Advancement in technology keeps revolutionizing daily life activities in all aspects. The traditional financial systems are not spared. After the 2008 economic crisis, a ‘solution’ came up in the form of cryptocurrencies.
The blossoming crypto market has provided a plethora of investment opportunities and strategies to raise funds. Since the start of 2013, more than 1500 Initial Coin Offerings (ICOs) have successfully taken place. This crowdfunding method surged to the first place in the list of all crowdfunding projects until challenges of fraud and exit scams appeared.
China’s late 2017 ICO regulation and eventual ban with a few other governments creating stringent policies for the budding market minimized these crypto funds to a trickle. As a result of multiple swindles and scams cropping up, people continuously lost faith in digital currencies. Hence, the rate of mass adoption reduced considerably.
Even though the ICO funding strategy is gradually easing off, a new fundraising method is taking shape. Fundraisers, investors, analysts, and commentators are amazed by the initial exchange offering (IEO). This new method is clearly a makeover of the ICO. Although the IEO fundamentally has its bases on the ICO, it is much secure because the offering happens through local exchanges.
The exchanges have reputational risks to worry about in case a scam arises.
What is an IEO?
An Initial Exchange Offering is described as a crowdfunding strategy that primarily relies on an exchange or even multiple exchanges. The involved third-party exchanges plan the events, make the smart contract, and also design the marketing campaigns. In the initial coin offerings, the developer is responsible for ensuring that the smart contract is authentic. The developer also ensures that everything is conducted according to plans.
Therefore, it is mandatory for investors to create accounts with the exchanges to enable them to participate in an IEO. Also, they send their digital tokens to the participating exchange rather than contributing them the Smart Contract like the case with ICOs. Once the IEO process begins, investors can purchase digital tokens from the participating exchanges.
The tokens are ‘minted’ solely by the developers before the initial exchange offering and sent to the exchanges. Each project floated in the market has its unique terms, deals, and conditions set in conjunction with the exchanges. The terms could be a percentage for the exchange, a flat fee, marketing expenses cover, or any other viable conditions.
Nevertheless, the project investment launched at any given time can minimize organizational, marketing, or security expenses. Therefore, it may become a great investment in the long term. A majority of the initial coin offerings rules are applicable to the initial exchange offerings. But, the deals and conditions are different depending on the current project.
A variety of the projects will demand a fixed token price in the whole IEO process. They may additionally demand a token limit per investor to get rid of the whales and any possible chance of price manipulation. These strict rules and regulations are primarily set up to guarantee that the entire process runs in order.
Crypto exchanges that host these projects need developers to create a hard cap and a soft cap for every project. The set limits enable a greater result of the IEO. Whenever excessive coins are on offer, that particular token economy is mostly doomed from the start. The Initial Exchange Offerings are not open to the general public.
Therefore, only the active users of the participating crypto exchange platform can participate. The Binance Launchpad host is a perfect platform that enables participants to buy tokens using the Binance Coin (BNB).
How Initial Exchange Offerings Function
The exchange that plans to host and oversee a token sale on their platform always strives to reach an agreement with the developers before the process starts. The exchange will then does an exhaustive and effective review of the token project at hand. They use a variety of parameters to check and authenticate the worthiness of the IEO.
After the exchange confirms that everything is in perfect order, they accept the project. Then, they set and announce the date for the token sale and the fixed price for every token. All the initial exchange offering participants must always have active and adequately funded account wallets on the exchange platform.
The Binance Launchpad platform is popular among IEOs. A featured project hosted and overseen by the platform is reported to have raised an incredible $5.5 million in 18 minutes.
The Benefits of IEOs
The crypto exchange platforms exhaustively and extensively scrutinize the token issuer and the quality of the offering that they bring due to their involved reputational risk. Due to that, the initial exchange offering platforms create a fiduciary relationship with investors. They are proven to do what the institutional investors traditionally and extensively invest in.
Therefore, in the initial exchange offerings, there is an undoubted trust because the developer partners with trusted exchanges. The IEOs get the much-needed credibility. For instance, Binance has built for itself a trusted name in the digital currency world since it launched in 2017. Bittrex Exchange cancelled a RAID IEO project due to some fraud characteristics.
These instances show that the exchanges put users’ safety first before profits. The exchange platforms are not ready to risk their hard built reputation to help scams since they will punch holes into their credibility. Furthermore, IEOs are user-friendly because investors only require to set up an account at the particular exchange, fund wallets, and buy tokens once the sale goes live.
How to Participate in an IEO
It is significantly easy to participate in an initial exchange offering. Users require to research for what IEO will be on offer. After they get the perfect project, they should determine which exchange will oversee the project and sign up on the exchange.
The potential investor has to get the cryptocurrency that the IEO will accept and then wait for the crowdfunding event to start. After it goes live, the users and investors can buy the desired amount of tokens.
Whether the new IEO trend will replace the ICOs or not, only time will tell. Several IEO success stories are cropping up and should never be ignored. Many major exchange platforms are turning to IEO products. Thus, all indicators point in the direction of an evolution of how different cryptocurrency products and projects raise funds. Nonetheless, users are advised to take caution and do extensive research before investing.