verifiably useless address, in essence an address that cannot be accessed by anyone. Due to the transparent nature of blockchain anyone can confirm that this has actually happened by using the TXID and entering it into an explorer to check for themselves. By doing so, they can see that the transaction was unquestionably sent and ensure that the address to which it was sent is in fact an address that is verified to be of no potential usage or belong to anyone. Therein lies the proof of burn. Anyone can check, prove and guarantee that the cryptocurrency was in fact burned and destroyed.

What is an ICO?
An Initial Coin Offering, abbreviated to ICO, is a practise of fundraising for blockchain projects, wherein tokens or cryptocurrencies are offered to investors before they are listed on the wider marketplace, such as exchanges. Investors are particularly willing to participate in ICOs as they are seen by many people to be the best time to pick up tokens while they are at their cheapest.

In practice an ICO is very similar to an IPO (Initial Public Offering) wherein it is the first time investors and the general public can purchase stock in a private company. IPOs are often carried out by smaller, younger companies looking to raise capital, although have also been done by established names like VISA, General Motors and Facebook. Similarly for crytocurrencies, the tendency for ICOs is to be carried out by startups in the space, although larger companies such as Kodak have also explored the idea of running an ICO.

As is the case with IPOs, many ICOs privately offer a portion of their tokens to professional and early investors before the wider ICO begins. This practise is known as a pre-sale. This is done to secure the support of influential investors, which can potentially be utilised by the company should they need further publicity. This practice is not necessarily popular with regular investors as many ICOs have tried to tempt early investors with unnecessarily large bonuses.

The products stemming from ICOs come in three different forms, with the value that they deliver and as a result the value of the token increasing the more developed they are.

No product: This is the most common form of ICO. In this case a team has been assembled and they have an idea that they would like to execute but no tangible product. It is usually their first project as a group. In such situations, it is especially important to research the team in detail and decide whether it is capable of successfully delivering on its promises.

Past products: In this case the ICO is being run to launch an application of blockchain technology by a company that already has a proven track record of successfully delivering such products.

Functioning product: Very rarely the case, but some ICOs will already have a functioning product and are raising money to develop it further and market it.

An ICO can be regarded as completed once its soft cap is reached. The soft cap being a predetermined minimal amount required for the project to move forward. Most ICOs will also have a hard cap which is the maximum amount that they will accept in investment. Should an ICO fail to reach its soft cap all contributions are returned to investors.

As mentioned, most ICOs tend to simply be a team of people hoping to successfully execute an application of blockchain technology. The idea, as well as the process involved, will be detailed in a document known as the whitepaper. As a potential ICO investor it is extremely important to read the whitepaper and arrive at your own informed conclusion about whether the idea is feasible and will deliver value.

Ultimately, it will be these two factors that determine whether the token issued as part of the ICO is successful. It is equally important to be aware of the ability of the team to deliver on their promises. The majority of ICOs will have a team page providing links to each team members LinkedIn. This can be a good place to start in researching the team members in order to make a decision on whether they can deliver on their promises.

Finally, a distinct feature of an ICO is the roadmap wherein the company details how and when it will hit certain milestones in the development of its product. However, the roadmap should only be treated as a guideline because developing software tends to be an agile process, changing as some milestones are hit earlier or unexpected problems emerge.

ICOs are a form of fundraising for blockchain projects, allowing investors to buy into a crytocurrency before that currency becomes widely available for trading. If cryptocurrencies are high-risk investments, ICOs can be seen as the highest risk way of investing. It is of utmost importance to carry out extensive research by reading the whitepaper, joining any social channels available, researching the team and examining the roadmap before deciding to invest.

Whitepapers Explained

The whitepaper is the core foundation of an ICO and it is not unusual for a company to present little else than a single document before initiating their ICO. In this segment we will examine whitepaper in detail, how to best analyze one to get as much information out of it as possible, and how to write one.

By definition, a whitepaper is an authoritative guide informing readers about complex issues and presenting an idea about how to resolve the matter. Whitepapers are created to help readers understand an issue, resolve a problem or make a decision. Within a business context whitepapers are generally similar to a marketing presentation in that they are a tool designed to persuade investors or customers of the viewpoint of the writer.

