Is An IEO a Stop-Gap Solution For ICO’s?
While the current bear market continues and many newly invested cryptocurrency enthusiasts are scratching their heads waiting for a repeat of the incredible bull run, we had in 2017 projects, and blockchain businesses are looking at what the learnings from that year and looking to improve on it.
One of the major contributing factors to the meteoric rise in the price of cryptocurrency was the popularity and promise of the revolutionary ICO.
ICO’s were a bit of a wild west with the majority of them failing for various reasons such as:
- Being a scam
- Not reaching their soft cap
- Burned out runway sooner than expected
- Seen as a short term investment (Pump and dump)
- Poor economic model
- The product takes too long to reach positive cash flow
- and a host of other reasons.
Investing in ICO’s is as high a risk opportunity as any in the cryptocurrency market and with so much money being lost through various failed capital raises we’re now seeing new concepts emerge like the STO (Security Token Offering), ILP (Initial Loan Procurement) and now the IEO (Initial Exchange Offering).
These options are looking to put more regulation in place and have companies who run ICO’s take responsibility for investor money and not allow them to disappear into thin air which was a prominent fixture of the ICO model.
What is an IEO?
An Initial Exchange Offering is the latest concept to be trialled as an alternative to an ICO and as its name suggests, is conducted on the platform of a cryptocurrency exchange.
An IEO is administered by a crypto exchange on behalf of the startup that seeks to raise funds with its newly issued tokens.
As the token sale is conducted on the exchange’s platform, token issuers have to pay a listing fee along with a percentage of the tokens sold during the IEO. In return, the tokens of the crypto startups are sold on the exchange’s platforms, and their coins are listed after the IEO is over.
IEO participants do not send contributions to a smart contract, such as governs an ICO. Instead, they have to create an account on the exchange’s platform where the IEO is conducted. The contributors then fund their exchange wallets with coins and use those funds to buy the fundraising company’s tokens.
What are the pros of an IEO?
Conducting an initial coin offering through an exchange might sound a little safer because it addresses one key issue that plighted many an ICO; the option to sell the tokens at a later date, but it also offers a few assurances that are attractive to gain new investors.
When buying tokens through an IEO, you buy in the knowledge that the exchange has done some due diligence and is launching a coin it believes has a future.
What’s more IEO’s have easy access to market their capital raise to an already active audience and can reduce marketing costs
While the investor registration process is more streamlined as prospective buyers are likely to have to undergo know-your-customer (KYC) and anti-money laundering (AML) checks, depending on the exchange.
What are the cons of an IEO?
When you campaign for an ICO in a perfect world, you’re looking for investors who see merit in your project and are willing to provide a capital injection to help you reach the market.
Once you start to generate cash flow, you can now offer that investor the option of selling his tokens to another investor or repurchase it at a higher price rewarding the investor for faith in your company.
Most cryptocurrency investors don’t think along those terms, and they’re in it for a quick upswing so they can dump their coins for a marginal profit. IEO’s make this process a lot easier since there is no waiting time.
Pump and dumps are a systematic problem
In an ICO the investment is held in a Smart contract, and the investor receives a promise in the form of a token. This buys the company enough time to trade some of what they’ve raised into fiat, create run away for a period they need and pay to list on an exchange.
By the time the token is listed the company still has the liquidity to run while investors can decide to opt out of their investment or not.
In an IEO however, this time is shortened, and if this behaviour is not calculated into the economic model of the business, they can quickly run short on capital and be stuck with plenty of their native token that won’t bring in much value if sold.
Exchanges taking control
Another negative of the IEO is the margin or arbitrage trading happening with these IEO’s on Binance. Since Binance insists you purchase their IEO’s with their native token, it quickly pumps up the price before the IEO which allows Binance or others to build a stake in BNB and sell off high while others are HODLing waiting to buy into the IEO.
This method allows the exchange to scheme profits before launching any IEO and to me is an abuse of power and showcases the dangers of centralised exchanges.
Do your own research
Investors should always remain cautious and consider the potential motivation the exchange may have for listing an IEO particularly, as some exchanges have been accused of accepting money to list certain tokens in the past.
Filter fraud or centralise power?
The raging debate will be where do we draw the line between combatting fraud and giving over too much wealth and power with centralised exchanges, who are already well known not have investors best interests at heart.
An IEO is by no means a direct replacement for the ICO and has its hang-ups, but it may suit some projects who feel its an easier way to legitimise their product, especially for utility tokens.
However, an IEO does by no means guarantee the success of a coin, and we’ve seen some IEO’s that have launched on Binance completely tank in price within a few days of being available.
It will be interesting to see the success rate of an IEO vs an ICO will be like. I’m pretty sure it will be an improvement since ICO’s performed abysmally but I highly doubt it will be a revolutionary method of raising capital for blockchain projects going forward.