Initial Token Offerings or ITOs are the more utility-focused, tokenized offering that bears some similarities to both Initial Public Offerings (IPO) and Initial Coin Offerings (ICO). Instead of offering shares or being a form of crowdfunding, ITOs offer access to a utility on the platform. This utility that an individual is gaining access to may still be at an early stage in its development and its function may still have a few ‘bugs’.
Utility Tokens vs Secutity Tokens
Security tokens function very similarly to shares, providing a sort of crypto equivalent to having a share in the profits of a company. Security tokens often give the investor a vote within the company.
Utility tokens are more focused on granting a user access to a function or service, rather than being a stake in the company. Both security and utility tokens are not the same as a crypto-coin, as a coin is merely the means of purchasing something. For example, a user could use a crypto-coin to purchase a token and grant themselves access to the specific function of that token. But a token, however, cannot be used to purchase a coin.
This is one of the key conceptual differences between an ITO and an ICO. ICOs are crowdsourced funding that uses capital to grant individuals access to coins that can be traded. An ITO grants users access to a service or a stake.
Disadvantages of Initial Coin Offerings (ICO)
One of the key disadvantages of ICOs and one of its main differences to ITOs is related to reputation. Often when a scam is revealed within the cryptocurrency ecosystem it tends to take the form of an ICO vanishing.
This is called an ‘exit scam.’ Exit Scams are rather simple. After a sizable group of people has purchased enough of the coins in the Initial Coin Offering, the coin provider simply vanishes with the investment. Leaving investors with effectively nothing. One example of an exit scam is the now infamous Bitcoiin. Note the extra ‘i’ in Bitcoiin. In this scam, which had celebrity endorsement, the scammers raised nearly $75 million USD before quickly absconding with the ICO.
In this way, the advantages of ITOs are made clear. ITOs foster far more of an interrelation between the user and the producer. The producers are incentivized not to merely accumulate wealth for the theoretical project but are encouraged to provide a continuous service for the user.