Coins and tokens: the new frontiers of crowdfunding

When people talk about crowdfunding they usually refer only to equity, lending, reward and donation. Yet, in addition to the "classic" types of crowdfunding (a term that literally means "to raise money from multiple people"), new ways of raising capital involving the exchange of coins and tokens, or virtual assets, have been gaining popularity in recent years. In this article we look together at what coins and tokens are, how they differ, and why you should consider them for your capital raising.

Difference between coin and token

Let's start right away with an important clarification: coin and token are two quite different things. 

The coin is a cryptocurrency, which is an exchange currency (like euros, dollars or pounds) with which to buy goods of all kinds (including tokens); the difference is that there is no "physical" form, only digital.

The buying and selling of coins (a category that includes the famous Bitcoin, which you have probably already heard of) takes place on Blockchain technology. It is essentially a shared and decentralized digital ledger accessible to anyone in the "network," structured in blocks. Each block contains encrypted information, meaning that once the information is recorded within the Blockchain, it cannot be modified or altered.

Tokens, on the other hand, are fungible and tradable representations of tangible or intangible resources (or assets). Unlike coins, tokens do not have their own Blockchain, but operate on dedicated platforms and do not necessarily represent a currency (for that, there are already coins!).

It is possible to buy and trade with both coins and tokens. What differentiates them are the actions that, as financial instruments, they can perform: the coin is to all intents and purposes a currency with its own value; the token, on the other hand, is to be considered more like a voucher or coupon, and is only usable in a given "space" or "circuit."

Utility and Security Token

Tokens are divided into two categories: utility and security.

Utility tokens serve a specific purpose (e.g., the ability to be used on a platform to obtain a specific service in return) and are not necessarily related to the company bringing them to market.

Security tokens, also called "investment tokens" or "equity tokens," on the other hand, are necessarily linked to the issuing company, of which they may represent a share or otherwise.

Token-based capital collections

Capital raisings involving the exchange of tokens represent the evolution of fundraising methodologies in the fintech sector and are set to play an increasingly important role.

There are different modes of token-based collection: with ICOs (Initial Coin Offering), IEOs (Initial Exchange Offering) and IDOs (Initial DEX Offering) utility tokens are exchanged, while with STOs (Security Token Offering) security tokens are exchanged.

Come accade con il crowdfunding classico, tali operazioni richiedono l’utilizzo piattaforma abilitante. Tuttavia, nel caso di ICO, IEO, IDO e STO – raccolte che avvengono tramite Blockchain – non c’è bisogno di un ente terzo che processi il pagamento (banche, carte di credito ecc.), dato che è la stessa Blockchain, per sua natura, a validare le informazioni.

Let us see, in more detail, the characteristics of each type of collection.

ICO (Initial Coin Offering)

Originating in 2013, ICO is a fundraising practice for blockchain projects in which tokens are offered to investors before they are listed on the broader market, such as the derivatives market.

To properly structure an ICO is advisable:

• verify that your business is appropriate for an ICO;
• Have a product "consistent" with the ICO collection itself;
• create a token, which is an asset your business needs to survive.
• know perfectly all related regulatory aspects by turning to professionals in the field;
• Drafting an accurate whitepaper that allows potential investors to form a precise understanding of your project;
• sviluppare una community intorno al tuo progetto.

IEO (Initial Exchange Offering)

La IEO fa la sua apparizione nel 2019 e si posiziona a un livello superiore rispetto alla ICO per mediazione e regolamentazione. Una Initial Exchange Offering (IEO), infatti, è una vendita di token “supervisionata” da un exchange di criptovaluta. Per estrema semplificazione, un exchange non è altro che un ulteriore strumento finanziario connesso al mondo cripto, volto a tutelare gli scambi e gli acquisti di criptovalute stesse. 

The advantage, compared to the ICO, lies in the presence of a platform-the exchange, in fact-that makes it easy to exchange one's tokens with other people, solving the problem related to the need to find interested parties.

Lo svantaggio è che la presenza di un exchange centralizzato comporta la rinuncia a uno degli aspetti primari del mondo token: la decentralizzazione.

IDO (Initial Dex Offering)

La IDO  (dove Dex sta per “decentralized Exchange”) debutta poco dopo la IEO, nel giugno del 2019, attraverso il progetto Raven Protocol.

Compared to its "exchange" cousin, the IDO provides greater control of funds, the ability to quote directly from the collection platform, and the elimination of the exchange fee that was required by the platform itself.

The big difference from previous types of collection is that in IDOs tokens can be listed immediately on a decentralized exchange (whereas in ICOs they are sold before listing). This allows new projects to directly engage a decentralized investment community, without the need for intermediaries. This is a plus that makes this type of collection much more in line with the peer-to-peer network and tends to maximize the potential of a crowd collection.

In pratica, la IDO unisce il meglio delle due tipologie di raccolta precedenti: è facile da lanciare (come una ICO) e semplifica il processo di rivendita dei token (come una IEO), potendo però fare affidamento su un exchange decentralizzato.

STO (Security Token Offering)

Security Token Offerings are the newest invention in fintech. 

The goal of these collections is the tokenization of tangible and intangible assets, enabling the buyer to legally own an asset, purchased-obviously-through coin or fiat currency (euro, dollar, etc.).

In altre parole, una STO è un contratto riguardante un investimento che rappresenta la proprietà legale di un bene fisico o digitale, che è stato verificato sulla blockchain.

STOs are based on strict regulation and have a lengthy asset-building process. In particular, companies that want to issue security tokens must follow a strict process of controls, regulations, and protocols. In addition, both the company that inputs Security Token via blockchain and those who want to invest must demonstrate that they have the necessary requirements and in line with the Security Exchange Commission (SEC).

These practices, although "inconvenient," provide soundness and security and "naturally" reduce scam attempts.

I security token risultano quindi più “sicuri” rispetto agli utility in quanto, a differenza di questi, non si muovono su processi di vendita basati sulla fiducia (spesso preda di truffatori), ma sono basati su una precisa regolamentazione che tutela sia gli investitori che la parte offerente.

Vuoi approfondire il tema delle raccolte di capitali in token e le relative ICO, IEO, IDO e STO?

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