In recent years, initial coin offerings (ICO) have lost their allure. Instead, several currency crypto ventures have begun using an initial exchange sale to raise funds.
An IEO, or Initial Coin Offering, is a token sale overseen by a cryptocurrency exchange. Many investors prefer IEO platforms to ICOs because they have a higher degree of due diligence.
In the last few years, the crypto community has shifted to other models for the major markets, such as Security Token Offerings (STOs), Initial Exchange Offerings (IEOs), and Controlled Token Offerings (RTOs).
Find out what an IEO is, what it can do for you, and how to get involved in one by reading this post.
What is meant by an IEO?
The most common fundraising tool in the crypto sector today is the ICO, but STO and IEO are close behind. Crypto websites and exchanges are used to carry out an Initial Exchange Offering. IEOs often require a third-party crypto exchange, unlike ICOs, enabling crypto projects to approach investors directly.
In reality, crypto exchanges are the ones who collect funds on behalf of startups in IEOs. They must fulfill their duties and conduct due diligence. Projects who want to hold a token sale on the exchange platform must pay a listing charge to the platform.
It’s worth noting that IEOs don’t sell crypto tokens to the general public. Members of the exchange site can only attend an IEO event.
Factors differentiating an ICO and IEO –
In the past, crowdsourcing funds through an ICO was typically the only way to launch a brand-new product or application. Investors may get a discount on the business by buying tokens, which were usually issued at a lower price for early investors.
Both ICOs and IEOs follow initial Public Offerings (IPOs) or stock market launches. There are stock offerings in which a company’s shares are sold to investors. In turn, both are aimed at increasing the company’s resources.
The main distinction between an ICO and an IEO is that the latter uses an exchange platform and allows only platform users to purchase shares through tokens. Furthermore, the platform is in charge of selecting projects that have the potential to be competitive. Otherwise, it risks losing its prestige and incurring financial losses. That is why many people assume that IEOs are much better than ICOs.
The platform acts as a responsible third party that guarantees the transaction’s protection. However, it’s unclear if exchanges would guarantee a refund if the project turned out to be a rip-off.
Advantages of an IEO –
- They are trustworthy: IEOs have several advantages, one of which is that they are carried out with a third party’s assistance, like the crypto exchange network. Any project that wants to launch an IEO on the platform will be screened. Exchanges want to keep their good name, so they choose token issuers carefully. That’s how they’ll be able to weed out possible money-laundering schemes.
- They are safer: Token issuers do not need to be concerned about protecting the crowd sale since the exchange network is in charge of managing the IEOs smart contract. Cryptocurrency exchanges can also handle the KYC/AML process. As a result, IEOs are seen as a much safer alternative to ICOs.
- They are easily usable: The processes used by exchange platforms to launch IEOs can be used by a startup looking to issue tokens. This makes the whole process much more accessible than launching an ICO on one’s own. Fundraising organizations must pay fees for listings and, in many cases, a proportion of tokens. On the other hand, the exchange network will assist them with marketing and streamlining the entire operation. As a result, startups planning to launch an IEO would have to spend less money on ads.
Challenges involved with IEO –
There is nothing like a perfect solution, and IEO is no exception.
- It is costly: The most significant drawback of IEOs is the cost of listings. There’s no doubt that IEOs are a safer and more practical choice than ICOs. However, the costs of token sales can be prohibitively expensive for startups. As a result, startups considering launching an IEO should be mindful of the costs and factor them into their budgets.
- Exchanges are strictly enforced: When cryptocurrency exchange platforms work with ventures, their reputation is put at risk. If the development team fails to fulfill the specified criteria or the project fails, the exchange is the one who suffers the most. That is why most crypto exchanges conduct due diligence on ventures before accepting them into their offerings. They examine the product’s whitepaper, interview potential participants, and ensure that the project’s objectives are practical and achievable. They have the right to withdraw from an IEO at any time before it takes place if they discover anything fishy about the project. Exchanges protect their reputations to the best of their ability, which means they will be selective in their project selection and will not take on every project.
- Transparency: One of the main issues for potential investors is this. Sure, introducing an IEO puts the exchange’s credibility and future revenue on the line. However, as an investor, you must be aware of the platform’s screening process and the rules that the exchange has established.
- Holdings are minimum: It’s worth noting that IEOs need much more native token holdings than ICOs. By setting a minimum, we are confronted with two issues. The first is that minimums would exclude any potential investors from participating. The second issue is that by imposing a necessary minimum, exchanges can artificially inflate the value of the native token by instilling a sense of scarcity.
Participating in an IEO –
Since IEOs are currently gaining traction, you can expect to see a bit of them on various exchange platforms. As a result, choosing an IPO that appeals to you shouldn’t be difficult.
When you’ve found an IEO that appeals to you, find out which exchanges are hosting the crowd sale. The next move is to open an account with a cryptocurrency exchange that offers it. In most cases, you’ll have to go through the KYC and AML verification procedures.
After you’ve finished them, look into the cryptocurrencies you can use to add to the IEO. After that, you will fund your account with the coin approved in the crowd sale and wait for the IEO to begin purchasing tokens.
IEO’s verification process –
To reduce the risk of fraud, exchange platforms that promote token offerings will conduct a series of tests before launching a transaction. After all, if a new digital currency isn’t what it claims to be, the credibility of the crypto exchange may be jeopardized.
Until approving a blockchain project, an IEO platform will look at a variety of other considerations in addition to the white paper. Any cryptocurrency exchange worth its salt will start by screening the team behind the company, putting the technology through its paces, identifying unique selling points, evaluating tokenomics, and determining whether there is any market for the company in the crypto room.
Investors will have to go through KYC and AML steps if the exchange platform wishes to continue. Prospective contributors will also be granted complete insight into how the token issuers are meeting their goals.
Due to the lower frequency of the IEOs, some of the less savory ventures in the cryptocurrency and blockchain space have been weeded out. While no approach is entirely foolproof, it appears that IEOs are on the right track.
The existence of an IEO does not imply that anyone should invest in these offerings. Regardless of how businesses and ventures plan to collect money, doing your due diligence is always recommended. Contributing funds to an IEO has advantages, but there are also risks to consider.