Fundraising methods already existed of various kinds, so what was the need for the new method and what is special about it?
Every new project, cryptocurrency or platform for crypto operations, like an exchange or a completely new blockchain network, needs funds. After the presentation of the prototype showing the operation of the project, there is a need for capital for further development and operations. Capital can be generated from different sources and by various methods.
Methods include financing by venture capitalists, initial coin offerings, or listening to the company. Of them, ICOs or initial coin offerings have been a prominent fundraising practice in use. Many well-known cryptocurrencies and projects that we see today use the same method to raise capital.
But now, it seems that initial coin offerings are losing their appeal lately, and many crypto projects are choosing the initial exchange offering fundraising method. This acceptance of the second over the first lies in the flaws and inconveniences in ICO, which seems fulfilled in IEO.
What is an Initial Exchange Offering (ICO)?
An ICO, for startups or projects seeking capital, is a way to sell project utility tokens that grant status with the company through a major cryptocurrency exchange.
Since the exchange is between, which handles the funding and makes sure to evaluate the processes where the white paper of the projects is inspected, and they provide genuine and massive publicity to the project. Those are the reasons that add value in the IEO process, and investors find those platforms, which provide the facility, that is, exchanges that allow offers, more attractive.
Why IEO is more advanced than ICO
Some similarities in its operation, in an IEO, a company also puts its token up for sale to generate funds. But this method provides more security and ease in the fundraising process for both the investor and the project that raises funds. The main difference from IEO is that a cryptocurrency exchange monitors the sales of tokens.
An example of a platform that takes advantage of the exchange offer facility is Binance. The largest crypto exchange has a Binance Launchpad trading platform to offer innovations and attract CEOs to the market. Since its launch, the platform has helped many blockchain projects raise capital.
How the OIE works
Exchanges that provide a platform for fundraising projects have some eligibility criteria and checkpoints that must be met before starting an offer. Verification helps reduce the risks of any fundraising scams or traps.
The exchange has this responsibility to make sure that a project is genuine and complies with all aspects from the technical point of view to its operation and management, everything. To launch an IEO, a project seeks to generate capital and new fame in the market, but the platform puts its brand value at risk by posting an offer.
After checking all the boxes for a project’s eligibility for fundraising, the exchange also has a responsibility to make sure that genuine investors participate in the fundraising. Investors have to go through some measure of KYC (know your customer) and AML (anti-money laundering) certifications. Investors share every detail to ensure transparency about the project before they put up their money.
IEO can be hugely successful if a project can generate enough enthusiasm. For example, BitTorrent, an internet protocol project, when it went for an IEO, managed to raise $7 million in just 14 minutes. He used the Binance Launchpad platform for the sake of the offering.
Positive aspects of the IEO process
Reviewing the details of how the IEO works, it is already clear that it is relatively better than other fundraising methods. But let’s talk about the real benefits of initial trade offers.
IEO provides a more interactive and user-friendly experience to participants, whether they are projects or investors. It is because IEO platforms work and are better designed than others. Investors feel safer with this type of method as all the formalities to verify the program are genuine and trustworthy. And exchanges provide much more support, from organizing the fundraising program to marketing and public projects.
However, when you dig deeper and look at the details, you will also get some disadvantages in the method. First, projects must pay a percentage of their capital raised as listing fees or exchange commission. Exchanges also sometimes get lost and cut corners when researching or verifying a project’s eligibility, which can result in fraud or loss for investors. And lastly, you can most likely get a lot of money when offering a project, but it can turn into a pump and dump scheme. Therefore, it is important to do your research before participating in an initial exchange offer.