While
general consensus about ICO is that the days of ICO (Initial Coin Offering) are
over post 2018 crash, IEO (Initial Exchange Offering) is generating similar
kind of buzz wave. I can see lot of co-relation
between ICO & IEO when it comes to FOMO, interest, price manipulation etc.
Major difference between IEO & ICO is IEO is supported by an exchange while
ICO has to get listed on an exchange. Due to ICOs performing really bad in 2018
mainly due to lack of liquidity IEO does covers that portion rally well. While there
are only handful IEOs executed, results are very encouraging for initial buyers
with returns resonating to ICOs in early days. I expect it to follow the same
hype cycle of ICOs but on a relatively smaller scale.
Let’s
cover this more in detail.
What
is an IEO?
Initial
exchange offering is administered or conducted on the platform of a digital
exchange also called cryptocurrency exchange on behalf of the startup that
looks for funds for its newly issued tokens.
While
ICOs generally use their own website or 3rd party tools to conduct the
token sale process which isn’t link to exchange. Post-sale, exchanges get involved
where they determine if they want to list the token or not. Through IEO, exchange
listing risk is mitigated.
This
facilitation however come with a price tag which is either a fix fee or percentage
or combination of both depending on the arrangement between token issuer &
exchange they’re using. Generally the fee structure varies from 50k USD to 500k
in fixcost plus 5-10% of the total sale.
With
struggling exchange business, this can provide much relief to their operations
if done correctly however they won’t like to conduct lot of them to keep the
scarcity.
How
are IEO and ICO different?
While
I’ve mentioned the major difference between ICO & IEO, here are the fine prints
- In case of ICO, fundraising is conducted at the
token issuer’s website while IEO makes use of the platform of the digital
exchange that conducts the token sale.
- The crowd sale counterparty for ICO is the
project developer but in IEO, it is the cryptocurrency exchange.
- The smart contract is managed by the company or
startup conducting the token sale for ICO and in case of IEO; it is the cryptocurrency
exchange that manages the smart contract.
- In ICOs, the marketing budget needed by
fundraising companies is significantly high. The project would have to invest
many resources to get the attention of the public and investors. In Initial
Exchange Offering, the marketing budget is relatively low as the exchange
actively markets the tokens of the startup.
- There is no screening required before a startup
can launch an ICO but is required in IEO and the exchange screen the company
before it allows it to fundraise on its platform.
- Another difference is that only after the
funding gets completed, ICOs mint their token while tokens are generated by the
project and sent to the exchange platform in case of IEO.
- IEO promises higher Liquidity, transparency and
protection than does ICO.
- Vested interest of exchange provide some level of oversight over the project.
Liquidity
crisis for ICOs
“When Binance?”is possibly
one of the most asked question in telegram channels because investors are
looking to offload their purchased tokens for multiple returns and moving onto
the next one. As if running the project itself isn’t a hard task, exchange
listing consumes both human & financial capital.
Creating a token is super
simple but listing it is super hard specially on big exchanges. Though there
are probably more than 300 exchanges globally, 1% of them own 90% of the volume
& that’s where the competition comes in. Not just that exchanges are
charging for exchange listing fee, the volume need to be significant else there
is a danger that the token will be delisted. To avoid that firms do pay up for
market making, which isn’t just ethically & legally questionable but also
financially expensive. Orphan tokens end up in decentralized exchange or tier 3rd exchanges where volume is close to nothing. As per few reports only 1 out of 5 tokens
was able to be listed. Number for tier 1 exchange is probably 1 out of 15.
It cost anywhere from $100,000 for tier 2/3 to $3M
for tier 1. There has been claims of charging $5M – $8M during the bull markets
as well. Exchange rather than specifying it as listing fee, they call it due diligence
cost. In all honesty, they’ve to perform the due diligence because they can get
into trouble by offering something that could be fraudulent.
State of IEO:
The
first ever cryptocurrency exchange that embraced IEO was Binance and launched
its IEO platform Binance Launchpad. BitTorrent (now bought by TRON) conducted a
token sale on Binance Launchpad in January and raised $7.2 million in a short
span of 15 minutes & generated 4X returns within days . Fetch.AI was the
second IEO on the same platform that hit a hard cap of about $6 million in 22
seconds. The Binance Launchpad was a success and how could other exchanges miss
out such a lucrative opportunity (they charge listing price and a percent of
the fund raised) as they started launching their own IEO platforms.
The
Singapore based major exchange Huobi jumped into the ring by launching its own
IEX platform. However, to look different from its competitors and to attract
more investors, they named their fundraising model DPO Direct Premium Offering
and is prominent for allowing users purchase crypto at a price lower than the
market price. KuCoin wanted to “reveal the hidden blockchain gem” and launched
their KuCpon Spotlight. The Malta Based exchange OKEx announced about the
launching of their platform OKJumpstart for holding IEOs on March 13. Bittrex
IEO is an upcoming IEOs scheduled to be launched in the first week of April.
ICO
vs. IEO. Which one is preferred?
Back
in July 2013, Mastercoin held the first ever ICO initial coin offering which
was vigorously followed by many Blockchain projects fundraising in the same way
however ICOs have many flaws slowing down the progress of fundraising and this
engendered the need for other means of fundraising like STOs Security Token
Offerings and now IEOs which has actually created a buzz in the crypto world.
Some
people might argue that IEO is the same old wine in a new labeled bottle but
that is not true. Though both IEOs and ICOs share the same rationales of IPOs
Initial Public Offerings, both are fundamentally different. What makes IEO
unique is that the project has to pass through a comprehensive assessment by
the exchanges in order to curb problems face by ICOs-Scams. This way, IEO
becomes riskless for investors to put in their money unlike what the scenario
had been during the ICOs craze when investors would invest in any ICO including
those who could offer even a white paper. This is the reason why majority of crypto
experts prefer IEO over ICO.
