Initial Exchange Offering: How is an IEO Different than an ICO?
What Is An Initial Exchange Offering (IEO)?
You’ve heard of initial coin offerings, or ICOs. However, we’ve seen a new trend with initial exchange offerings, or IEOs.
ICOs have raised billions of dollars since the beginning of 2017. With an ICO, you typically send cryptocurrency to a company in exchange for a certain number of digital tokens. The startup gets money it can use to build its business while the investor gets tokens that can be expected to increase in value as the platform grows.
Initial exchange offerings are similar, but they work in a different way. Our friends at Coinstaker recently dove into IEOs, including the advantages of an IEO, the differences between an ICO and an IEO, and what exactly an IEO is.
How Does An Initial Exchange Offering (IEO) Work?
An initial exchange offering is similar to an ICO. In both an ICO and an IEO, the startup is selling tokens to investors in order to finance the project.
With ICOs, the counterparty is the developer. The developer is selling tokens directly to investors.
With IEOs, things work differently. Startups that conduct an IEO will rely on an exchange or multiple exchanges to complete the crowdfunding campaign. The exchange might be responsible for the smart contract that accepts money in exchange for tokens, for example, or for marketing the sale.
During an IEO, investors will send money to the exchange’s wallet or smart contract. The exchange will then send tokens to the user.
The benefit of an IEO is simple: most developers aren’t ICO experts. Most startups are launching their first ICO. The startup might have plenty of qualified blockchain developers, but none of these people are ICO experts. By choosing to conduct an IEO, the startup can rely on the expertise of an exchange to ensure the token sale proceeds in a secure way.
The other benefit, of course, is that exchanges have users that have already completed AML/KYC verification. These users have been thoroughly vetted by the exchange. Typically, during an ICO, the developers would need to conduct their own AML/KYC – or rely on a third party to do so.
There are plenty of other benefits for both the exchange and startup that we’ll talk about below.
Prior to the IEO, the developers will create or “mint” the tokens. Some developers will mint tokens on the Ethereum blockchain and use a popular protocol like ERC20 tokens. Other developers will launch their own blockchain. After minting the tokens, the developers send tokens to the exchange.
Each IEO comes with different terms, deals, and conditions with the exchange.
Some exchanges will request a certain number of tokens. An exchange might request one million of the startup’s tokens in order to complete the token sale. Those tokens have virtually no value currently, but the exchange stands to profit substantially if the project takes off.
In other cases, the exchange charges a flat fee in fiat currency. The exchange might also add bonus services like marketing expenses or legal compliance.
The terms of the IEO can also vary widely. Projects can demand that tokens be sold at a fixed price throughout the whole IEO process, for example. Or, they can demand a token cap per investor to prevent “whales” from purchasing a disproportionate share of tokens. Some projects even hand all pricing to the exchange, allowing the exchange to control pricing based on supply and demand.
Sometimes, multiple exchanges will participate in a single IEO. In other cases, the IEO will be conducted by a single exchange.
How To Invest In An Initial Exchange Offering
If you want to participate in an initial exchange offering (IEO), then here’s the step by step guide, according to our friends at Coinstaker:
Step 1) Check for an IEO: Today, most blockchain startups continue to finance their projects via an ICO. IEOs are comparatively rare. Check your exchange for an IEO. Typically, the development team or startup will announce whether they’re conducting an IEO or ICO.
Step 2) Research Which Exchanges Will Participate: Sometimes, only a single exchange will participate in the IEO. In other cases, multiple exchanges will participate. Determine which exchanges are participating.
Step 3) Sign Up on the Exchange: You need to know which exchanges are participating in the IEO ahead of time so you can complete registration at each exchange. You will likely need to complete KYC/AML verification at the exchange, and signups can take anywhere from a few hours to a few days.
Step 4) Research Which Cryptocurrency Will Be Accepted: BTC and ETH are the two most commonly-accepted cryptocurrencies at ICOs and IEOs. However, some exchanges will use IEOs as an opportunity to promote their own native token. Find out which cryptocurrency will be accepted ahead of time.
Step 5) Wait for the IEO to Start: IEOs, like ICOs, will typically have a specific start time. Wait for the start time to begin, and then send your desired amount of crypto to the exchange. You’ll receive the tokens in exchange.
Why Choose An IEO: Benefits For Startups
To investors, it doesn’t really matter if you’re participating in an ICO or IEO. In either an IEO or ICO, you’re going to go through AML/KYC certification and send crypto to an address in exchange for tokens.
However, for developers, an IEO can offer considerable benefits – and that’s why a growing number of developers are choosing IEOs. Benefits include:
Exchange Listing: Many startups have completed an ICO, only to run into trouble when trying to list their token at an exchange. Exchanges are notoriously greedy when it comes to posting tokens. Some exchanges purportedly charge listing fees of $6 million. With an IEO, you know your token will be listed on the exchange immediately after the sale. You already have a healthy token economy for your project in the early months, which can kickstart your growth.
Access the Exchange’s Existing Userbase: Some of the largest exchanges have userbases of millions of users. When you conduct an IEO, you get immediate access to that userbase. You can reduce marketing costs because your market is already right in front of you. If you picked the right exchange, and that exchange’s userbase continues to grow over time, then trading activity in your token can continue growing as well.
Better Credibility: When you have to send money to a random website and wallet to participate in an ICO, it can be a bit dicey. With an initial exchange offering, however, you’re dealing directly with an exchange you know and trust. This gives added credibility to the project. Startups can avoid being labeled as a scam, while scams get weeded out.
Reduced Price Manipulation: Too many ICOs follow a similar path. Whales participate in the pre-sale stage at a discount rate. Then, those whales sell their tokens when the markets open. Even if you’re selling at the main ICO rate, you’re making up to 50% profit. This, of course, puts downward pressure on the market, sinking the currency out of the gate. An initial exchange offering (IEO) doesn’t prevent this from happening, but it can help reduce price manipulation.
Why Would Exchanges Launch an IEO? Benefits For Exchanges
What’s in it for the exchange? Why would an exchange launch an initial exchange offering? Benefits include:
Attract New Users: There are thousands of users who are interested in the startup and its technology. These users have not signed up for your exchange – but they will sign up when you launch an IEO.
Good Marketing: If your exchange has a history of hosting legitimate, high-quality projects and IEOs, then this is great marketing for your exchange.
More Fees: Exchanges live off fees. Hosting an IEO is a great way to generate more trading fees on your exchange. Exchanges also charge fees to the startup.
Why Would A User Participate In An IEO? Benefits For Users
Benefits for users include:
No Need to Sign Up Twice: If you’re already a member of an exchange, then you can participate in the IEO without signing up for another platform or going through KYC/AML at the startup’s website.
Easy Market Access: With an IEO, your new tokens sit right alongside your existing tokens in your exchange wallet, making it easy to transfer balances between accounts and access the wider crypto market.
Participate in ICOs With Reduced Risk: ICOs can be risky – especially if you’re bad at spotting scams online. If you’re a member of a legitimate exchange, then it’s unlikely the exchange is going to host scams. IEOs can allow investors to participate in ICOs with reduced risk.
Conclusion: There’s No Perfect Crowdfunding Mechanism
Over the last decade, we’ve seen the rise of crowdfunding platforms like Kickstarter and Indiegogo. In the last year, we’ve seen the rise of initial coin offerings (ICOs) and initial exchange offerings (IEOs). We’ve learned that there’s no perfect way to crowdfund a large sum of money. However, as we learned today, initial exchange offerings come with several unique benefits.