An initial exchange offering, or IEO for short, is a fundraising exercise for a crypto project supervised by an exchange. It rings the bells of an initial coin offering (ICO), and for good reasons too, but there are fundamental differences that make it a better fundraising model than an ICO.
The best way to understand an initial exchange offering is to revisit an ICO. In an ICO, investors would send money into a smart contract in exchange for new tokens. IEOs work differently. A trusted exchange is heavily involved in the crowdfunding exercise.
The cryptocurrency exchange acts as a middleman between the developers of a project and investors. Developers of a particular project would have teamed up with an exchange beforehand. It’s a win-win situation for all the stakeholders involved.
Investors don’t directly hand their money to developers but the exchange. The exchange will then credit the investor’s account with an equivalent number of tokens. There is no direct link between developers and investors. Everything flows through the exchange.
Differences between initial exchange offering and ICO
An initial exchange offering and initial coin offering are two different routes to the same destination. The IEO is the more refined route and can be thought of as the next step in crowdfunding campaigns.
Here are some of the major differences between the two.
The most obvious difference between the two crowdfunding campaigns is token issuance. In an ICO, the developer’s website – through the use of a smart contract – receives investor funds and releases the project tokens.
In an IEO, an exchange is a bridge that connects investors and developers. The exchange receives funds from investors – who could be the platform users – in exchange for tokens.
An ICO is launched in the country in which the crypto project is based. This is one of the reasons why the majority of ICOs post-2017 moved to crypto-friendly countries when lawmakers in countries such as China banned them.
An IEO crowdsale takes place in a country where the presiding exchange is legal to offer its services.
Smart contract management
An exchange manages the smart contract for an IEO while that of an ICO is managed by the developer.
There is no law that determines who can launch an ICO or not. This means that the ICO industry is a sea of both good and bad actors who have different intentions but targeting the same audience.
At the height of the ICO boom, many projects created outright scam projects and raised money from them. ICOs leave investors at the mercy of scammers.
Things are different with initial exchange offerings because exchanges vet projects before listing them on their platforms. The credibility and reputation of exchanges are on the line.
Marketing efforts and budget
Marketing an ICO project is very costly and requires a lot of effort. A lot of people need to be hired to do the work. Some projects with limited budgets opt for cryptocurrency airdrops. This does not guarantee the success of the project.
IEOs don’t require a large marketing budget. The exchange’s platform is enough to market the project. Another upside is that an exchange has an audience ‘all-in’ on crypto.
ICO projects who successfully raise their money have to reach out to exchanges for listing. The listing fees vary depending on exchanges. An IEO token is automatically listed on the exchange that conducts the IEO.
The AML/KYC for ICOs is dependent on projects. Exchanges carry out the necessary KYC/AML for its users, including IEO investors.
Initial exchange offering benefits
Initial exchang offerings would not really take off if they do not providers the involved stakeholders with tangible benefits. This means that they have to meet the goals of initial coin offerings but with less risk.
IEOs provide a number of benefits to investors – who have been on the wrong end of doomed ICO projects.
To start with, an exchange puts its reputation on the line when it partners with developers for an initial exchange offering. Exchanges are forced to heavily scrutinize each project because should it be a failure, it will be a major blow to them. They can’t risk the hard work they have done in the past to be undone by a new project.
An initial exchange offering can make or break an exchange. It’s good for investors.
Exchanges do thorough due diligence on a project before allowing projects into new offerings. This is good for investors as they don’t have to spend hours checking the founding team, researching whether the project goals are attainable or not and if it could be a scam or not. An initial exchange offering mitigates the risks for investors.
However, not all initial exchange offerings will succeed immediately. Some will fail due to reasons beyond anyone’s control. It’s a new trend and the exchanges themselves are only starting to get the hang of things.
Over time, more IEOs will be launched on different exchanges with varying results. Investors would then be able to pick out exchanges that perform better than others, and would naturally, invest in IEOs from those marketplaces.
IEOs also benefit token issuers who do not have to go through the bumpy ride of ICOs. They just let the exchange take of the business while they concentrate on delivering what they promised.
Initial exchange offering ecosystem
The initial exchange offering ecosystem consists of exchanges, developers, and investors. Regulators are also involved but they are outside the immediate circle. What do these three main stakeholders have in common and what’s in it for them?
Investors are obviously the main target for new projects intending to raise money. The crypto industry admitted ordinary people into a league formerly reserved for accredited investors.
However, the buyers of new tokens – primarily retail investors – have lost a huge chunk of money from poor projects that wanted to cash in on the crypto frenzy. Investors will now flock to new projects they know are administered by reputable and noteworthy exchanges.
