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Initial Coin Offerings: Understanding Crowdsale Terms like ‘Soft Cap’ & ‘Hard Cap’

litepay ico initial coin offering

Few terms have boomed in recent popularity quite like ‘Initial Coin Offering’ (ICO). The term refers to a disruptive method of fundraising made possible by the emergence of blockchain technology, and ICOs continue to bring in millions of dollars for startups.

While many investors have already familiarized themselves with the general idea behind ICOs, the steep learning curve can prevent the public at-large from understanding specifics about how tokens are issued and how fundraising ‘success’ is measured. 

Initial Coin Offerings and the modern ‘crowdsale’

At face value, ICOs are similar to many of the fundraising methods that have existed for decades. People and teams with big ideas look to the public for financing, hoping to create a product of value or necessity.

ICOs take clear inspiration from Initial Public Offerings (IPOs), a term referring to when private companies first sell their stock shares to the public.

However, when a member of the public invests in an ICO, they are not given stock ownership in a company. Instead, they are merely purchasing a digital currency or token that plays a role in the network and could theoretically rise in value. During the sale, the majority of ICOs allow users to ‘buy in’ exclusively with digital currencies like Bitcoin or Ethereum.

What makes ICOs so disruptive is their reduced barrier for entry. In theory, anyone can launch an ICO or contribute to funding an ICO, creating a new wealth of opportunity for developers across the world.

Not all coins have a limited supply

While some ICOs choose to set a limit on the total amount of coins that can be purchased, others choose to offer a limitless supply during the sale.

ICOs that choose to set a ‘cap’ typically have a maximum amount that can be funded, and will refund any transaction that occurs once there are no tokens left to sell. These essentially operate on a ‘first come first served’ basis. While this limits the maximum amount of funding  that the team can procure, champions of limited supply models believe that it creates a heightened sense of value.

The idea of limiting the amount of tokens on sale has strong ties to digital currencies that employ a maximum supply cap.

While not launched through an ICO, Bitcoin is a prime example of a digital currency with a maximum supply cap. Proponents look to Bitcoin’s fixed supply as one of its use cases, as the digital asset is likened to a digital version of gold.

Other ICOs, on the other hand, instead choose to not limit the amount of coins that can be sold during the sale. Many of these projects will sell tokens for a specific duration of time, while others choose to employ different models like inflation (based on fiat currencies) and do not place restrictions on how many tokens can be bought during the initial offering.

While there are many arguments for and against digital currencies with a maximum supply cap, the issue ultimately boils down to preference. Project developers choose which model to employ, and the public chooses which projects to fund.

Soft caps are fundraising minimums while hard caps are fundraising goals

When discussing an Initial Coin Offering, some variation of the terms ‘soft cap’ and ‘hard cap’ are often used.

An ICO’s soft cap is the minimum amount that a project can be funded in order to be considered successful. This metric is set by the project’s developers, and is essentially the team’s way of specifying the minimum amount of money that is required for the project to continue.

Often, if a soft cap is not met, the team refunds all purchases and the project is considered unsuccessful. Other times, the project may proceed with however much was raised, even if the amount is under its soft cap. Without oversight, this is largely the decision of individual projects.

A hard cap, on the other hand, is the maximum amount that a project can be funded. This ceiling is also decided by the project’s creators, and in many cases any attempts to purchase a token or digital currency that has already met its hard cap will be refunded.

Essentially, a soft cap can be thought of as a project’s minimum funding amount required, while a hard cap can be thought of as a project’s goal. Many projects choose to employ a hard cap that far exceeds their minimum funding amount, while others may limit the amount in order to create a sense of scarcity for the digital currency or token.

Disrupting the norm; no concrete ways of thinking

While understanding the methods often employed by ICOs in order to distribute and sell tokens is helpful for contextualizing individual token offerings, there are seldom strict rules in the digital currency landscape. By its design, decentralization means that anyone can approach an issue in whatever way they think is best.



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