Crypto world is changing, and the evolutionary process is unstoppable. Since the beginning of the year, many exchanges have announced a new public offering mechanism – IEO. Let’s see if it is worth your attention.
If you are familiar with the ICO mechanism it is quite the same, with just a slight difference, there is third-party involved – a reputable exchange.
A project applies to exchange, if admitted, it mints tokens and provides them to the exchange, which in turn distributes these tokens to buyers.
Subject to the agreement between the project and the exchange, conditions usually found in an ICO can be set up in an IEO, which may include the capping of individual contribution and having a fixed price per token.
One of the first to implement this mechanism was Binance, which released its IEO Binance Launchpad platform.
In January, BitTorrent project, bought by TRON, initiated a token sale at Binance Launchpad and raised $7.2 million in less than 15 minutes. The next IEO Fetch.AI raised more than $6 million in 10 seconds ahead of exchange listing.
Watching the success of Binance Launchpad, other well-known exchanges announced the launch of their own IEO platforms. These platforms include Bitmap Launchpad, Bitrix IO, OK Jumpstart (Alex), KuCoin Spotlight, and Huobi Prime.
Let’s discuss the strengths and weaknesses of an IEO.
One of the main advantages of IEO is trust. Since crowdsale is held on the platform of the exchange, the verified user looks at every project that wants to launch an IEO on its website. Exchanges do this to maintain a good reputation by scrutinizing token issuers. Thus, the IEO may exclude fraudulent and dubious projects because of the involvement of funds through the exchange platforms.
RAID’s IEO is a great example. Bittrex recently announced that it had cancelled the IEO for the RAID project a few hours before the crowdsale began. The reason for this cancellation was because of the terminated partnership between RAID and OP.GG. According to Bittrex, the partnership between the two companies was a vital part of the project, and when the cryptocurrency exchange became aware of the event, it decided to cancel the token sale, as it believed that it was not in the interests of Bittrex customers.
From the perspective of token issuers, they don’t need to worry about the security of the crowdsale, as the exchange manages the smart contract of the IEO. The KYC/AML process is also handled by the exchange, as most service providers do KYC / AML for their customers after creating their accounts.
2. Simplicity for the projects
Startups that issue tokens benefit from a more flawless process of IEO launch on exchange platforms when compared to launching their ICO. Thus, startups launching their IEO need much smaller marketing budget than for an ICO. In addition, token issuers can use the client base of the exchange to receive a greater contribution to their projects.
Since the listing of tokens is also “included in the deal”, it is a natural process when the exchange lists the startup token after the end of the crowdsale.
Not everyone, but the owner of a verified account on the exchange can participate in the IEO. Plus, the exchange giants have more power, which can bring to market failure and to imperfect competition in the form of oligopsony (when the number of buyers is small while the number of sellers, in theory, could be large). There can be hundreds or even thousands of projects, while there are few reputable exchanges.
2. Third-Party Involvement
In addition, most exchanges are centralized sites. Users must trust their blockchain assets to a third-party, which is associated with the risk of failures and hacker attacks. One of the cornerstones of blockchain technology is the absence of third-party, but with IEO we have the exchange acting like one. Scamming with IEO will be much harder, but if the exchange has latent motives to do so, all the other stakeholders would have a hard time exposing the exchange.
Though it seems to be a safer and more efficient alternative to ICO, the costs associated with token sales can be much higher for startups. The listing fee can go up to 20 BTC, while exchanges can even ask for a 10% discount from fundraisers’ tokens.
ICO was booming in 2017-2018. However, an outstanding number of projects were scams or untrustworthy. Thus, this is not the most efficient fundraising model for stakeholders.
On the other hand, IEOs are meant to
provide an increased level of trust among projects, since the exchanges
actively participate in the fundraising process, which should improve overall
IEO has demonstrated the potential of becoming a new model for fundraising in the crypto space and significant flows prove that.
Be it the scammers’ next favourite tool or the ultimate fundraising concept, IEOs will spice up at least the next quarter of the year.