Ever since Mastercoin launched the first one in 2013, initial coin offerings were all the rage in the crypto world. Basically, all you had to do to start one was create a smart contract that defined the terms of your token, write a white paper, and offer your tokens to the market.
While following this way of launching a cryptocurrency resulted in several positive and successful projects (Ethereum, the “father” of most modern crypto projects, was started through a ICO), we certainly saw a significant number of horror stories emerge as a result of the practice.
Many successful cryptocurrency endeavors failed to get off the ground because they couldn’t gather enough people willing to invest in their idea. This lack of investment was mainly due to the project team not having enough start-up capital to pay for marketing and listings, two expenses that typically end up costing millions of dollars.
According to Autonomous Research, ICO issuers typically need to shell out between $1 million and $3 million to get their token listed on a major exchange.
Another problem closely related to ICOs is the number of projects that managed to receive funding but ultimately turned out to be complete scams. A to study conducted by the Satis Group determined that approximately 80% of ICO projects are scams, with fake projects attracting around a tenth of all funds invested. Due to a general lack of regulation, these fraudulent schemes muddied the ICO waters so much that the trend slowed down significantly in 2018/2019.
All of this made navigating the ICO space quite difficult for both successful projects and their potential investors, due to not having many collaterals or securities to protect their interests.
Fed up with the negatives and uncertainty, parts of the community turned to a new project financing model called initial exchange offer (OEI). Today we are going to take a closer look at what IEOs really are and how/if they are really better than ICOs.
What is IEO?
IEOs are a new form of crypto financing that has become increasingly popular lately. What this practice does is introduce a crypto exchange into a project’s fundraising effort in a much more direct, centralized, and practical way.
The exchange essentially becomes the counterparty in the entire token launch process (whereas with ICOs, the counterparty was the development team behind the token), allowing crypto projects to raise funds directly on the platform.
The tokens sold in an IEO are distributed to investors by the exchange itself, unlike ICOs where the developers are in charge of this activity. During ICOs, the development team will need to create their tokens and distribute them to those who buy them (investors, exchanges, etc.). With IEO, a single exchange takes this burden on itself; After the developers mint the tokens, the coin is sent to the exchange, which then does the sale/distribution.
Investors do not need to send crypto to the developers’ smart contract to get their tokens. The purchase can be completed through your existing exchange accounts. You will need to have an account on the exchange (probably KYC and AML verified) and any cryptocurrency that the exchange accepts for the IEO token; Once the exchange announces the IEO date, you will have the opportunity to bid on your own tokens.
Before selling a token, the exchange will thoroughly examine and investigate the project. This is done to confirm, among other things, that the token has a proper use case and good developers who will not walk away from the scam and throw their bags at initial investors.
Naturally, exchanges do not perform these services out of the goodness of their hearts. The terms of the compensation are usually a secret between the project and the exchange, but it is fair to assume that a certain portion is paid in the token that is listed. This ensures that the exchange has a vested interest in the success of the IEO and will do whatever it can to make that a reality.
IEOs bring a host of interesting considerations for everyone involved. To begin with, the Project:
- You get easy access to a large base of potential investors
- Get help with token distribution
- You can be sure that the investors are real and trustworthy people.
- You get a vote of confidence by being officially endorsed by a major exchange and a marketing boost by being promoted on the exchange’s social media.
- It will be listed immediately after the IEO, meaning there will certainly be no token illiquidity in the market. This can be a potential issue as pre-IEO investors could start selling their tokens (as we saw with Fetch.ai, BTT and other Binance Launchpad projects)
On the other hand, the exchange:
- Get paid for hosting and organizing the token sale, as well as for listing the token
- Higher volume of transactions on the platform since the new listing
- Potentially increased user base as new users join, looking to invest in the IEO
- It allows the exchange to drill down into the project to determine if it is fraudulent or not before listing it.
- Potentially higher reputation if the project actually succeeds in the long run
Finally, the investors they have their own set of benefits:
- Easy access to new and upcoming cryptocurrency projects
- You can choose to trust the exchange that the project is not a scam; alternatively, they can refer to the exchange’s research data which is usually made public prior to the IEO
- You can easily trade the tokens after they are listed on the exchange
How to participate in an IEO
The process is quite simple:
- Find a project willing to do an IEO. This will be announced on the social networks/websites of the project/exchange.
- See which exchanges will participate in the IEO. The project may decide to go with a single exchange or eventually more of them; this so far has not happened yet.
- Register with the exchange and complete your KYC/AML records.
- Find out what cryptocurrency you will need to buy the tokens.
- Know the date your IEO starts and bid on your tokens when the time comes.
There may be some slight variations in the process from project to project and exchange to exchange but, for the most part, things should follow the pattern mentioned above.
History/Future of IEOs
First IEO Director the exchange was Binance who opened his token Launch pad service sometime in 2017. The Bread ($6 million) and Gifto ($3.4 million) token sales were the first projects to jump off the Launchpad, and were followed by the recent MTB, Search.ai Y Red Celer token throws.
The exchange primarily accepts its own utility token BNB as a means of payment for these IEO tokens; there are plans to launch additional projects in the future, so stock up on BNB and keep an eye out for future announcements if you’re interested in a piece of those Binance Launchpad giveaways.
Other exchanges followed suit, launching their own token startup efforts soon after. Bittrex tried to launch its first token in mid-March 2019, but unforeseen project behavior caused the IEO to get cancelled.
Bitmax It recently introduced its Launchpad program by introducing DOS, a decentralized Oracle service, to its investors. Cryptocurrency exchange based in Malta OKEx announced his own program called Accept jump startone that will aim to incubate high-potential projects and support early entrepreneurs.
EXMO The cryptocurrency platform launched an IEO in February 2019 and chose Paytomat as its first partner project. KuCoin Featured Y first huobi are among other major Launchpad projects that were recently confirmed.
Should you, the investor, participate in an IEO?
No one can really give you a straight answer to this question. IEOs introduce a centralized layer of monitoring and security that is not present with ICOs. Some investors might appreciate that new form of trust; others may find it intrusive and “not in the spirit of cryptography”.
Ultimately, the benefits this model has over classic ICOs seem to significantly outweigh the negatives, when it comes to token launch projects and exchanges. This means that very soon you may not even have a choice and be forced to go with the flow and accept IEO, if you want to get in early on that potential 100x token.
This is probably not too bad, as the new format could help restore some of the trust that people lost in cryptocurrencies due to ICOs. Who knows, we might even end up with a new uptrend thanks to the initial swap offerings.
CaptainAltcoin writers and guest post authors may or may not have a personal interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice or a substitute for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com