In regard to crytocurrencies and ICOs within the blockchain space, a whitepaper is a document that details what problem the project is aiming to address and how it intends to utilise blockchain technology to do so. The document will usually contain the following:

  • A problem and detailed solution that the project is providing.
  • A detailed description of the product and the system architecture upon which it is built.
  • Details of the team behind the idea.
  • Comprehensive information on the ICO: how much funding will be raised, the roadmap etc.

The potential and perspective of the token, how it will distributed if the ICO is successful. The language used in whitepapers can sometimes be highly technical, however it is important not to be put off by this and dedicate a sufficient amount of time to analysing the project. When examining an ICOs whitepaper there are a few key questions a potential investor should ask:

The Use Case

  •  Is there a real use case?
  • Is this a large problem or issue that a lot of people have?
  • Is the project solving it with a unique solution?
  • What does the competitor landscape look like inside and outside of digital assets?
  • Is using blockchain technology necessary to solve the problem?

The Roadmap

  • Is the timeline realistic?
  • Does it accomodate for the expected delays that come with developing a software?

Funding

  • How will the funds be distributed in developing the project?
  • Is the value of the project realistic?

 

The Token

 

  • How many tokens are being released?
  • How many does the team keep for itself? Is the balance acceptable?
  • How large is the supply of tokens?
  • When will the token be released?
  • Will the token have value?
  • When will it be tradeable on exchanges?

 

The Team

 

  • Who does the team behind the ICO consist of?
  • Who are the advisors on the project? What are their track records like? Do they really support it across their social channels?
  • Does their track record suggest that they capable of delivering on their ambitions?
  • Do they have any prior blockchain experience?

 

Partnerships

 

  • Have any established companies expressed a firm interest in working with the project once the product is released?
  • Can these claims be proven to be true?

 

The Technology

 

If you have a technical understanding of the technology, dig deeper to validate claims the team makes.

 

It’s vital that the whitepaper includes a detailed technical description of the project and future development plans (development roadmap). If some tasks of the roadmap have already been performed, that may be regarded as a huge advantage for the project.

 

An added bonus for any ICO project, although this won’t necessarily be detailed in the whitepaper, would be the ability to market themselves and the professionalism of their website. It is especially important for projects to stand out in such a congested space. Secondly, a positive social media presence of an ICO is always a bonus and allows potential investors to interact directly with the team. The most commonly used social media platforms in the blockchain and cryptocurrency space are:

 

  • Telegram
  • Rocket Chat
  • Reddit
  • Twitter
  • Medium
  • Linkedin
  • Github

 

The messaging application Telegram tends to be the most direct route to interact with a project’s team as it is popular form of contact in the blockchain space. It is not unusual to have the projects team or even founders as admins for the group who answer any questions directly.

To summarise, the whitepaper is the focal and most important aspect of any ICO and as a potential investor it is absolutely paramount to read it carefully and arrive at an informed decision before investing. There are several key factors to consider, such as the product, the team and the roadmap of the product development. However, if analysed properly, the whitepaper in combination with external research can help minimise the risk of ill-judged investments. 

Before Participating in an ICO

Once a potential investor feels confident about an ICO, having read the whitepaper, carried out due diligence and joined the relevant social media channels, it can still be somewhat challenging process to participate. In this segment of Blockchain Business we will explain the required steps to carry out before participating in an ICO, some of which are mandatory.

First and foremost, it is extremely important to do in-depth research before investing in any ICO, starting with reading the whitepaper. ICOs are unregulated, high-risk investments and investing blindly, or simply on a recommendation, is never advised. Furthermore, ICOs are carried out using crytocurrencies and as such it is important to already own the relevant cryptocurrency in order to participate.

Here we will detail the first steps in the process. However, each ICO is different and has its own distinct process for participation, not every ICO will insist on joining a whitelist, for example. Further research into the particular ICO process is an absolute necessity to guarantee a smooth and successful participation. Finally, it is always important to be wary of any phishing scams. Always make sure to only follow official social channels, directly from the website and ask questions in those channels to minimise risks. The community is your first point of contact and is often very eager to help.

The Whitelist

A whitelist is a list of preapproved investors who have signed up to participate in an ICO before the sale to general public. The whitelist will be open for a predefined period of time and generally require some basic details about an interested investor such as a name and email. Although, some whitelists can be more thorough in the information that they ask for.

