At the end of 2017, China banned domestic crypto startups from attempting ICOs to find an alternative to fundraising for their projects. So projects started researching the new trend of Initial Exchange Offerings or IEOs. This innovation allows them to carry out fundraising for the project without fear of law or government intervention. Let’s learn all about what is IEO in today’s article.
What is an IEO in Detail?
IEO – Initial Exchange Offering, as the name implies, this form is implemented on the platform of a cryptocurrency exchange. In contrast to an ICO, an IEO is managed as well as a reputable representative by a cryptocurrency exchange for a startup seeking to raise funds with the issued tokens.
Since token sales are conducted on an exchange platform, token issuers must pay a listing fee along with a percentage of the tokens sold during the IEO. In return, tokens will be sold on exchanges and their coins will definitely be listed on the exchange after the IEO ends. Since a cryptocurrency exchange will own a percentage of the tokens sold, it is incentivized to provide marketing support to token issuers.
IEO participants will not be able to govern like ICOs on smart contracts. Instead, they have to create an account on the exchange where the IEO is conducted. IEO participants then have to deposit coins into the exchange’s wallet to purchase the IEO
IEO on Exchanges
More and more cryptocurrency exchanges have started to “trend” IEO and IGO. One of the first exchanges, none other than Binance, launched Binance Launchpad as a platform dedicated to IEOs. In January, BitTorrent – was acquired by TRON and initiated a token sale on Binance Launchpad and raised $7.2 million in less than 15 minutes, which mainly came from crowd sales.
Just 15 minutes to sell off all the tokens in a crowd sale is not an easy thing and a dream of crypto startups, this IEO on Binance Launchpad has set an all-time record. The second IEO on the Binance exchange, Fetch.AI, hit the $6 million mark in just 22 seconds.
After observing the success of Binance Launchpad, other major exchanges have also announced the launch of their own IEO platforms. Among the IEO platforms are Bitmax Launchpad, Bittrex IEO, OK Jumpstart (OKEx), KuCoin Spotlight, and Huobi Prime.
Advantages and Disadvantages of IEO
IEO projects are attracting the interest of financial investors involved in investing in cryptocurrencies. This form of investment has advantages and disadvantages that occur during token trading.
One of the main advantages of an IEO is the credibility of the investment method that makes investors believe. When the crowd sale is conducted on the cryptocurrency exchange platform, the partner screens every project looking to launch an IEO on their website. Exchanges do this to maintain their good reputation by carefully vetting token issuers.
As a result, IEOs can remove fraudulent and dubious projects from raising capital through cryptocurrency exchange platforms, and it will become much more difficult to scam contributors with IEOs.
The RAID IEO case is a great example. Recently, Bittrex announced that they canceled the RAID project IEO a few hours before the start of the crowd sale. The reason for canceling RAID’s plan to raise $6 million from contributors was the terminated partnership between RAID and video game data analytics company OP.GG.
According to Bittrex, the partnership between the two companies is an important part of the project, and when the crypto exchange learned of the event, they decided to cancel the token sale because they believed it was not for the sake of the token sale.
Token issuers do not have to worry about the security of the crowd sale because the exchange is managing the smart contract of the IEO. The KYC/AML process is also handled by the crypto exchange as most service providers do KYC/AML for their clients after they create an account.
The project investment process becomes easy
Startups that issue tokens benefit from the more seamless process of launching IEOs on exchange platforms – compared to doing their ICOs “alone”. While fundraisers pay listing fees and a percentage of their tokens, the exchange helps them with marketing.
So startups launching their IEOs require a lower marketing budget than if they decided to do an ICO. Furthermore, token issuers can take advantage of the exchange’s stable customer base to receive more contributions to their projects.
Unified token list
Since the token listing is also in the “deal”, it is a natural process for the crypto exchange where the IEO is conducted to list the startup’s coin after the end of the crowd sale.
While IEOs seems like a safer and more efficient alternative to ICOs, the costs associated with token sales can be high for startups. Listing fees can go up to 20 BTC, while exchanges can even take a 10% cut from fundraising companies’ tokens.
High cost of buying tokens
The main disadvantage of an IEO lies in the list price. There is no denying that IEO is a safer and more efficient alternative to ICOs. However, the costs associated with token sales can be quite high for startups.
For example, listing fees can go up to 20 BTC, and some exchanges can cut even 10% off the tokens sold during the fundraising campaign. That’s why startups who want to launch an IEO should know about its cost and factor it all into their budget.
Strict exchange process
When cryptocurrency exchange platforms collaborate on projects, their reputation comes first. And if the development team does not meet the stated requirements or the project fails, the exchange will suffer the main blow.
That is why cryptocurrency exchanges often do due diligence before accepting projects into their service. They check the product’s whitepaper, and screen members, and make sure that the project’s goals are realistic and achievable.
They can withdraw from the IEO any time before it happens if they discover anything shady about the project. Exchanges protect their reputations as best they can and this means that they will be strict in their selection and may not take on every project.
Check project transparency
This is one of the major concerns for potential investors. The exchange puts its reputation and potential revenue by launching an IEO, for sure. But as an investor, it’s important for you to understand the vetting process the platform uses and the kind of regulation the exchange puts in place for itself.
Limited user base
IEOs are limited to exchange users. Meaning, if the exchange is not available in a particular country, those will be automatically excluded from the IEO. Currently, there are some countries that still prohibit financial investors from participating in the trading of tokens for Binance IEO projects because of some legal regulations on the national currency market.
Some countries that cannot participate in Binance IEO projects are China, Korea, Thailand, Venezuela, Iran, Yemen, Burundi, etc.
How to join IEO?
Since IEOs are currently relatively uncommon in the crypto community, it’s still not difficult to choose an IEO that you like. After you have found your IEO, you need to find out which exchanges are holding an IEO crowd sale.
The next step is to sign up for an account on that crypto exchange and complete the KYC and AML verification process.
After the user completes KYC and AML, next will need to check which coin is being IEO and fund the account with the currency accepted in the crowd sale (e.g. Binance BNB). The final step is to wait until the IEO starts and buy tokens.
Will IEOs help the Crypto Market Get Excited Again?
ICOs created a boom in 2017 and 2018. However, a significant percentage of crypto projects are operated by scammers or with bad intentions (BitConnect, Hextracoin, etc.) …). However, we cannot say that this is an effective fundraising model for crypto startups because no one knows the future.
On the other hand, IEOs provide a higher level of trust among crypto projects, because exchanges organize crowd sales themselves for the fundraising process, which improves crowd sale efficiency. As such, IEOs have the potential to become the standard model for raising capital in the crypto market and possibly even spark the next boom.