Initial Exchange Offerings (IEO), an alternative to ICOs, first appeared in 2018. The main difference between these methods of attracting investment lies in the key role of the exchange, which selects promising and viable projects, in its opinion.
IEO — Initial Exchange Offering — is the initial exchange offer. Unlike the ICO format, which was popular at that time but compromised itself, the main feature of IEO is that the sale of tokens is strictly linked to a specific stock exchange, which studies the project before listing, determines its reliability and viability and only after that allows investors to purchase digital assets.
Why IEO is Better Than ICO
An important difference from ICO is that the initial exchange offer has a long-awaited regulation. In one form or another, a contract is concluded with the project managers, where all the main parameters of the transaction are stated – the estimated price of the token, the maximum issue volume, soft cap, hard cap, and the details of the distribution of the investment received.
Watching the cryptocurrency market in the last year, it was hard not to notice that trust in ICO dropped sharply. The reason for this was the huge number of scam projects that flooded the market in 2018. This led to the fact that even potentially successful startups sold their tokens in a closed mode only for large investors.
IEO will make it possible to make the sale of digital assets more democratic, to attract ordinary investors again, providing them with transparent analytics of the project and certain guarantees. It should be noted that the IEO procedure may be temporary, but at this moment is the best way to organize the sale of tokens for a new project. For example, the exchange is interested in listing the largest possible number of high-quality and liquid coins, since each transaction with them brings it a profit in the form of a commission.
Projects hosting tokens via IEO also receive a number of advantages:
- Saving on advertising and search for investors, since the stock exchange already has its own formed audience;
- Listing on the exchange itself, which took a lot of time, moral and financial efforts from ICO projects, is provided automatically;
- The project increases confidence, as an investor is confident that before listing, all the main financial indicators were carefully checked.
Among the minuses of the IEO procedure, it can only be noted that the acquired tokens are not sent to the investor’s smart contract, but are stored on his account at the stock exchange issuer. Exchanges, unlike digital assets based on blockchain, are usually centralized; this fact increases the risk of losing assets in the event of a hacker attack or any other fraudulent activity.
Nevertheless, we must admit that Initial Exchange Offering is a timely solution for both investors and projects selling their digital assets, as well as for the cryptocurrency market as a whole. The main reason for the collapse of the market is the loss of trust and the absence of any regulator determining the rules of the game for all participants.
At that time, until national laws on the turnover of digital assets will be adopted, IEO is the main way to attract investment for promising projects in the cryptocurrency market.
A Fly in the Ointment
There is nothing free in the world — tokens issuers, in any case, will have to pay considerable amounts for listing, which may differ on different exchanges. Also, the marketplace may require a certain percentage of the total amount of funds raised.
The main marketing costs fall on the shoulders of the startups distributing tokens through IEO. These expenses are considerable; their total amount can easily reach $ 100 thousand or more.
Exchange personnel should consist of qualified and technically savvy analysts, who are able to competently and systematically evaluate the long-term potential of projects and the viability of their business models. This may imply high labor costs. In the event of a campaign failure, the exchange carries significant reputational risks.
Only the holder of a verified account on the exchange can participate in IEO, and not anyone, who wishes. In addition, most exchanges are centralized sites. Users have to trust their blockchain-assets to a third party, which is associated with the risks of failures and hacker attacks.
In general, some experts believe that amid widespread legal uncertainty, the IEO model is only a temporary alternative to ICO.