Due to the explosion in interest in ICOs in 2017 whitelisting has become a common practise, especially for those that expect to garner the most interest and investment. The primary function of the whitelist is to separate those who have a genuine longstanding interest and awareness of the project from opportunistic investors. A whitelist can also help the team behind the ICO understand the demographic of interested investors and gives ICOs the opportunity to contact any potential investors directly with information such as when the sale goes live.

In order to participate in an ICO it is vital to sign up to the whitelist. Once the deadline for this has passed, the opportunity to join is over and there is nothing that can be done to remedy the situation. It is not uncommon for desperate investors to bid substantial amounts of moneys for places on whitelists, although this is never an advised practise. In order to participate in any ICO it is important to stay aware of all aspects of the process, joining the whitelist being an absolutely key part of this.

KYC (Know Your Customer)

KYC, an abbreviation for Know Your Customer, is a process carried out by some ICOs to better understand their investors, allowing prioritisation and ensuring participants do not break any laws by investing.

KYC normally begins after whitelisting is complete, however it can be a part of the whitelisting process, and the information gathered will greatly vary. Some of the requirements can include the following:

  • Name.
  • Date of birth.
  • Country of residency.
  • Public address from where investments will be sent.
  • Intended investment amount.
  • Links to social media accounts.
  • A photo of identification such as a passport or driving license.
  • A photo of the investor holding up that same ID.
  • A photo of a recent bill with the investors address on it.

With the ever growing interest in cryptocurrencies and ICOs, as well as potentially tightening regulation, KYCs will become more common and thorough to protect ICOs and their investors from legal issues. As mentioned, the information for a KYC can vary and it is important to be prepared before participating, as well as allowing sufficient time for the ICO team to review the information provided as part of the KYC. Similarly to the whitelist, once the window for KYC has closed the opportunity to be a part of the ICO is over and no exceptions are made.
How To Participate in an ICO

After carrying out lengthy research, reading the whitepaper, being confirmed on the whitelist and completing any necessary KYC, an investor is ready to participate in an ICO. In this segment we will detail the steps required do so, as well as some of the risks associated and ways to prevent potential pitfalls. 

Once the process of finalising the whitelist and KYC are complete the official ICO begins with the date and time of the sale being announced in advance. Investors participate in an ICO by sending cryptocurrencies, such as Bitcoin or Ethereum, to a designated public address that is revealed the moment an ICO goes live. Investors should be wary of any public address being suggested to be that of the ICO before the actual sale date. These are phishing scams.

Once the ICO public address receives the funds sent by an investor this fulfils the terms of a smart contract, which results in the public address that sent the investment receiving the ICO token in return. Although this can vary depending on the ICO, some of them will instantly send their tokens to investors once the token sale is complete, whereas others will have a lock up period wherein the tokens are released at a later date. If a public address was required as part of joining the ICOs whitelist, it must be the same address that is sending the investment.

Does the ICO set a realistic market cap?

The market capitalisation of a coin is calculated by multiplying the number of tokens by the value of a single coin. It is important to understand the market cap of a cryptocurrency before its release to gauge whether it is overvalued. If a coin is selling for $0.50 during its ICO and there are 4,000,000,000 coins being released, that would give the cryptocurrency market cap of $2 billion. Where does this place it in the rankings of all other coins? Does the project warrant such a ranking or is the price inflated? Will the price possibly drop after ICO?

The manner in which the ICO tokens are distributed can greatly vary. For example, it is completely normal for an ICO to distribute 50% of all tokens, reserving the rest for the founders, team or other purposes. How the tokens are distributed is an important question to consider before investing. Unbalanced distribution gives the founders great control over the price of a coin as they can sell it how they see fit. Lisk distributed 92% of all tokens, keeping only 8% for the core team which means that the Lisk price is fairly regulated by the market.

An ICO is completed once the soft-cap is reached, which is the minimum amount the team decided that they would require to move ahead with the project. However, after reaching the soft-cap the ICO will continue until the the hard-cap is hit. The hardcap is the point at which the ICO is officially over and will not accept any more investment. Should the ICO not hit its soft cap all investments are returned and the project does not go ahead.

