5 Things You Should Consider Before Creating an ICO

In our blog, we have already touched upon launching an ICO and the steps a startup should take to launch an initial coin offering. We discussed the importance of a properly composed whitepaper, a strong marketing campaign, a professional team, and, of course, an innovational idea that is the ultimate goal of your startup.

However, there is another side to launching an ICO that is no less important and can directly affect its success or failure. We are talking about the technical aspects of initial coin offerings that should be considered before you go public with your ICO.

How does ICO work?

Let’s briefly revisit the basic structure of an initial coin offering and its main components.

What is ICO? ICO, or initial coin offering, is a new way of fundraising where a startup offers to invest in a new crypto coin, or token, for the profit from either direct trading of the tokens on the crypto exchange or access to the product or service that the startup is about to create. The company about to launch an ICO should take care of the following matters:

• Prepare a white paper clearly describing the idea and the way it is going to be implemented
• Develop an ICO website where the potential investors can find all information about the upcoming ICO
• Develop a unique token to be offered in the token sale
• Develop a smart contract that will manage the investments and the token distribution
• Work out an effective KYC mechanism to verify the investors’ identities
• Implement reliable and comprehensive security mechanisms protecting your ICO website, your data and the data of your investors
• Run a full-scale marketing campaign to promote your ICO and attract as many investors as possible

This is a very broad roadmap of an ICO project which includes dozens of small and not-so-small technical details that are critical for the success of your initial coin offering. In this article, we will try to dig a bit deeper into the makings of an ICO and find the things that you should definitely consider.

What do you need to consider before launching the ICO?

Before we proceed, we would like to explain why the technical components of the ICO are so important. By its nature, ICOs are based on blockchain and smart contracts. One of the advantages of blockchain is its immutability, thus, once the ICO is launched, nothing can be changed anymore. All errors in the code will make it to the release and may undermine your otherwise great project. And, since we are talking really big money (successful ICOs easily raise millions of dollars), your investors may be truly unhappy. Needless to say, your reputational losses may be fatal.

In software development, every little thing matters. In blockchain-related projects, every little thing matters double. Therefore, proper preparation for the ICO launch is definitely in order.

#1 The ICO strategy

No, this is not about the whitepaper or the marketing campaign. This is about how you plan to run your ICO, and this may be the most important stage. Remember, you cannot change anything once you have the ball rolling, thus, it is vital to have all components of your ICO laid down to the smallest detail.

What should you plan in advance? We have put together a list of the key points that should be considered before you get to create your ICO

• Token type, name, fractions, if any. Also, decide on the total number of tokens to be issued during the ICO.
• Pricing strategy. There are several pricing strategies that you can use in your ICO, depending on your specifics and the goals you intend to achieve:
• • Undetermined price – no price for the token is set. The number of tokens that each investor gets is proportional to the amount of their contribution.
  • Fixed price – the token price is fixed
  • Dutch auction – the initial token price is set at a high level and gradually lowers with time
  • Price rise – the initial investors can get the coins at a low price which raises with time
• ICO start date and end date
• Soft and hard cap and the currency in which they are expressed. In this respect, think of the mechanism to stop the token sale once you have reached the hard cap.
• Whether you will run a pre-ICO or a bounty program or offer early-bird discounts
• The way the tokens will be distributed and accessed
• The actions in the event of the ICO failure (investment refunds)

Once you have all these points carefully planned, you will have all aspects of your custom ICO covered and you can proceed to the development of your ICO.

#2 Token development

The token is a new coin that you are going to issue during your ICO. The token is created during the ICO development and stored in the smart contract. Basically, it is a piece of code that represents a unit of value and provides access to the corresponding amount of cryptocurrency or the company’s products or services. In this respect, we should mention briefly the two major types of tokens that can be issued in an ICO:

• Security tokens. The main criteria of a security token are that they represent a share in the future profits of the company and that the profit depends on the effort of others, in our case, the project team. In other words, security tokens fall under the criteria of the Howey test. Security tokens are tradable assets, similar to stocks in the traditional finance, and are, therefore, subject to security regulations imposed by governments.
• Utility tokens. These tokens, in their turn, are not investments in the pure sense of the term, as they do not represent a future profit. Rather, they give their holder the right to access the product or service that the company generates. For the holder, the value of such token is in the amount of product that corresponds to it. As the company grows, the token value grows with it. Utility tokens do not fall under the securities regulations, thus, may be the preferred solution in some cases.

Another point you need to think about is the number of tokens you plan to issue and whether this number will be finite or not. With a finite number of tokens, you are not going to issue any more of them upon your ICO end. The infinite number of tokens allows additional issues.

