IEOs are issued by a crypto exchange on behalf of a startup. While the acronym stands for Initial Exchange Offerings, this new method of coin offering involves new crypto coins which are sold to raise funds for a new project.
IEOs are the same in principle as ICOs. Both are ways for projects that trade in cryptocurrency to source funding. As this article explains, the implementation of IEOs offers several important differences and improvements upon the ICO model.
This article discusses the inspiration behind the invention of IEOs, which are essentially an attempt to improve upon the original ICO. It also considers a few of the potential merits of IEOs, as well as flags some areas of concern.
What is the difference between an ICO and IEO?
When creating a new project or application, it is common to crowdsource by launching an ICO. Interested investors can buy into the company at a discounted rate with the purchase of tokens. Token/coins are typically priced lower for early investors. The investor does so with the hope that there will be short and long-term fiscal rewards.
ICOs and IEOs assume the fundamental practice of Initial Public Offering (IPO) or a stock market launch. These are all forms of public offerings, where shares of a company are sold to investors. So, an IPO, like an IEO, raises capital for a company.
The surge of ICOs to the market created a bubble that has since burst and many investors are taking a new approach. As a result, ICOs are facing a lot of scrutinies, and for good reason.
A stat from Cointelegraph tells us that in 2017, ICOs raised a total of $5.6 billion and that number increased to $11.4 billion in 2018. While the initial idea of crowdsourcing is a good one and there was a lot of early enthusiasm for ICOs, many of themturned out to be completely valueless. This was because they lacked liquidity, lasting power, and some were even outright scams.
To better understand the design and reception of ICOs read How the SEC’s Crackdown on ICOs is Shaping Regulations in the US.
Solving the ICO problems
The design and new regulations of IEOs have attempted to remedy several of the issues inherent in ICOs.
For this discussion, I use Binance as my primary example because of its current success and popularity for developing IEOs. However, there are many IEOs and this article is not an endorsement of anyone in particular. A few examples of exchanges issuing IEOs other than Binance are, KuCoin, Huobi, and Bittrex.
This article is meant to educate its readers of the pros and cons, and hopefully inspire the reader to do additional research to make their own determination.
Advantages of IEOs
The primary difference between an IEO and an ICO is that IEOs have additional standards and regulations than the earlier ICOs. This is primarily because IEO tokens are backed by a third party. The exchange has made the effort to source quality projects; this is the primary role of the Exchange.
In other words, IEOs are just ICOs with a new layer of intervention and regulation to attempt to ensure value.
Exchanges are designed with two primary goals: the first it to turn a profit, and the second is to ensure that value of their investments.
Essentially, exchanges are attempting to offer a bit more certainty for IEO tokens by acting as custodians and setting higher industry standards for IEO participation. Exchange organizers are therefore taking a more hands-on approach to ICOs.
Moreover, investors only need to deal with the exchange directly and not the token provider, as platforms offer wallet service for the token and facilitate trading. Fundraising is coordinated by the exchange, not the ICO.
Exchange tokens
It is most often the case that an exchange platform has its own token that can be used to trade on the platform. Exchanges are also offering instant liquidity and taking on a greater personal risk so that the investor does not have to.
Finally, exchanges are also managing purchases and deposits with smart-contracts, making KYC and the whole process of ICOs much easier to navigate with less margin of error.
IEO: ICO plus rules
In brief, IEOs have taken the problem areas of ICOs seriously. As such, they may be a better bet than an ICO, since the latter is not backed by an exchange. Because the exchange is taking on the majority of the risk of the token sale, an investor may feel safer to assume that there is potential in it. Exchanges assume more of the risk than individual investors. As such, an exchange is invested in more viable options. So they are doing a lot of the vetting process of these projects for the investor.
Overall, IEOs are subject to much more internal regulation to ensure the viability of the project and their liquidity. Unlike many ICOs whose coins never saw the light of day on any exchange, IEOs guarantee the projects they are crowdfunding for will be listed on that exchange, enabling a better developed system of liquidity. In fact, exchanges will even cancel a token if they decide that the project is no longer viable.
Disadvantages
Transparency
As I mentioned at the start, IEOs and ICOs are essentially the same. The difference is the exchange and the value and trust that the design of the exchange is trying to build. Regardless of the work that the exchange is doing to ensure value, IEOs do not suffice as enough due-diligence from an investor standpoint. They will need to do their own research and vetting process.
To begin, transparency should be a major concern for potential investors in IEOs. Even though the exchange is putting their reputation and potential earnings on the line, as an investor it is crucial to ensure that you have an understanding of what the vetting process is. Also, what kind of regulations is the exchange is setting for themselves?
Token Supply Count and Retention
Moreover, simply being an IEO does not ensure the lasting value of their token. There are other factors to consider. It is also important to know what the initial investors and founders are holding and when they plan to release their tokens onto the market. Is there a vesting schedule that limits them from cashing out their tokens too early?
