What is an Initial Exchange Offering – An Overview
Unlike Initial Coin Offerings (ICO), Initial Exchange Offerings (IEO) is administered by an exchange on behalf of the crypto startup that seeks to raise funds with its new coins.
As the coin sale is conducted on the exchange’s platform, issuers need to pay a fee along with a percentage of all the tokens sold during the EIO.
In return, the tokens of the startups are sold on the exchange’s platforms, and their coins are listed after the end of EIO.
As the cryptocurrency marketplace takes a percentage of the coins sold by the startup, the exchange is incentivized to help with the token issuer’s marketing process.
Initial Exchange Offerings (IEO) participants do not send contributions to a smart contract. Instead, they have to create an account on the exchange’s platform where the IEO is conducted.
The contributors then fund their wallets with coins and use those funds to buy company’s tokens.
History of Initial Exchange Offerings (IEO)
The series of consecutive ICO bans left crypto startups trying to find proven alternative solutions to raise funds for their projects.
Projects started to discover the new trend of Initial Exchange Offerings (IEO). This innovation enabled them to perform their fundraising process easily and with no fear of the law or the authorities.
Initial Exchange Offering (IEO) vs Initial Coin Offerings (ICO)
Initial exchange offerings are pretty the same as the ICOs but the coins are offered through an exchange, rather than offering them directly to investors. Also, tokens should be immediately tradeable on the exchange after the IEO.
Initial Exchange Offerings (IEO) vs Security Token Offerings (STO)
STO stands for Security Token Offering. As the name suggests, STOs sell securities. And most importantly, they are regulated.
Companies must abide by certain rules, and investors enjoy more safety. Also, because of higher requirements, Security Token Offerings (STO) are expensive to launch than ICOs.
IEOs are the latest to join the crypto fundraising family. Instead of a startup selling directly to investors, the coins are offered via an exchange.
The advantages include an ensured listing, access to the exchange’s database, and coin validation.
Impact of Initial Exchange Offerings on Crypto Exchanges
For investors and traders, IEOs are simple and easy. That’s one of the big advantages to them.
While with ICOs you had to look into when they would happen and how to participate – a complicated process -, with IEO you’re ready to participate from the start. Assuming the EIO is backed by an exchange platform you’re registered with; all you need to do is log in and purchase your cryptocurrency.
There’s no need to register using random sites or look into what payment methods the project accepts. If the exchange site accepts a payment type, the IEO will.
There’s only one thing you should keep in mind: There are a limited number of tokens on offer during IEOs.
This means that, for projects with high expectative, the IEO tokens might sell out within minutes.
There are also cases when an IEO is highly on-demand, where an exchange site might go down during the offer due to excessive traffic.
While serious cryptocurrency exchange platforms try to prepare for these kind of situations, they are often impossible to avoid.
Think of the Ticketmaster site, and when an iconic musical act announces a one off concert.
If it can happen to them, there is a higher chance that can happen to cryptocurrency exchanges.
Pros of Initial Exchange Offering (IEO)
One of the main advantages of IEOs is trust. As the crowd sale is conducted on a cryptocurrency exchange platform the counterparty screens every project that seeks to launch an IEO on its website.
Crypto exchanges do this to maintain their reputation by carefully checking the token issuers.
Therefore, IEOs can eliminate scam projects from raising funds via crypto exchange platforms, and it becomes much harder to scam investors with IEOs.
Token issuers do not have to worry about crowd sale security as the exchange is managing the IEO’s smart contract.
The KYC/AML process is also handled by the cryptocurrency exchange as most providers do KYC/AML on their customers after they finish creating their accounts. – KYC means Know Your Customer while AML stands for Anti-Money Laundering -.
Token issuer startups benefit from the more flawless process of launching IEOs on exchange platforms compared to doing their Initial Coin Offerings (ICO) by themselves.
While the fundraising organizations have to pay a small percentage for listing and tokens, the exchange will help them with the marketing part.
So, startups launching their IEOs require a lower marketing budget than if they decide to go with the other choice ICO.
Next, coin issuers can take advantage of the exchange’s customer base to receive more contributions to their future projects.
Cons of Initial Exchange Offerings (IEO)
As token listings are also “in the deal,” it is a natural process that the cryptocurrency exchange where the EIO is conducted lists the coin of the startup after the crowd sale is over.
While IEOs seems like a more secure and efficient alternative to ICOs, the costs associated with token sales can be high for startups.
Listing fees can go as high as 20 Bitcoin, while exchanges can even take a percentage from the coins of the fundraising startups.
Final Thoughts on Initial Exchange Offerings (IEO)
ICOs created a fundraising in 2017 and 2018. However, a significant percentage of the crypto projects were not 100% safe.
And because of this, as well as ICO bans, we can say that this is not an effective and proven fundraising model for cryptocurrency startups.
On the other side, IEOs provide an increased level of trust for cryptocurrency projects, because the exchanges hosting the crowd sales actively participate in the fundraising process, which improves the efficiency of the sale.
Therefore, IEOs have the potential of becoming the standard model for raising funds in the crypto space.
In simple words, IEOs could create all-win situations for the projects, the exchanges, and investors.
However, as Initial Exchange Offerings (IEO) is still on its early stages, legal authorities need to step in to help make the all-win outcome happen.