The phenomenon of cryptocurrency is no longer new to anyone in the 21st century, even the most casual observers have heard about it. Meanwhile, those of us who are already part of the ecosystem know that the market is far from finished growing. Crypto world experts are constantly exploring and developing better and more convenient methods that will promote sustainable trading opportunities and enhance systematic development in the crypto market.
After initial Coin Offerings (ICOs) were recognized a bit risky by some crypto investors due to factors like sending funds to wrong wallets and some project teams absconding with funds; initial Exchange Offering (IEO) has emerged as the new capital-funding model for many crypto startups.
Unfortunately, although several token projects are now deciding to list their tokens directly via IEOs–due to the difficulty of obtaining timely, reliable, and useful market information–many cryptocurrency traders are still struggling to tell Initial Exchange Offering (IEO) from Initial Coin Offering (ICO). Both ways may be used as fundraising options for crypto startups but they are remarkably different.
So, what exactly is an IEO and how does it differ from the conventional ICO model?
Table Of Contents
- What is an Initial Exchange Offering (IEO)?
- How do exchanges select projects?
- Initial Coin Offering (ICO)
- Other advantages of Initial Exchange Offerings include
- Interested in Participating in an IEO?
- IEO-Approving Exchanges
What is an Initial Exchange Offering?
An Initial Exchange Offering is a fundraising tool used by startups to sell new tokens directly to the market, via a cryptocurrency exchange platform. Essentially, an initial exchange offering varies from the conventional ICO model in one key aspect. As opposed to the tokens being distributed through the project being sent to investors’ wallets (ICO), the tokens are distributed through an exchange (IEO). This means investors buy the token directly on an exchange platform.
In simple words, an IEO is a partnership between a token project and exchange platform. Once a company creates tokens, it sends them to a suitable exchange platform for public sale. The exchange acts as a marketplace for new tokens. Unlike ICOs where the counter-party is the token developer, with IEOs the counter-party is the exchange platform. As such, to buy directly from the platform, investors need to create an account with the exchange.
Project teams can negotiate different terms, deals, and conditions with the exchanges. And, depending on the mutual agreement, prices and conditions governing the sale of the tokens are set. These will include the listing fee, interest the exchange platform will retain after selling the tokens, flat rate at which the tokens will be sold, catering for the marketing expenses, and so forth.
How do exchanges select projects?
Before taking up a token sale on their platform, an exchange employs a team of experts to thoroughly analyze a particular project, gauge its viability, and authenticate its worthiness. They cautiously evaluate the job done by the developers, validate the seriousness of the business, and assess the market potential of the idea. And to steer clear of unserious projects, some exchanges require developers to also prove they have enough assets to back up the new token.
Once the exchange is satisfied and everything is in place, they announce the token sale date and price.
How exchanges benefit from IEOs
In most cases, a successful IEO will likely result in an all-win case for token developers, exchange platforms, and even the users. Let’s look into what this crowdfunding method can actually provide to an exchange:
- New users. By hosting an IEO, the exchange receives an influx of users who—after they sign up—may decide to stick around and utilize the exchange’s other services.
- Increased profits. Beside charging developers a listing fee and earning a given interest of contributions from sold tokens, exchanges also benefit greatly from an increased volume of users/investors due to trading fees.
- Marketing. While marketing the new token with the project’s marketing team, exchanges can use the marketing campaign to market their platform and services as well.
- Depending on the agreement, an exchange can gain exclusive rights to a token enabling it to get a significant advantage over other platforms (especially if the listed token turns out to be successful).
- Strong reputation. If a token is successful, the exchange’s popularity and trust go a notch higher which is great for business.
Anyone who wants to participate in the IEO token sale has to create an account with the exchange platform and deposit relevant coins to their wallet (usually, developers specify the coins they will allow) so they are ready to purchase the new token.
Initial Coin Offering (ICO)
Contrary to IEOs, Initial Coin Offering involves selling of digital tokens by start-up companies to investors in exchange for fiat currency or, in most cases, mainstream cryptocurrencies like Bitcoin & Ethereum via their website. The counterparty is the digital token developer. Usually, an agreement between the token developers and investors (smart contract) is used to launch and manage token sales. It dictates the terms and conditions that will govern the sale of the tokens. Participants are required to send their contributions via smart contracts to acquire new tokens. ICOs are used by companies to bypass the numerous hoops set by venture capitalists and banks before lending the intended start-up capital.
