If you’re looking for information on IEOs, you’ve come to the right place. Our guide will walk you through the basics of what an IEO is, the pros and cons, and the importance of using a trusted exchange.
What is an IEO?
The abbreviation IEO refers to an Initial Exchange Offering and at its core it is the same as an Initial Coin Offering (ICO) but done on the website of a cryptocurrency exchange, which acts as a middle-man who conducts the sale. In a typical ICO, new digital currency is sold to the public at a discounted price with the purpose of raising money for a new project. In an IEO everything takes place at the website of the exchange and the exchange sells the tokens of the project, while keeping a small percentage of them.
IEOs are thought to be the next new thing after ICOs, which have stopped being as appealing to investors because of the big number of scams and failed projects and the lack of credibility of the ICOs. Cryptocurrency exchange Binance has been very influential in the rise of IEOs since it supported projects such as BitTorrent Inc. and Fetch.AI that raised $7.2m and $6m respectively in a matter of seconds.
The most important aspect of an IEO is that the exchange is at the forefront, whereas in the ICOs the exchanges do not take any part in the process. In an IEO it is the exchange that does the promotion and marketing, manages the smart contracts of the IEO, and ensures the sale is legally compliant and handles all of the KYC/AML process. As will be explained in relation to the following questions, this is a promising scheme that stands to benefit all three parties involved (exchanges, project, investors).
What are the benefits of IEOs?
There are many benefits of IEOs in comparison to ICOs, which has been the reason why they are becoming increasingly popular. The benefits for the three different parties that participate will be considered separately.
Firstly, the investors benefit from IEOs because of the increased trust and security compared to ICOs. The fact the crypto exchanges are involved makes a huge difference because this means that in order to maintain a good reputation all exchanges will carefully vet all the projects willing to launch IEOs. Because the exchange also stands to benefit or lose from an IEO, many exchanges tend to set high criteria for upcoming funding rounds in order to ensure that the IEO will be a success. This means that more trust is injected in IEOs and the frequent ICO scams are very likely to be diminished, which is very positive for investors. Moreover, it is easier for investors to participate in IEOs since they don’t need to manage transactions with different wallets as an account on the exchange is sufficient to participate in the IEO; all they have to do is visit an IEO list and see which projects are launching on their preferred exchange. Also, the investor gets a token listing on the exchange with immediate liquidity and can pay for the tokens in the IEO through other means such as BTC or even altcoins.
The projects also stand to benefit from IEOs since the preparation and marketing process becomes much easier. This is because the crowdfunding happens on the exchange’s platform and the platform undertakes all of the promotion/marketing, which makes recognition of the project easier. This is one of the issues with ICOs, since there are many scams and it is difficult to create a project that will be recognized and raise a lot of funds. This would ordinarily take a lot of money for marketing reasons, however in the case of IEOs this is not necessary since all of the work is done by the exchange. Moreover, the KYC/AML process and everything related to making the sale legitimate does not have to be done by the project but by the exchange. Also, an advantage for projects doing IEOs is that they will definitely be listed on the exchange, which is an increasingly difficult task when the amount of digital currencies becomes greater. The projects gain legitimacy from the exchange that performs the IEO, which would be very difficult and expensive to get through other means.
Lastly, the exchanges also benefit from IEOs since it gives them another source of profit. Exchanges always take a commission of the tokens sold and a listing fee. Moreover, if the project becomes very successful, those owning these tokens are very likely to use that exchange too. Moreover, exchanges will start to develop a reputation for the IEOs they do and the quality of the projects involved and this is a chance for exchanges to expand and gain more exposure increasing their number of clients.
What are the disadvantages of IEOs?
Firstly, while the risk is arguably diminished for investors, it is the investors that are in the most precarious position. For example, EXMO who launched an IEO said that their due diligence on projects is the same as that done for coins after ICOs. Therefore, an aspect that has been criticized by analysts is that IEOs are “eerily similar” to ICOs and scams will continue to take place. It is unclear the extent to which scams will decrease, however that will become clear as more IEOs take place. The early successes in the Binance platform have made investors grow in confidence, but there is still uncertainty.
For projects, while the exchange can help boost their credibility it can also do the opposite. An exchange that does not have a good reputation and has done IEOs that failed or were scams is not likely to help a project gain credibility. Therefore, this is a double-edged sword that can also damage projects, and these projects greatly depend on the exchange to market and give legitimacy to the IEO. Moreover, if projects seek to launch an IEO on a very well-recognized exchange, the exchange is likely to set very high requirements and will accept very few projects that are not scams and are likely to bring new clients for the exchange. Thus, it remains difficult for startups to get promoted and gain a good reputation. While some argue that IEOs make starting your own project less expensive, it is true that there are still many expenses involved such as paying the exchange a listing fee and giving them a significant percentage of the tokens sold.
While exchanges will want to vet all the projects and ensure they are legitimate before launching an IEO with them, there are many less predictable factors involved that can affect success such as the market situation. This can be a problem since there might be failed IEOs without any mistake being done by the exchange, however this will adversely affect the reputation of the exchange. Exchanges depend on the coin doing well after its launch on getting more credibility, which can be quite uncertain and unpredictable.
Why should founders do IEOs on trusted exchanges only?
As previously explained, the success of an IEO greatly depends on the exchange for multiple reasons. Firstly, most of the marketing/promotional aspect of the project is done by the exchange since the whole sale happens on the platform of the exchange. The KYC/AML process is also done by the exchange and the founders have to depend on the already existing clients of the exchange to invest in the project. If the exchange is not trusted this might mean that it won’t bring legitimacy and credibility to the IEO and this might dissuade investors from putting money into the IEO. Also, all of the funds spent by investors have to go through the exchange, therefore the exchange has to be trusted to handle the funds and not commit fraud.
As mentioned above, if the exchange is trusted, this means that the founder’s project will be considered trustworthy by the clients of the exchange and this can boost the revenue of the IEO. It is important to choose trusted exchanges because the opposite effect is also possible. The IEO’s success depends on a good partnership between a legitimate exchange and a new and promising coin, both are necessary for success in this case.
If you are ready to launch your IEO, follow up this article by reading our Quick guide to IEO marketing and running an IEO to plan your next steps.