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.
- Lack of volume
While IEO does guarantees exchange listing, it doesn’t guarantee a volume. If the volume drops a lot, there is a delisting risk.
- Regulatory 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.
- Delayed liquidity
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.
- Lack of lock-up period
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.
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.