Here are the clear differences between the two:
- Tokens are sold directly to the public by the developer, in exchange for cryptocurrencies or fiat money.
- The startup team has to launch a fundraising platform and create smart contracts to manage token sales.
- Developers take home all the profits.
- Developers are solely responsible for marketing and publicizing the new token.
- Participants send contributions via smart contracts to acquire tokens.
- Depending on the project type, token issuer needs AML/KYC.
- Token sale is exclusively conducted on the platform of a cryptocurrency exchange.
- IEOs are administered by the crypto exchange on behalf of the issuing company seeking to raise funds with its newly issued tokens so there’s no need for smart contracts.
- Besides claiming a certain percentage of the total sales, exchange platforms also charge listing fees.
- The exchange is tasked with the responsibility of marketing the new token. Developers may choose to market it or not.
- Participants purchase the new tokens via an account they create in the exchange’s platform.
- The exchange takes care of conducting AML/KYC on its participants.
Initially, ICO was the most preferable method to raise capital from tokens. However, it lost its glory after reports stating that over 90% of ICO projects created in 2018 didn’t turn out as planned. What made investing in ICO an even more risky business was the fact that over 80% of ICO projects were carried out by scammers.
Besides, the fact that most countries do not provide proper legislative measures to protect investors from fraudsters only made matters worse.
That’s why ICO slowly turned into IEO. The idea of Initial Exchange Offerings came up due to its transparency and the fact that it was considered more reliable in safeguarding investor interests. This is because, whereas anyone (even fraudsters) is eligible to come up with an ICO project, IEO-involved exchange platforms conduct a thorough screening of the authenticity of a token before listing. Most platforms exercise it to protect their reputation as it can spell bad news if they allow unscrupulous projects within their sites. This said, with due diligence and a thorough review of each project traders can rest assured a listed token is properly backed up.
Other advantages of Initial Exchange Offerings include:
- Dependable scam protection. Exchange platforms know that their reputation is tied to the projects they list. Accordingly, they only list high-quality viable projects.
- High-grade security. Most exchange platforms use sophisticated technology (e.g. 2FA, key management) to guard against fraudsters. In view of this, exploiting of such high-security standards makes IEOs less prone to cybersecurity risks.
- Cost efficiency. Initial marketing fees to familiarize the public with a token are quite costly. Since IEO utilizes the exchange’s marketing services, developers don’t need to spend money on advertising.
- Simplicity. Any IEO is easier in the sense that developers do not need to go through the hassle of acquiring new investors, marketing the token and making their presence felt in the crypto world. IEO enables them to tap into the exchange’s expert marketing services and already-existing client base. As such, it allows developers to focus on their core business activities while the exchange handles the details of the fundraising efforts.
- Automatic listing. Exchange listing—which usually requires a formidable effort from the startup team during ICOs—is done automatically.
- User-friendliness. Stakeholders can easily purchase newly-listed tokens. They only need to sign up with the given exchanges, deposit to their digital wallets, and buy the tokens once listed. The investor is also assured that the token immediately moves into the regular marketplace once the IEO is finished
Whilst IEOs are supposed to increase the transparency and security of ICOs, some of their strengths also turned out to be their weaknesses.
- Limited accessibility. The fact that only investors fully registered with the exchange platform can buy available tokens leads to limited accessibility. It limits the number of potential investors given that some traders like to transact anonymously–which is not possible with such exchanges whose overall regulatory framework includes comprehensive KYC (Know Your Customer) and Anti-Money Laundering (AML) checks for participants intending to trade via their platforms.
- Developers have to factor in all the costs incurred in an IEO when setting the token’s price. Compared to an ICO, IEOs may easily result in narrower profits unless well-managed.
- Not all Initial Exchange Offerings projects turn out to be successful. Just like some ICO projects, some IEOs can also flop in the market.
