ICOs, IEOs, and even STOs have failed to live up to the promised hype as it has become difficult for blockchain companies to raise capital through them. However, some companies have found success in the token sale model.
The nascent crypto market has brought with it several investment opportunities and ways to raise funds. Since 2013, more than 1500 Initial Coin Offerings (ICOs) have taken place. This crowdfunding strategy took the top spot for crowdfunding projects until the problem of scams and scams started to come in and out.
China’s ICO ban in late 2017 and several other governments making regulations for the new market have slowed these cryptocurrency funds down.
Due to scams, many people have lost faith in cryptocurrencies reducing their adoption rate. While ICO funding methods are fading, the new fundraising frenzy is building momentum. Speculators and fundraisers are amazed by initial exchange offerings (IEOs). IEO is a transformation of ICO.
IEOs are mostly based on ICOs but are safer as the offerings are made through local exchanges which bear reputational risk in case of fraud.
What is IEO?
Initial Exchange Offering is a crowdfunding strategy that relies on an exchange or multiple exchanges. Third-party exchanges create smart contracts, event planning, and some marketing campaigns. At the ICO, it is the developer who makes sure the smart contract is correct and everything is done according to plan.
Therefore, investors must create an exchange account to participate in the IEO.
Investors send their digital tokens to exchange accounts instead of donating them to Smart Contracts in case of ICOs. When the IEO starts, investors can buy crypto from participating exchanges. Tokens are ‘printed’ by developers prior to IEO and sent to exchanges.
Each project has different agreements, terms and conditions with the exchange. Terms can be a fixed fee, a percentage for exchange, marketing fees or other conditions. Nonetheless, a project investment can reduce some marketing, organizational or security costs and turn into a great investment in the long run.
Many ICO rules can be run with an IEO but the terms and conditions vary depending on the project at hand. Some projects demand a fixed token price during the IEO process. They can also request a token cap per investor to eliminate whales and price manipulation opportunities. These rigid steps are largely set up to regulate the process.
The exchange requires developers to set an upper and lower bound for all their projects to allow for greater IEO results. If too many coins are offered, the token economy will be destroyed from the start. The IEO is not open to the general public. Thus, only active users of participating exchanges can participate.
Binance, the host of Binance Launchpad, is an ideal example of allowing participants to earn tokens using Binance Coin (BNB).
How IEO Works
Before any exchange oversees the token sale on their platform, it is mandatory for them to come to an agreement with the project developer. The exchange then conducts a thorough and extensive review of the project using various conditions that authenticate IEO eligibility.
Once the exchange is satisfied and accepts the project, they will announce the date for the token sale and a fixed price per token.
All IEO participants must have an active and funded account wallet on the exchange platform. Binance Launchpad is very popular with IEOs with a flagship project that brought in $5.5 million in 18 minutes.
Cryptocurrency exchanges are strongly encouraged to check token issuers and offering quality due to the reputational risk involved. As a result, IEO exchanges develop fiduciary relationships with investors because they do what institutional investors have traditionally invested in.
Therefore, in IEO there is a lot of trust as developers partner with trusted exchanges. In this way, IEOs gain much-needed credibility. Binance has built a trusted name for itself in the crypto world since its launch in 2017. Bittrex Exchange canceled the IEO for the RAID project after discovering that they were apparently scammers.
Therefore, it shows that the exchange prioritizes user safety over profit. Exchanges are not prepared to help with scams because that would make a hole in their reputation. IEO is user friendly as investors only need to create an account on a specific exchange, fund their wallet and buy tokens once it goes live.
How to Participate
Participating in IEO is very easy. Users should first check if IEO will be offered. Once they find a viable project, they need to research which exchanges will participate and list on the exchange.
They also need to get their hands on the cryptocurrency that the IEO will accept and then wait for the crowdfunding event to start. Once live, users can buy the desired number of tokens.
Whether IEOs are a trend or are here to replace ICOs, only time will tell. Binance’s experience points to the fact that a new funding strategy has great potential and can shake the crypto industry. Several success stories have emerged with Fetch and BitTorrent IEO selling out in seconds.
With many leading exchange platforms starting to launch IEO products, all indicators point to the evolution of how crypto projects raise funds. The new model has potential and could help crypto projects get the necessary funding provided exchanges are diligent in their role.
However, users should always exercise caution and do thorough research before investing in any project no matter how secure or trustworthy it appears.