What is an Initial Exchange Offering (IEO)?
An Initial Exchange Offering (IEO) is a cryptocurrency crowd sale overseen and controlled by a cryptocurrency exchange. IEOs are similar to initial coin offerings (ICOs), which allow new investors to get cryptocurrency tokens while fundraising the potential for cryptocurrency projects looking to launch or get further investment. Unlike an ICO, however, an IEO is generally exclusive to users of the exchange.
What is the purpose of an Initial Exchange Offering (IEO)?
IEOs have been referred to as the next step up from ICOs. Because of the unregulated nature of ICOs, it has been difficult to identify which ones are legitimate and which ones are scams. This means that either worthwhile projects haven’t been able to raise funds and have had to close in addition to vulnerable individuals losing funds investing in projects which were ultimately fraudulent. To combat the wild west lack of regulations in the ICO space, IEOs stand as a middle ground between the lack of regulation of ICOs and the slow and stringent regulations of security token offerings (STOs).
IEOs have been a concept for some time, but the idea of an exchange-supported crowdfund hit popularity after Binance launched its platform to assist projects at the end of 2018. Binance Launchpad offers projects advice, issue-resolution, and marketing support. Backed by the exchange, projects also have a layer of credibility that ICOs simply can’t boast.
This layer of legitimacy goes for most IEOs, since the exchange is essentially putting its name behind the project, it needs to endorse the idea first and ensure that it is not a scam. With this centralised vetting process in place, investors have extra trust that the project is safe to fund.
How does an IEO work?
Like ICOs, IEOs have a limited supply of cryptocurrency coins on offer for a set price as part of the crowd sale for the project. Unlike ICOs, though, IEO tokens are already minted before the crowd sale is launched. This means that investors receive their tokens immediately, making it more secure and convenient to fund the project from the investment point-of-view. The exchange also handles the funds as the intermediary platforms.
Because an IEO is backed by an exchange, it makes it easier for the investor to participate too. With the exchange acting as the platform, no funds need to be sent through smart contracts nor is there a requirement for double-check transaction addresses.
What are the advantages of IEOs?
Because of the nature of the way an initial exchange offering is set up with an intermediary platform, there are several advantages an IEO boasts that an initial coin offering doesn’t. These include:
- Investors can be more confident in their investment. With the extra layer of protection (or at least credibility) of the exchange, it is more likely that the investor will be able to trust the project.
- With additional marketing, development, and advisory support, IEO projects are more likely to have better success at the end of the day.
- IEO projects can offer a more user-friendly experience for investors. (This is especially with first-time cryptocurrency investors).
What are the disadvantages of IEOs?
- The cryptocurrency projects suffer from listing fees to host their project on the platform. While the exchange might offer support, it comes at a cost.
- Research is still needed. Some exchanges might cut corners looking over the white paper of the project and standards might slip as a result. Before investing in an IEO, just make sure you do any of your own research too.
- Volatility in the market is a risk. Because of the way the market moves, it is possible that cryptocurrency tokens might rise in value only to fall drastically.