The most popular ICOs sell out in matters of seconds and therefore it is important to be prepared the moment an ICO goes live, whilst also taking into consideration other factors such as the speed of the transactions you send. Whether participation is successful is dependent on how fast the ICO receives an investment. Should the transaction not be accepted in time, it will be returned to the address that sent it. How the speed is determined varies, depending on the cryptocurrency that is being sent and the wallet sending it. It cannot be changed in the case of all currencies. It is recommended to research this extensively to avoid missing out on an ICO.

The act of participating in an ICO is relatively simple and consists of sending an investment to the public address defined once the ICO goes live and receiving tokens in return. 

The most important aspect of investing in an ICO is prioritising security by staying well-informed through the ICOs official social channels and double-checking all the information before commiting. The most time-consuming aspect of the process is the extensive research. However, it is absolutely fundamental to a successful participation as it allows for better investment decisions.
The Risks of Investing in ICOs

As is the case with any investments there is always a risk of capital being lost. However, the nature of ICOs and the space in which they operate also present a host of new dilemmas that investors must be aware of. 

ICOs are unregulated securities that allow the founders to raise huge amounts of capital without having a tangible product, prototype or beta version. They are simply an ambitious idea. As a result, it is a safe assumption that the vast majority of ICOs will fail to deliver their product and lose investors the money they invested. This must always be taken into account by investors and is why extensive research of the concept and team is encouraged.

Regulation

Despite the fact that the ICO space is not currently highly regulated, there is always the looming notion of new laws being created to cover this growing phenomenon. Such changes could immensely alter the investment landscape as well as value and availability of tokens. Should these laws adversely effect ICOs, investors could potentially be liable for the loss of their investments. This must always be considered by potential investors.

Scam ICOs

The lack of a legal frameworks has led to a few scams in the space wherein an ICO whitepaper is presented and investments are raised, which the founders then keep for themselves. Due to the nature of ICOs and blockchain technology there is little that can be done in this scenario. This is one of the reasons extensive research is encouraged before participating in an ICO. The more time is spent on ensuring the company and concept are credible, the less likely an investor is to lose their money.

Phishing Sites

Equally, ICO scams appear in the form of phishing sites. These sites are designed to appear just like the sites of legitimate ICOs. However, when investments are sent, no tokens are received in return. Investors need to be conscious of this and always ensure that they are on the official, legitimate ICO site. Joining official social media channels such as Twitter and Telegram help minimise the risk of being a victim of a phishing scam. Asking questions and participating in discussions on these social channels in always advised.

Once you’re absolutely confident you reached the official ICO page, bookmark it to minimise risk of reaching a fake one on your next visit. If ever unsure about anything, ask in the ICOs official social media channels.

To conclude, ICOs can be good investment opportunities with considerable dedication, research and wariness of scams. They are not a way to make quick money and they require extensive research to minimise the risk of losing your investment.

How to Run an ICO

Despite the reputation ICOs have garnered, running one is a delicate and complex process and should be treated so. In this segment of the Academy we will detail general requirements and best practises to follow, as well as some tips based on the experiences of the Co-Founder and President of the Lisk Foundation, Max Kordek.

Should I run an ICO?

As running an ICO does not necessarily require a product or beta version, but can raise a substantial amount of money, ICOs have garnered a reputation for being an easy way to raise capital. However, in reality this is not the case. Running a legitimate ICO is a complex undertaking, which is continuously getting more difficult. There are more ICOs sprouting everyday, making the landscape ever more competitive, and the regulatory environment is a particularly turbulent one, meaning it can change at any moment and dramatically shift the landscape.

The first, and arguably most important, decision that must be taken into consideration before starting an ICO is whether it is actually needed. An ICO is a very particular way of raising money, with its own distinct pros and cons. It is surprising how few ICOs consider whether the concept that they are planning to launch actually has any tangible use for blockchain technology and tokenization, or genuinely provides value to potential users and investors.

An ICO is not only a means of raising money but also an innovative way of deploying blockchain technology and should be treated as such. It is not a fundraising tool for any business, it takes a niche product that can suitably apply blockchain technology and create an ecosystem wherein a token has genuine value for the user.

Therefore, the first and foremost thing to consider is whether a problem actually requires blockchain technology to be solved. Does creating a utility token or cryptocurrency around the concept contribute to solving the issue? Could it be done better through a traditional centralized process? If the answer to the last question is yes, it is advisable to reconsider an ICO concept, both for the good of the project and blockchain technology as a whole.

