2017 saw an increase in the number of countries that have imposed stricter regulations governing Initial Coin Offerings (ICOs). China has even declared an outright ICO ban. This was right about the time when Initial Exchange Offerings (IEOs) came into the picture, becoming the way for token issuers and crypto investors to get around the situation without having to circumvent any laws.
IEOs share the same purpose with ICOs which is to shore up funds for token issuers to finance circulation of their virtual currency or to launch their blockchain-based apps or services. Both crowdfunding methods, IEOs and ICOs provide a path for investors to buy into the token issuers’ projects by using fiat money or virtual currency.
How they differ
Token issuers use cryptocurrency exchange platforms like Binance Launchpad or Bittrex International IEO for IEOs. In return, token issuers have to pay a listing fee and a percentage of the funds raised (fiat or crypto) to the exchange platform of choice. ICOs are launched on the issuers’ respective websites so no fees are paid.
Another difference lies in who handles the process. For IEOs, everything from marketing to smart contracts is managed by the cryptocurrency exchange. For ICOs, the token issuer does all the work.
To participate in an IEO, the investor must have an account in the token issuer’s chosen exchange platform. All transactions will be done via the digital wallet registered in the exchange. This is not a requirement for ICOs. For as long as an investment (fiat or crypto) can be transferred as agreed, absolutely anyone can participate in an ICO.
Finally, for IEOs, exchanges carefully vet token issuers before any agreement is made. This is not the case for ICOs. Virtually anyone or any entity can launch an ICO.
For a while, ICOs became the preferred way to shore up funds especially for projects of DApps (decentralized applications) developers. This could be because of the following reasons:
- Inclusivity. One does not need to be somebody to launch a startup or invest in one. ICOs are available to absolutely anyone with the capability to sell a project or to buy into one.
- Simple. Since ICOs are decentralized, they have minimal restrictions and required paperwork making them the simplest way to invest or to shore up funding.
- Track record. ICOs raised billions of dollars in 2018. Such confidence has been used as proof to show that ICOs are still relevant for interested parties.
- Complete control. Since there is no third party involved, token issuers have complete control over the process of rolling out. They do not have to pay fees whether it be an outright amount or a percentage cut to a third party.
- Attractive to startups. Since it does not require too much paperwork as compared to IEOs, not to mention fees involved, it is understandable that some startup companies still opt to go the ICO route.
Switching to IEOs
As shown above, ICOs do come with a slew of benefits. Despite this, many are still making the switch to IEOs as evidenced by recent data gathered by BitMex Research. The trend can be attributed to the following:
- Trust. This is one of the main reasons why investors go for IEOs. Exchanges properly vet token issuers before any transaction can happen. Proper vetting in ICOs depends on the investor’s efforts.
- Security. IEOs offer better security to investors because exchanges do not just partner with anyone or with any entity. Cryptocurrency exchanges do due diligence before giving token issuers the green light to use their platform. This lessens the possibility of investors being scammed with bogus projects.
- Fair shot. With IEOs, it is easier to “enforce” certain conditions such as capping. This is because investors have to open an account in corresponding exchanges if they want to participate in IEOs, giving exchanges some degree of control. Capping, for example, prevents crypto whales to lord over the process which can happen in external controls-free ICOs.
- Tradable. Tokens issued in IEOs are automatically tradable once they are released via cryptocurrency exchanges. This does not happen in ICOs.
- Hassle-free. For token issuers, going for IEOs is convenient. They do not have to worry about smart contracts, dealing with investors, or marketing. The exchanges do everything for them. Token issuers who opt to do ICOs have to do all the work all on their own.
With several woes continuing to haunt ICOs, it will certainly not be a surprise if IEOs will emerge as the go-to crowdfunding method. And with IEOs raising $80 million in March 2019 alone, it might no longer be a question of if but when.