An Initial Exchange Offering (IEO) is a fundraising mechanism and a variation of ICOs where tokens for sale are sold and distributed through cryptocurrency exchanges. With the proliferation of scams in the cryptocurrency space, IEOs aim to provide a safer space for investors to invest in promising projects. This is different from STOs in that it is does not involve the type of regulation that would need to be followed by security tokens, but it is still more regulated than ICOs due to its placement on exchanges.
Main Differences Between ICOs and IEOs
ICOs and IEOs are very similar in what they do: they are both processes through which projects can sell their native tokens to interested parties or investors. The biggest difference lies in how the tokens are distributed. Instead of being sold directly from the developer of the project through smart contracts, an exchange or multiple exchanges become the distributors of these tokens in an IEO. To put it simply, an IEO is an ICO that involves one or more exchanges who act as middlemen to facilitate the transactions.
To purchase tokens during an IEO, potential investors have to register on the exchange, transfer funds to the account, then purchase coins through the exchange when the token sale becomes live.
Benefits of IEOs
Safer Investments – Since the success of the IEOs directly impacts the reputation of the exchange, the exchange is incentivized to provide reliable investment opportunities for their customers. This means that investing in projects through IEOs is much more secure than ICOs as all projects would be pre-vetted by the exchange.
Efficient Transactions – Having IEOs go through exchanges streamlines the process of exchanging value for tokens. Investors will only have to sign up and go through KYC once to invest in multiple projects.
Wider Audience – IEOs can be a great tool for projects to reach investors that they wouldn’t otherwise have access to. Since exchanges will already have a community of trusting cryptocurrency users, this widen’s the audience that projects can reach and supplies a comparatively educated customer base that can provide a solid foundation for new cryptocurrency businesses.
AML/KYC Verification – Because all transactions will be handled by the exchange, the exchanges will also be tasked with completing AML/KYC verification for all investors. This streamlines the process for cryptocurrency projects, ensuring that all buyers are verified and trustworthy.
Automatic Exchange Listing – Having a token listed on an exchange can be quite expensive and a long process for new projects. Through an IEO, tokens will be automatically listed on an exchange, which cuts down cost and can also stimulate the token economy of the project which is essential to its growth.
Credibility – IEOs run through reputable exchanges can instantly boost the credibility of the involved projects.
Attracting New Users – Many cryptocurrency projects will have amassed a dedicated following prior to their funding campaigns. Through IEOs, exchanges can also gain access to new users who will have to go through the exchange to invest in these projects.
Strengthen Reputation – If an exchange is able to show a proven track record of raising funds for successful projects, this can help strengthen their place as a leader in the IEO and cryptocurrency space.
Revenue Stream – Exchanges are supported by fees, whether that is trading fees, listing fees or other fees. Hosting IEOs provides an additional avenue to generate income through IEO fees from startups and increase trading activities on the exchange platform.
Disadvantages of IEOs
With the advantages that come with IEOs comes extra work for the exchange to vet projects and a higher cost that has to be absorbed by the project. This can be unrealistic for cryptocurrency startups that haven’t raised any money yet.
For exchanges, hosting IEOs poses the risk of an external project damaging the reputation of the exchange by association. While exchanges will always do their due diligence and carefully vet these companies, the exchange won’t have control over the direction of the project after the decision to manage the IEO is confirmed.
Lastly, exchanges have historically been vulnerable to issues relating to centralization, especially when it comes to security and the ownership of tokens. Because these transactions will go through the exchange, the token transactions are not recorded on the blockchain and the investors do not actually own these tokens. This would be especially alarming if the exchange were to suffer from an attack or data breach.
Initial exchange offering is still a new concept but it undoubtedly provides a novel fundraising process that solve some of the existent problems in ICOs. Whether it is streamlining fundraising campaigns, providing more secure transactions or finding a mutually beneficial relationship between exchanges and projects, IEOs can be a promising solution to new cryptocurrency projects.