the ICOhas been the king of fundraising for crypto projects for years. But his days are numbered. Thanks to regulators, particularly those in the United States, who felt the funding method circumvented the normal requirements to sell a security, they have heavily criticized the ICO. But while one funding mechanism is out of order, many others have sprung up in its place. One of them is the initial exchange offer.
We explore what IEOs are, who is using them, and the pros and cons of this latest funding tool.
What is an initial exchange offer?
An Initial Exchange Offering or IEO is an evolution of the Initial Coin Offering or ICO. While anyone in the world can start and participate in an ICO, the IEO is more restricted. In an IEO, a
centralized exchange it serves as a platform for the initial sale of a project’s tokens.
This small but significant difference between ICOs and IEOs means that exchanges act as inspectors, curators and gatekeepers for projects that want to sell their tokens to the public. Having an exchange that serves as a mediator between the buyer and seller of tokens should ideally reduce the rampant fraud and scams that have plagued ICOs in the past.
There are other forms of crypto crowdfunding that Decrypt has covered besides the ICO, such as the Security Token Offering or STO and the token generation event, but for the sake of simplicity, we will focus on comparing the IEO to the ICO in this article. What all of these initial offerings have in common is that they create a set amount of crypto assets in the form of a token or coin to sell to the public, usually at a fixed price. The IEO is unique in that the sale of these initial tokens is managed by an existing crypto-asset exchange rather than directly by the project team.
did you know
Ethereum is by far the most used platform for launching ICOs. The vast majority of the value generated by ICOs has been built on the Ethereum network.
Who invented the initial exchange offer?
The first major exchange to offer the IEO and popularize the practice was Binance through its IEO platform called Binance Launchpad. However, even Binance founder Changpeng Zhao (also known as CZ) admits that they did not invent the concept or the term and were inspired by the “centralized ICO” websites that were popular in 2017.
A brief history
- June 2017, the amount of money raised by ICOs surpassed angel and seed venture capital funding for the first time.
- In February 2018, the United States Securities and Exchange Commission (SEC) began sending subpoenas to the teams behind ICOs that were believed to be fraudulent or illegal, signaling the end of the ICO fashion.
- January 2019, Binance launches its first IEO, the sale of BitTorrent Tokens (BTT), which sold out in less than 15 minutes and raised over $7.1 million.
did you know
Of the best-funded crowdfunding projects in history, ICOs dominate; occupying 17 of the top 20 positions, including the three most funded projects.
What’s so special about it?
The IEO is an attempt to revive the success of the highly effective funding mechanism of ICOs, but with more restrictions and higher standards.
Initial exchange offer Advantages
- More legitimacy because projects are vetted by an external party, which should reduce the chances of a project being a fraud or scam.
- Faster and more streamlined experience for both IEO project teams and participants.
- Marketing to an exchange’s existing user base gives the IEO project more exposure to a larger audience.
- Exchange of legal resources, structure and orientation of established exchanges to project teams
What else is different?
The IEO is managed by a central authority, the exchange, which can be seen as contrary to the decentralized and peer-to-peer principles that blockchain technologies were based on.
Initial exchange offer Disadvantages
- Exchanges charge fees because they provide services such as a trading platform, legitimacy, marketing, advice, and legal protection.
- Exchanges can list or remove a project anytime they want.
- Participants are limited to those who are willing to register on the exchange, while ICO participants are unrestricted.
How are IEOs created?
Any blockchain project team that wants to raise funds in exchange for tokens can apply to an exchange that has an IEO platform. Popular exchanges currently running IEOs are Huobi and Binance. Each platform has its own review process, requirements, and fees.
How do you participate in an IEO?
All exchanges that offer IEOs require you to register or create an account on their platform. Exchanges will also require users to complete Know-Your-Customer (KYC) account verification before participating in an IEO. Finally, many exchanges require you to use their own native tokens in order to participate. For example, Binance requires users to use the binary coin (BNB) and Huobi requires users to use Huobi Token (HT) to purchase tokens during an IEO.
What can be done with an IEO?
Once you are registered, verified, and have the platform tokens, you are ready to purchase crypto assets through an initial exchange offering. Binance allows users to buy tokens on a first-come, first-served basis until the initial supply runs out. Huobi requires users to hold their Huobi Token (HT) for a certain period of time, so the more HT you have, the more IEO tokens you can buy. After the sale is over, you can freely trade your newly acquired tokens on the same exchange.
IEOs are another crypto fad or a sign that the ecosystem is maturing. Hopefully it’s the latter, and that the industry is developing desperately needed improvements to standards and user experience that will spark a new wave of interest from investors and consumers.
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