If once the token has been issued the initial holders plan to flood the market with them immediately, then there never was a long-term plan in place; this is referred to as a “pump and dump.”
A dump is when initial investors create the appearance of a viable token, only to dump it on the market immediately.
Minimum Holdings
IEOs have much higher minimum native token holdings than the previous ICOs did. Instituting a minimum creates two central concerns. The first is some minimums are going to exclude large potential investor populations. The second is that by instituting a required minimum native token holding, this could artificially inflate the value of a native token through manufactured scarcity.
Although high demand for IEOs can be interpreted positively, there is still a concern for the longevity of these projects. And whether IEO investors have faith in the projects over the long haul, or if they are just in it for the quick gains will impact the long-term health of any IEO.
All Things Considered
Whatever the long-term outcome of IEOs, it is important to remember that they are a direct response to the nature and flaws of a deregulated market. With an IEO backing a project we can safely assume that it is not an outright scam, however, you should not bank on their internal vetting process without doing your own research.
At the end of the day these regulations are voluntary and self-imposed. Consequently, take a close look at what an exchange means when they bandy about the word “standard.” And as always, if you are thinking of investing in an IEO it would be wise to get as much information as possible, and be sure to know what kind of projects they deem to be valuable.
Although exchanges are working to increase the industry standard of the original ICO, an IEO is still not a guarantee of the long-term success or liquidity of a token.
Nevertheless, those backed by the regulated IEOs are more secure than an ICO because they must, at the very least, satisfy the standards of the exchange in order to participate in the exchange.
However, IEOs do not eliminate uncertainty about a token’s long-term value in the crypto-market, nor does it mean that the investor does not need research the project.
Do Your Research
Sorry if it sounds like I am repeating myself, but it really can’t be said enough; do your research! Part of taking part in the crypto revolution is the move to financial privacy and financial freedom. But to enjoy these benefits, we must first educate ourselves while arming ourselves with decision-making tools.
Here are a few items that an investor needs to consider when IEO shopping:
- Is this IEO offering going to fill a need or niche in the market?some text
- Ask yourself, why is this new token available? Is there a gap in the market? Given what you know about similar entrepreneurial endeavors, how does this project measure up to those?
- What value is this IEO claiming to have and why?some text
- This goes along with the previous concern, however, there is also the question of long versus short-term value. Just because a project seems to have value now, does not mean it has the same potential in the future.
- What is the supply count of the IEO? And how much of the supply will the exchange team keep?some text
- This is crucial! To avoid your token losing value once it hits the market, be sure that the project is clear about initial investment holdings and what will be released, and what the timeline for the release is.
- When will the rest of the supply be available on the market?some text
- Know what the roll-out plan for the IEO is. This can also be a sign of what value the exchange sees in the longevity of the project. If everyone dumps their tokens onto the market all at once, then the token’s value decreases almost immediately. Consequently, IEOs will result in a similar burst to what occurred with ICOs.
- How will the additional supply affect the future market value of the IEO?some text
- Although IEOs are offering immediate liquidity, this is not an assurance of any long term health or value. Know what value this token is adding to the market and why the exchange thinks it is worth backing.
Summary and Chief Takeaways for IEOs
Reputation
IEOs respond to the negative results and reputation of ICOs, which were often with scams, disappearing acts or get rich quick schemes. They exchange now offers as a responsible third party and is the primary backer for a new project. This is in an effort to vet good quality and increase regulatory guidelines for participation. So not only is the exchange offering its financial support, it has done some homework and is willing to risk its reputation.
Credibility
Exchanges are enforcing regulations and guidelines that help to decide what kind of projects they will back and therefore the tokens they are going to list on their exchange. Accordingly, exchanges are offering a certain level of assurance of quality in order to incentivize investors.
Instant Exchange Listing
IEOs have guaranteed liquidity, and so will generate tokens and then list them on the exchange platform. In the past, many ICOs never made it to the stage of exchange listing. IEO listing then guarantees a certain amount of liquidity that ICOs never promised.
KYC/AML Included
IEOs are also setting themselves apart from ICOs by standardizing know-your-customer and anti-money-laundering. Exchanges are managing the details of smart contracts and transactions, further eliminating challenges of the previous ICO system.
Conclusion
To conclude, exchanges are offering resources, reputation, industry knowledge and liquidity to cryptocurrency startups. However, this does not eliminate the reality that IEOs are revised ICOs; as such, a level of risk for the investor remains. Also, know what regulations are in place and understand the processes used by the exchange of interest.
If you'd like to learn more about this topic, I'd recommend a book called 'Initial Exchange Offerings for Beginners: What They Are, How They Work and How to Find & Invest Into the Most Profitable IEOs' and it's available on Amazon here - https://amzn.to/40sL9Uh
