Mary wants to start an apparel store online. She needs funding, around $5000. She’s young and still in college. She doesn’t have connections with big investors. She has some close friends but they can only make small investments.
Her friends are read to persuade their networks to invest if Mary can offer them something good.
Mary thought that was a great idea. She can use the investments to build her store and offer investors her products or discounts to apparels.
In order to do that, Mary needs to make a note of their contributions. Give them a receipt or a token that is a proof of their contribution. Investors can produce the token at a later date for apparels or discounts.
Token (Credits : Dayan Yari from the Noun Project)
The token simply says Mary owes the token holder its value in the future.
This is the basic idea of an ICO(Initial Coin Offering). ICOs has some properties that make them incredible.
Solves The Problem of Trust
Mary’s friends might trust her with their investments. But its difficult for their networks to trust her. Let’s see how ICOs solve the problem of trust.
Credits: Meaghan Hendricks from the Noun Project
ICO is a computer program that issues tokens for investment. The computer program is a set of instructions.
If the buyers pay x coins then Issue him y coins
Like an agreement between Mary and the buyer. This computerised agreement is called a smart contract.
This computerised agreement once prepared cannot be altered. This is because unlike traditional internet services, the computer program or the smart contract doesn’t lie in a computer owned by Mary.
The program is replicated across thousands of computers in the network. Once the program is deployed, buyers will be able to buy tokens. The token transaction data is also replicated over the network.
Credits : Priyanka from the Noun Project
This information are stored in blocks and linked together, hence called “BlockChain”.
Here the investor is not trusting Mary, instead computers. Mary cannot manipulate the transaction data. This doesn’t completely solve the problem of trust. Lot of scamsters have launched ICO, issued tokens and vanished. Be careful when you invest in an ICO.
Seeing Mary’s success , Sara launched her ICO for an e-learning platform. You can exchange Mary’s tokens for Sara’s tokens.
Credits : Guillaume Berry from the Noun Project
The Way Ahead
ICOs in the future are likely to gain massive adoption. Because ICOs enable anyone living anywhere invest in an idea they believe. If you want to learn to program smart contracts, I recommend you to take a look at Zastrin.
If you are a total beginner to Cryptocurrencies and Blockchain, I recommend you to have a look at CryptoManiaks.