In 2018, the alternative for Initial Coin Offering (ICO) appeared, called Initial Exchange Offerings (IEO). A basic difference between these two methods of bringing investments is covered within the key role of crypto exchange that engages in the selection of promising and viable projects based on its own opinion.
At ICO, the listing of tokens on crypto exchanges may not immediately come out. It may actually take a few months for the actual completion of token-sales. For IEO, crypto exchange was initially the key partner of alternative token-sale organizer. IEO produced the tokens and sent them over to a crypto exchange. Following this, IEO distributes digital assets among the interested investors, to verified users of a marketplace.
Instead of facilities for the ICO investor on a smart-contract, an IEO participant must register and thereafter get verified through an exchange. The investor must transfer funds to an account and only after the start of token sales, can they purchase coins at the exchange.
An agreement between an exchange and organizer IEO will need to be on several terms. These terms include the maximum volume of token sales for one investor, a certain cost being met for an asset, percentage of profit from sales, a fixed amount of money for trading, distribution of expenses for marketing, etc.
Why Do We Need IEO If We Already Have ICO?
The sphere of Initial Coin Offering (ICO) has been swiftly developing during the last few years, however by the end of 2018, everything came to a standstill point. We can’t say that interest for ICO has faded away completely, but the picture is completely different today than what it was at the end of 2017 when in one day a good 50 − 60 new ICOs were being conducted.
According to research by Statis Group, this is partly related to the fact that nearly 80% of ICO projects were actually a scam. They attracted a tenth of all investors’ funds in total (from the $11.9 billion collected in 2017, $1.34 billion went into the scammers’ pockets). Since there was no legal code of action in store for such scams in most countries, investors remained unprotected from such scammers.
As such, interest in IEO started growing. The need for financing hasn’t disappeared and current projects are being dealt with in two ways. Firstly, through private placements - when a project collects the necessary sum in a private mode. A prime example of this would be the Telegram and it implies a high interest for a project. The second approach involves an agreement with crypto exchanges about the initial placing on a crypto exchange or IEO.
IEO offers an easier approach to participate in purchasing tokens compared to ICO.
Which Companies Conduct IEO?
Only a few crypto exchanges offer IEO services, among them are Binance, EXMO, GBE and OKcoin.
Recently, the largest cryptocurrency exchange, Binance restarted a platform for token-sales called Launchpad. This platform initially started in August 2017. Within a few seconds of opening, Launchpad conducted IEO token-sales for BREAD ($6 million) and GIFTO ($3.4 million). The success of a project Fetch.Al became the main sensational news by the end of February 2019, which collected $6 million on Binance. Before that, within 18 minutes, there was a full sell out of all volumes of BitTorrent tokens for around $7.2 million.
EXMO cryptocurrency platform launched IEO in February 2019. The first project-partner on April 1st, 2019 will be the universal mobile crypto-wallet Paytomat, it would also be the first Eastern European IEO project. Taking into account a quality audit with a high level of trust on the coins exchange (there was not a single delisting), there was a huge level of interest garnered among the market participants.
As there is a wide range of currencies or flat money available (USD, EUR, RUB, TRY, UAH, PLN) and several methods for payment, once the sale of tokens takes place, projects can withdraw their fiat money and investors can acquire tokens with fiat funds.
Seven token-sales have already been conducted by the Gibraltar Blockchain Exchange (GBE). An instrument is named as GBX Grid - Token Launch Centre. OK Group invested more than $100 million in the creation of a company on bringing in of capital for startup projects; projects that closely worked with the leading funds of digital assets within the industry.
For global news, authorities in Paraguay are planning to join the South Korean company Commons Foundation to conduct IEO. Tools are attracted to building the "largest in the world" data-center for mining cryptocurrencies. Commons Foundation promises the investors they will pay in tokens with MicroBitcoin having a 30% profit from mining and 70% from the daily profit of a crypto exchange.
What Makes IEO Attractive To Investors?
An exchange takes potential projects and estimates their investment attractiveness, the viability of the developed goods, risks involved, the position in the market, etc. When a marketplace takes reputation risks on itself, this increases the level of trust from investors.
ICO began private suggestions for coins and made it accessible mainly to large investors. Whereas IEO made the process of investing in digital assets more open to all kinds of investors, allowing for a wider range of participants.
If an exchange on which IEO is conducted is centralized, then the probability of "gas wars" starting is eliminated. When the participants of token-sales compete with each other, limits are set higher. The speed at which transactions take place increases and there is a higher rush to purchase tokens.
What Advantages Does IEO Have For Exchangers And Organizers?
With ICOs, the counter-party is the developer, but with IEOs, the counter-party is the exchange. The main advantage of IEO for organizers is a prepared base for potential participants from the huge amount of users exchanging an IEO. This leads to a reduction of expenses in marketing.
Not only is a crypto exchange doing the marketing, but organizers of IEO are also engaged in the marketing process. This only saves tools but also creates the effect of synergy, an advancement of tokens being sent out to the market.
The main source of profit for exchanges is trading commissions. The more users and coins there are in a listing, the more transactions take place, and so a higher profit is attained from commissions. IEO on its own platform gives an opportunity to attract new users and to offer exclusive coins that are not present in other markets. All of this increases trade turnovers and profit.
For ICO, listing on crypto exchange is the next logical step after completion of token-sales. A procedure of listing is often attended with large and temporal expenses. There are no guarantees that a coin will quickly appear on a popular exchange and will become liquid.
IEO optimizes the process of token return in a marketplace. Right after the completion of a campaign, an asset becomes more or less liquid, because as a rule, it appears in a listing of a large crypto exchange.
This method of bringing in tools is mutually beneficial for crypto exchanges and for the issuers of tokens. In spite of the considerable expenses involved for organizers, IEO is increasing the chances of success for projects with long-term prospects.
What Are The Disadvantages Of IEO?
There is nothing free in the world, tokens included. The issuers of tokens will have to pay considerable sums for putting up listings, this will differ depending on the different exchanges. A marketplace can demand a certain percentage from the amount of money collected.
The main expenses in marketing lie on the shoulders of those starting up and those distributing tokens by means of IEO. These charges aren’t small, just the mere lump sum without ceremony can reach $100 thousand or more.
Those working with crypto exchange need to be skilled technically, they should be capable of estimating the long-term potential for projects and be prepared for the possible losses that may occur in their business models. It can imply high expenses in regards to the remuneration of labour. In case of a campaign failure, the crypto exchange carries considerable reputation risks as well.
Only those with verified accounts on the exchange can participate in IEO, not just any interested individual. In addition, most exchanges are on centralized grounds. Users have to trust the blockchain-activities handed by the third party, which is also related to the risks of failure and hacker attacks.
Some experts are sure that generally speaking, IEO is only a temporary alternative to ICO. A more permanent alternative will soon be necessary.