Writing an ICO whitepaper

Once you have arrived at a concept, the next step is to write a whitepaper that is going to present the problem that you are solving, describe the solution and convince investors of the value of the project. Make an accurate costing model and have a clear fundraising goal, both in terms of a soft and hard cap, as well as a deadline.

Whitepapers can vary in length. The original blockchain whitepaper, released in 2008 by Bitcoin founder Satoshi Nakamoto, was only 8 pages long. The landscape has shifted considerably since then and now many whitepapers are well over 100 pages.

Even if the concept speaks for itself, the whitepaper needs to be thorough, covering every aspect of a project. If investors are seriously going to consider putting money into an ICO they need to be safe in the knowledge that the project is well thought through and that nothing has been left to chance.

There are a few things that every whitepaper does need to contain. They are as follows:

  • The problem.
  • A proposed solution (using blockchain technology).
  • How the concept behind the ICO will implement the solution.
  • How the token is going to be valued, distributed and interact within the ecosystem.
  • The concept roadmap.
  • The team behind the concept.

Each whitepaper is different and its form depends on the nature of the concept and project. Some are more technical, full of formulas and schemas, whereas others depict a concept better through illustrations and diagrams. Complex mathematics and cryptography will be involved in every blockchain project as it is important to explain the concepts in more digestible ways based on the inclinations and preferences of investors that the ICO is targeted at. Naturally, a clear understanding of these concepts is an absolute requirement too. It is advised to read through as many whitepapers as possible prior to writing one, in order to best understand how to communicate and what to include.

I always want to see two whitepapers. One technical whitepaper and one based around the business itself and how it is going to be marketed.” – Max Kordek, President of the Lisk Foundation

Outside of the issue being solved, it is the team that is arguably the most important factor to consider. It tends to be the first thing that investors look at when deciding whether they should invest. A good concept with an underwhelming team will never materialise. Therefore, it is important to build a solid, multi-disciplined team consisting of professionals with proven track records of delivering on large projects, preferably with blockchain experience as well.

Building an ICO team

Building a worthwhile team to partake in the project will be one of the more demanding aspects of any ICO, . This can involve a heavy initial outlay on the part of the founders as no money would have been raised by this point.

It can be somewhat of a balancing act determining where most emphasis is needed over the course of a project in terms of developing a team. During the ICO stage marketing is most important in order to build awareness about the project and garner the interest of investors. However, many investors will be worried about a project that does not have a considerable roster of developers to bring the concept to life. Once again, it is about understanding what each individual ICO prefers and what type of investor the project aims to attract.

Outside of the team working on the project, many ICOs will also flaunt the advisors that they have on their board. This is also a key aspect of demonstrating the value of a project. If respected industry individuals are willing to stand behind a project, it makes investors considerably more confident and safe about the value the project can bring. It is advised to research heavily who the foremost influencers are in the blockchain space and whether they are suited to a particular project. Advisors will normally expect compensation in the form of payment, as well as a portion of the tokens that will be distributed during the ICO.

“Do it yourself. Don’t rely on agencies. Build an amazing team in one location that lives the blockchain spirit. Don’t try to be “cool” by having a remote team scattered around the world.” – Max Kordek, President of the Lisk Foundation

Building an efficient and effective team is undeniably one of the most defining aspects of any ICO, and a hugely deciding factor in whether the project will be successful or not. This in turn makes getting influential advisors on board easier too. It is near impossible to pinpoint an exact balance between the developers and marketers that should be on your team as it hugely varies from project to project. Although too much emphasis on one over the other is never advised. However, what can be guaranteed is that if the ICO is a worthwhile concept it will be considerably easier to get talent on board.

Other best practises

  • Set up a foundation in a cryptocurrency friendly location. For example, the Lisk Foundation is based in Zug, Switzerland.
  • Set up social channels so investors can reach out to you. Telegram, Reddit and Twitter are among the most popular channels used in the space.
  • Always communicate consistently and professionally. Investors, especially in the cryptocurrency space, are very active with their communication. It is very important to respond in kind.
  • Do not hype the price of your token. Let the product speak for itself.
  • Always prioritise investor security.

“Interact heavily with your community so they become a big part of the project itself.” – Max Kordek, President of the Lisk Foundation