Humble Beginnings: The ICO
Perhaps the best way to begin to understand IEOs is to take a look at the Initial Coin Offering (or ICO).
ICOs provide a means to fund new blockchain-based projects without having to deal with regulation or other intermediaries such as banks, VCs, and stock exchanges.
Companies put together a white paper detailing how the product or service would work as well as put together a marketing website to share and promote additional information about the project itself, the token/coin being offered, and other relevant information to solicit investment.
They could then crowdfund to raise money (oftentimes by accepting Bitcoin and/or Ether) and offer investors a specified amount of the cryptocurrency or token in return. The investors in these scenarios would anticipate the new token seeing success, which would raise the value of the tokens they’d already received.
The drawbacks of ICOs
On the investor side of the equation, ICOs present potential issues. The most glaring of these is that companies aren’t held responsible for actually completing the projects that they lay out– and even if they do, it’s impossible to know that their efforts will result in success.
ICOs aren’t registered or regulated. Those who want legal protection against scams or in the case of loss will be hard-pressed to find it if they’ve invested in an ICO. You’re investing based on speculation and hope rather than proof of output– and you have no way of knowing for sure whether the people you’re giving your money to are trustworthy. Although sophisticated investors will perform due diligence and are therefore less likely to be scammed, the less-sophisticated investor may not be able to decipher a legit project vs one that is a scam.
The Shift Towards IEOs
Glancing over the disadvantages of ICOs makes one thing obvious: a better option would be ideal. This is how IEOs managed to emerge– they’re intended to serve as an improvement to the traditional ICO while bringing some new benefits to the table, too. Even though they aren’t the perfect solution, IEOs present several notable advantages over ICOs.
What are Initial Exchange Offerings (IEOs)?
IEOs can be simplified considerably into one concise definition: they’re ICOs run through exchanges (such as Binance). These exchanges are platforms that allow users to buy and sell digital currencies for traditional ones (like dollars, pounds, and euros). Some exchanges are private and invite-only, while others are public.
In the case of IEOs, exchanges serve as intermediaries which conduct the actual sale. Rather than developers sending over their new crypto tokens to investors in exchange for funds, they send their tokens to the exchange. The exchange will, in turn, provide those tokens for sale to individual contributors.
What are the benefits of IEOs?
There are a number of benefits that IEOs present to both businesses and the individuals looking to help fund their efforts. Exchanges are heavily incentivized to do their part in ensuring that the projects they host are legitimate. Their reputation could be at stake if they host a token sale for a project that fails or winds up being untrustworthy.
Exchanges work hard to ensure the sales they host trace back to legitimate companies with bright prospects for the future. There’s no technical guarantee that tokens sold through exchanges will wind up being profitable (or that a buyer will even make back what they pay), but there’s a greater likelihood of a positive outcome than there is when you place blind trust in a company.
Token issuers appreciate the IEO model for the access it affords them to an audience who’s already interested in what they’re selling. When these companies partner up with an exchange, they gain access to that exchange’s existing userbase– they’re displaying their token to individuals who fall perfectly within their target market.
Another key benefit of the IEO is the speed with which transactions can be conducted. Centralized exchanges’ speed far eclipse that of previous decentralized options like the Ethereum network (which is where most ICOs were launched from). What was once a laborious and frustrating process has become a simple transaction by comparison.
The disadvantages of IEOs
While IEOs are widely considered a tremendous improvement over their predecessors, they aren’t without their drawbacks. Nothing comes to us for free– and the companies who issue tokens have to pay the price for the numerous benefits that IEOs present. ICOs never involved fees (outside of network fees such as Ether’s Gas Price), but working through exchanges to sell IEOs does. Some exchanges collect as much as 10% of the funds a campaign raises. Buyers, too, often wind up paying fees that can add up quickly if they aren’t careful.
Almost every exchange requires KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures and account verification processes. This means that companies looking to fund their token offerings wind up spending extra time playing a waiting game. Businesses looking to sell through multiple exchanges or switch up the exchange they’re using could be in for a much longer wait than they anticipate before their sale launches.
On the whole, a majority of analysts, consumers, and token-offering businesses see IEOs as a notable improvement over ICOs. The process is far from perfect– exchanges are free to push for aggravating fees, branching out to other exchanges is a time-intensive effort, and there’s still no way for investors to be certain they’re making profitable choices. With all of that in mind, one can’t overlook the benefits that IEOs provide.
When you take part in an IEO, you get the excitement and uncertainty of participating in the fundraising that builds the foundation of the crypto space. No investment is guaranteed to work in anybody’s favor, but token creators and investors alike can rest much more easily at night knowing their transactions are protected and vetted.