- Additionally, just like in ICOs, some traders do not purchase tokens immediately after they are put up for sale. They lie low waiting for prices to drop to suitable levels before making a move. Statistically, most tokens drop their prices after some time, hence, through observing such trends, some traders hold on (just in case). This could mean narrower profits or even losses to developers.
Interested in Participating in an IEO?
First, make sure the country you live in permits participating in the IEO. Some IEOs do not allow users from countries such as the United States, China, Venezuela, North Korea, and New Zealand, among others. This is because the laws and regulations in those jurisdictions may not support a specific IEO.
Next, ascertain whether the project you are interested in intends to conduct an IEO. If it is, verify the host exchange platform. At times, developers may decide to utilize the services of more than one exchange. Sign up with the chosen exchange and complete the KYC/AML procedures.
You can then familiarize yourself with the exchange by prowling through their terms and conditions. Research on the type of cryptocurrency coins acceptable for trade with the new tokens and fund your exchange account appropriately. You are now ready. Wait for the IEO to begin and make your purchase. In most cases, once the agreement between the developer and the exchange is settled, a particular date is set for listing and the price per token stated.
Current and all time high ROI of IEOs on @Binance💰 @maticnetwork and @bittorrent are at the top 🔥— Revain (@Revain_org) September 16, 2019
Is this data matching your own return on investment?🤔@cz_binance @CryptoRank_io #Binance #ieo #crypto #cryptonews $BTT $BNB $MATIC pic.twitter.com/7OOsys06SN
Since the beginning of 2019, the development of IEO has strongly accelerated in terms of completed offerings and aggregate funding volume.
Binance became the pioneer of the IEO crowdfunding method when it established the Binance Launchpad in early 2017. Other crypto exchanges also developed their own IEO Platforms, and now the service is available on multiple exchanges including BitMax, EXMO, Bittrex, KuCoin, Huobi, and OKEx.
As a reputable large global exchange platform, Binance has experienced the most success with IEOs and is currently the most preferred platform to launch IEOs.
First IEOs Bread and Gifto were listed on the Binance Launchpad in 2017 and garnered $6 million and $3.4 million in mere seconds. Later in 2019, it conducted a crowd-sale for BitTorrent which surprisingly earned $7.2 million in a record 15 minutes of sale opening. Another noteworthy project was Fetch.AI which managed to collect $6 million in less than 30 seconds. There have been other numerous successful projects released via the platform–and for this reason, the exchange is quite popular among both developers and users in the crypto ecosystem.
Most of IEO exchange platforms are held by exchanges operating within the Asian markets while other continents are slowly embracing the notion. This can be attributed to the strict laws and regulations concerning the subject. Nevertheless, the concept of IEOs is rapidly gaining mainstream acceptance. Paytomat, a European platform, effectively completed IEO via EXMO exchange and attracted 100 BTC in just two minutes.
The inception of Initial Exchange Offering is not only a refreshing concept but also an answered prayer to traders. In the past, many have fallen into the hands of con artists hiding behind unverified Initial Coin Offerings. It was almost impossible to discern between a genuine ICO and a scam since there nobody could scrutinize the credibility of ICOs. Traders were forced to rely upon reports from journalists, the developer’s goodwill, and probably luck. Not anymore, with IEO’s, exchange platforms have taken on the responsibility to ensure only authentic projects are allowed into the market. This way, investors are confident that their contributions are put into worthwhile projects. Though IEOs are not perfect, they only endorse and certify legitimate projects making them way more credible than most ICOs.
Whether it is here to stay or not, IEO is the new format for fundraising in the Crypto Finance ecosystem. Offering increased liquidity, cost efficiency, and scalability as exchange can leverage established investor relationships and data, we can only predict IEOs to grow over time. And indeed, this strong potential for growth is evident as more users and exchange platforms continue to embrace the innovation of IEO.
However, this does not mean you should throw all caution to the wind when investing: as always, you need to weigh out all the factors before investing in any project. Even though IEOs give more security to investors, they can still be abused by both irresponsible projects and unfair exchanges.
Nonetheless, one thing is for sure. IEOs are the future cornerstones of the global crypto finance infrastructure.