The case
of RAID IEO is a best example here. Bittrex had recently cancelled the IEO for
RAID project just hours before the start of token sale. The reason behind why Bittrex
cancelled IEO for RAID was the termination of partnership between the e-gaming data
analytics platform OP.GG and RAID. Bittrex considered the partnership between
the companies an important part of the project and the termination of the
partnership simply made the token sale redundant and not in the interest of the
consumers of Bittrex.
Major
Advantages of IEO
The
biggest advantage of IEO for the team/project is quick access to vetted
investors and hence funds just like the companies that after launching their
IPO initial public offerings get their name listed on NASDAQ exchange and get
access to funds. Couple of days ago I read in an autonomous research that ICO issuers
have no other option but to pay an amount anywhere from $1 million to $3
million to get their tokens listed on an exchange. Further adding, there are
additional costs as well like they have to spend on running marketing campaigns
and hiring advisors. Since exchanges still charge high listing fees and share
in the funds raised for conducting IEO, the startup/team behind the token get
time to focus on the project development and not on marketing and fundraising.
It
is an open secret that exchanges earn a lucrative amount of money in the form
of listing fee and share in the funds raise which further depend on the size of
the platform. In addition, IEO participants after creating an account on a
particular exchange might still roam around and ultimately become regular
costumers.
Finally
investors who participate in IEOs face the least risk. They simply create an
account on an exchange and can participate and purchase tokens in any IEO launched
on the exchange instead of creating many accounts and dealing with a number of
wallets on different exchanges. Leading exchanges such as Binance make sure the
projects pass a vetted process of assessment before the token sale gets
conducted on the exchange because they do not want to loose costumers by
getting their reputation spoiled by cooperating with an illicit or fraudulent
project which means there is always a higher degree of trust in case of IEO. However,
in case of ICOs, you could be at risk if you are not good with spotting scams
and dubious projects. A legitimate exchange will never host scams so if you are
a member with one, you would face the least risk. Initial Exchange Offerings
IEOs allow investors to take part in Initial Coin Offerings ICOs with low risk.
Challenges
for IEO
- Non-compete between exchanges
When a token is launched independently
there isn’t any affiliation with a specific exchange so it can be listed on
multiple exchanges exposing itself to lot of users. My concern is that if a
token was sold through a specific exchange there may be reluctance for other exchanges
to list it specially the competition one. While goal of crypto is to build an
open financial system, this may lead to a silo approach.
While IEO does guarantees exchange
listing, it doesn’t guarantee a volume. If the volume drops a lot, there is a delisting
risk.
While they’re
marketed as utility tokens, there is a chance that they’re a security in
multiple jurisdiction. In that case they would have be classified under Security
Tokens, which I’ve covered in detail here.
While there is a guarantee that
it’ll be listed on exchange, the firm offering the token may delay listing due
to any factor. Major factor would be product not being ready or bear market.
In case of traditional IPOs,
there is generally a lockup period for early investor but so far there isn’t
anything like this in IEO. This can
create a pump & dump scheme, so buyers beware & don’t buy into any
hype.
How
to become an IEO participant?
You
need to follow five steps to take part in IEO.
- Throughout the last year,
the fame of ICO has dwindles to great extent but they still are the main mediums
for fundraising for many cryptocurrency projects. So first of all you need
to be sure if an IEO is going to take place by checking the website of the
startup/development team.
- You need to know about the
exchange that will conduct the IEO. If you are already registered on the
exchange and have a wallet, you move on to the next step. If not, you need
to create an account on the exchange in order to participate in IEO
because a token issuer may sign an agreement with only one out of many
exchanges and in that case, you would have no other option but to create
an account on the exchange.
- You need to complete your
KYC Know Your Costumer which is an anti money laundering AML procedure.
Once you are registered with an exchange, you would have to go through a
sought of verification procedure to reduce security risks. You need to do
it as soon as possible because it may take the exchange some time to get
your identity confirmed.
- Now you need to find out
the crypto option that is available. You normally have the options for ETH
Ethereum and BTC Bitcoin over the exchanges except for some in the likes
of Binance who go with their own tokens.
- Finally, you need to wait
for the time until your Initial Exchange Offering IEO starts. Make sure
you are present minded and do not miss the token sale for it might only
last for couple of minutes or may be less (the case of Fetch.AI).
IEO!
The next fundraising boom?
Back in 2017 & 2018, ICO engendered a fundraising boom
in the crypto space but a notable number of ICOs were conducted by scammers,
looted investors who blindly trusted every ICO and this was the sole reason why
ICOs lost their glory and prestige. In addition to ICOs with dubious nature,
ban on ICOs in countries like China, Macedonia, Nepal and Ecuador exempted a
big source of funding for the startup and companies who wanted to fundraise for
their tokens. Since IEO ensures provision of high level trust, security,
project credibility and instant fundraising, it is no doubt going to engender
the next fundraising boom in the crypto space and hence will become the
standard model for raising funds.
Conclusion:
Having
said that, one might argue that there is nothing like a perfect crowdfunding
model/mechanism because since Mastercoin till the present day IEO, we have been
seeing so many crowdfunding mechanisms with ICO the most prominent among all but
due to the arrival of IEO, even ICO looks in hot water. Things can change. We
have seen things getting flipped 180 in matter of days. Who knows about the
future? The life span of IEO could be shorter than that of ICO as well. It
depends on how advanced the new crowdfunding mechanism is. A more advanced CFM
than IEO will no doubt dwindle the prospect of survival of IEO. But for now, the
perks and benefits promised by IEOs are way too lucrative to be ignored and as
a result, it will take priority over ICO but I still think STOs are the way to
go for any similar offering.
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