Investors can participate in a new initial exchange offering by:
- Checking online to see the upcoming IEOs and find exchange offerings they are interested in.
- Find out which exchange is hosting the initial exchange offering
- Register an account with the exchange (if they not already a client)
- Fund their account and hold the cryptocurrencies required for the IEO
- Exchanges with their own tokens require users to hold those exchange tokens. For example, Binance users need to have Binance Coin to participate in IEOs.
Exchanges are not in it just to connect (sort of) investors with the next big project in crypto. They are in it for their own benefit too. There is nothing like a free lunch. The question is: what and how do they benefit?
The exchanges take a commission from the gross sales. This works for them because they already have the infrastructure in place to do so. They don’t spend much on organizing the initial exchange offering.
The only downside is for big exchanges is they have to be selective of projects they pick. However, even if one or two projects fail, the exchanges can still survive. After all, some of them have remained in business after hacks.
Crypto exchange Bittrex International canceled a planned IEO for RAID token after the project ‘as a result of significant changes’ in RAID’s business status.
Exchanges may offer discounts for users who want to buy the new tokens. This is a good way for exchanges to capture more customers. Exchanges make money from transaction fees and the higher the number of transactions on their platform, the more money they make.
Those exchanges with their own tokens stand to benefit a lot because it pushes more people to buy the exchange tokens. This could potentially pump up the price of exchange tokens. So, giving discounts during a token sale is less price to pay compared to the value of more people buying and holding the exchange tokens.
There is no doubt that an initial exchange offering gives more credibility to a new project in a way that an ICO can only dream of. Developers who manage to get their projects accepted on major exchanges have a higher probability of reaching their fundraising goals.
Secondly, an exchange exposes a new project to a large user base ready to invest in new tokens. This reduces the cost of marketing for the development team and affords them more time to create the best possible version of their product.
Many ICO projects that managed to raise funds struggled to get listed on exchanges or had to do so after paying exorbitant listing fees.
It is only ‘natural’ that after an IEO, a project gets listed on the offering exchange.
Exchanges offering IEOs
A few high-profile exchanges have joined the IEO bandwagon. They haven’t had the same magnitude of success. Here are some of the exchanges involved in IEOs:
Binance is one of the leading exchanges in the world. Through the Binance Launchpad, the exchange has launched two very successful IEOs. Millions were raised in minutes. The exchange has its own native token that investors use for the IEOs. Investors can also buy new tokens using other cryptocurrencies such as Ether.
Some of the completed IEOs include:
The Malta-based exchange, through OKEx Jumpstart, offers IEOs in two segments – subscription and allotment.
Bittrex first foray into IEO ended with the exchange canceling the RAID token sale. It cited a change in business status as the reason for doing so. The exchange opted to maintain its integrity and claimed that it was doing so in the best interest “of its users.”
Huobi’s launchpad is the Direct Premium Offering (DPO) platform. Newly purchased tokens are immediately tradable against the Huobi token.
How to launch an exchange offering
The ICO crazy saw projects raising massive amounts of money from just a plain white paper and a promise that the token would appreciate in value. Investors were buying into token sales like it was the end of the world. But things have changed.
This what projects need to do in order to launch IEOs:
Developers need to have a minimum viable product (MVP). It is much more believable than anything written or promised in a white paper.
Exchanges will only work with a project if they believe that the team has the potential to deliver on its promise. New projects need to have good developers as well as a few heads who can take care of the business side of things.
Projects need to raise reasonable amounts of money and not what happened at the height of the ICO craze when companies such as EOS.io raised more than $4 billion in a year-long initial coin offering.
IEOs usually raise less than $10 million. The companies should be willing to work with these figures to meet their goals.
Developers need to have white papers that completely describe the project in full. It should also include information such as tokenomics, business model, team, partners, financial model, and a whole lot more.
Initial exchange offering conclusion
An initial coin offering allows investors and traders to buy new tokens straight from their exchange wallets. This new crowdfunding exercise – aka ICO 2.0 – gives more credibility to new projects who are thoroughly vetted by exchanges.
This is good for investors who see lowered risk in investing in new tokens. However, this is a new model. And it is far from perfection.
Investors should do their own research beforehand and invest when they are sure that they know where they are putting their money into.
While initial exchange offerings are welcome, they are giving too much power into the hands of exchanges. These marketplaces will decide which project deserves to see the light of day and which one does not.
They are the new gatekeepers to crypto projects the same way that venture capital decided which firm made it to Silicon Valley. But the benefits are too great to be ignored.
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