With a finite number of tokens, your investors are better motivated to contribute to your project, as they expect their tokens to rise in value as your startup grows. When the tokens are issued infinitely, they may devalue quite easily. However, this strategy may help to maintain the attention to your project, as new investors will appear all the time.

As for the token standard, the most frequent ones are ERC20 and ERC223. Both these standards are compatible with Ethereum smart contracts that are the common solution for ICOs.

#3 Smart contract development

The smart contract is, probably, the most critical component of the ICO structure. Bugs and errors in smart contracts have already caused quite significant losses both to companies and their investors – we still remember the infamous Parity Wallet case when about $150 million worth of Ether was frozen and inaccessible due to a bug in the code.

Thus, do not take any chances with the smart contract development. The best strategy is to assign this task to a professional smart contracts development service that can guarantee the use of the most advanced technology and tools. Also, the smart contract must be thoroughly tested in all possible situations, thus, the development team should have a strong tester.

Another good practice is doing a smart contract audit – a comprehensive review and testing of the smart contract code and performance. Sometimes, a smart contract audit is done in-house by the same development team, however, for the best results, we recommend engaging a third party to do it. Professional smart contract auditors will do full testing including simulation of attacks and hacks, high loads and other risk situations. Such audits can help to identify the bugs that may find their way into the smart contract code and eliminate them.

Again, any changes in the smart contract code are possible only before its deployment. If the smart contract is deployed to the blockchain with bugs, they will start living their own lives and theкe will be nothing to do about it.

#4 Implementation of security mechanisms

In ICO development, security measures must apply not only to the blockchain components, such as the smart contract and the crypto wallet, but also to the ICO website per se. In 2017, we witnessed the hack of the CoinDash ICO when the company’s wallet address was changed to a fake one and all the funds raised during the ICO were stolen.

Thus, it is critical to protect your ICO on all sides. While most ICO developers implement effective security measures for the blockchain, the wallets, and the smart contracts, the ICO websites are often overlooked. At the same time, their vulnerability is no less critical.

Which security measures should you think of using? Try our checklist below:

• Use a halt function in the smart contract. If anything goes wrong during the token sale, you should be able to stop it to avoid massive further losses. The smart contract should provide a mechanism of pausing the sale with the possibility to resume it later.
• Use the latest versions of the Ethereum environment and Solidity. When any errors are discovered, the software providers release new versions or patches to correct them. By following the provider news and installing the updates, you will reduce the risk of bugs in your ICO code.
• Use the HTTPS protocol. When the server and the client communicate over the HTTPS protocol, there is no possibility to intercept the exchanged content. HTTPS uses certificates to verify that the server the client is requesting is the valid one.
• Implement a firewall. A firewall will restrict your incoming and outgoing traffic and allow access only to safe IP addresses. Installing an effective firewall is one of the priority steps in ensuring your ICO data protection.
• Use anti-DDoS mechanisms. During DDoS attacks, the ICO website is targeted by massive queries that consume all server resources and make the website inaccessible. At the same time, the hackers try to either get control over the website or reroute the user requests to another address. To protect your ICO resources from DDoS attacks, use secure hosting with anti-DDoS mechanisms and implement your own. A good idea is to include the scalability options into your code to make it withstand volume-based attacks better.

The cyber-crime has reached the size when you just cannot be too careful in designing the security of your ICO infrastructure. In addition, with the GDPR already in effect, if your ICO is running in the European Union or attracting investors residing in the European Union, you should be extra-careful, as you may be financially liable for compromising your users’ data.

#5 Legal aspects

The days when the ICOs were totally deregulated are gone, as each month brings news of regulations and restrictions imposed on coin offerings and cryptocurrencies by either governments or public platforms. We have researched the current state of government regulations of ICOs and the social networks’ stance towards them and summarized our findings in the blog.

The new rules demand that you should, on the one hand, consider the geography of your ICO. Some countries, such as China and South Korea, prohibit ICOs altogether, while others, such as the USA, apply SEC rules to the security tokens, effectively restricting their residents from investing.

The social network bans require new approaches to the ICO marketing campaigns. You can no longer advertise a new coin launch on Facebook or Twitter. However, there are many other resources that welcome ICO-related content, especially when you promote your crowdsale together with sharing your knowledge and expertise in the subject. Check Medium and Quora, for example, you will find plenty of crypto content there.

Wrapping up

If you have read this far and begun to fear that launching an ICO is way over your head, we are here to convince you otherwise. ICO as a capital raising process is extremely effective, and with the huge popularity of ICOs today, the investors’ interest is at its peak. Indeed, a successful ICO requires thorough preparation and planning where no detail can be ignored. A good idea is getting a reputed blockchain app development service to support your project and take care of all technical details that should be considered. If you are planning an ICO and are concerned about its preparation, contact us for a free consultation on various ICO aspects.