Fundraising in blockchain technology has experienced steady developments, reducing investor risk and making it easy for project developers to reach a mass audience via popular exchanges.
Initially, crypto fundraising was popular via Initial Coin Offerings (ICOs), a form of crowdfunding similar to the traditional Initial Public Offerings (IPOs). However, ICOs came with the perks of fewer regulations than traditional IPOs; unfortunately, these fewer regulations came with the concerns of increased risks for investors. During the ICO boom in 2017 – 2018, several ICO scams in the form of pump-and-dump schemes were created, causing investors to lose several billion dollars; as a result, these fraudulent schemes lowered the quality and interest in ICOs.
Of course, the irregularities with ICOs weren’t going to stop crypto fundraising, and it was obvious that new approaches were needed to ensure reliability in crypto fundraising; hence, several Centralized Exchanges (CEXs) pioneered by Binance started to raise funds via their platforms, presenting new crypto projects to their users after vetting them. For example, in January 2019, The Binance IEO launchpad crowdfunded BitTorrent Token (BTT), and its hard cap of $7.2million was raised within 15 minutes.
What is an IEO?
An Initial Exchange Offering (IEO) is a cryptocurrency crowdfunding campaign conducted and administered by a centralized exchange (CEX). Unlike an ICO, where tokens are directly distributed by the issuers, tokens issued from an IEO fundraising are immediately listed on the exchange and are distributed to each participant via the exchange.
Unlike ICOs, where each participating individual is required to send their contributions via a smart contract, IEOs are pretty much easier to enter. Individuals are only required to purchase an account with the CEX in question, fund their wallets with money, and participate in the crowd sale. Of course, the project creators typically pay a listing fee alongside the IEO demands so that the token is immediately available for trading after fundraising is over.
How Does an IEO work?
The project creators or company creating the fundraising campaign is expected to draft a whitepaper explaining how the token will achieve value, how the funds raised will be spent, and how the project will record success. So as not to tarnish their image, the CEX in question is obligated to vet the whitepaper, and if good enough, the company/project is expected to register with the CEX, pay a listing fee, and issue tokens to the exchange for distribution.
Afterward, the CEX is expected to fulfill necessary obligations to ensure the success of the IEO by putting the word out to its users and other related marketing tasks. Also, since most CEXs are KYC and AML-compliant, the CEX onboarding the new project is required to vet all investors and secure the funds for the company. Finally, the tokens become available for trading on the exchange after all these are completed.
Advantages of IEOs over other Crypto Fundraising Approaches
Investor Security: Typically, CEXs are expected to conduct adequate research before listing or even agreeing to onboard a new crypto asset; investors typically trust IEOs. In other words, CEXs always want to protect their image and their customers’ interest; similarly, investors would breathe an air of peace, seeing that the project is launched by a CEX they trust. As a result, IEOs are considered less risky compared to ICOs and other crypto fundraising approaches.
Broad Reach: IEOs directly market their project to the existing customers and audience of the CEX looking to onboard them; so, in other words. If an IEO launches on a CEX with a million global users, then the project can instantly market itself to a million users, which could positively influence the success of the project. Since IEOs don’t need to start marketing from the ground, they have a head start at selling their value proposition to an existing audience, ready to listen to the offer.
Investor-friendly experience: Often, CEXs that launch IEOs have aesthetically pleasing, easy-to-use platforms that could make it easy for first-time investors to participate in IEOs without any technical issues.
Also, CEXs can efficiently offer support to investors more than other fundraising approaches since they have a vast customer service team.
Liquidity: Unlike an ICO, IEOs don’t have to go through another journey to list tokens on an exchange; as soon as the IEO is concluded on the exchange, it is immediately available on a marketplace; and the instant presence of liquidity speedily helps the market movement of an asset, encouraging active trading.
Disadvantages of IEOs
Commissions: In the absence of a listing fee, the company/project may be required to drop a certain percentage of the tokens as commissions; this may commit too many tokens into the hands of a single body, hence creating a whale.
Centralization: It’s no news that CEXs are heavily centralized; hence, in the bid to ensure investor security, these CEXs may unnecessarily gatekeep crypto fundraising, blocking the path for promising projects.
Doesn’t offer complete protection from PnD schemes: It is difficult to control what happens after fundraising has been completed; if the hype of the token massively exceeds its value proposition, the token may not last long; after the initial spike, it could come crashing down forever, and investors will lose money. In truth, IEOs minimize these risks; however, they cannot fully offer protection from pump and dump schemes.
It is pretty evident that IEOs help mitigates risks when investing in coin offerings; however, only you are responsible for your investment decisions. Therefore, it is crucial that you do your due diligence and ensure that you are convinced by the project before participating in any crowdfunding event.
You can learn more about Initial Coin Offerings (ICOs) and Initial DEX offerings (IDOs) via the CCTIP blog.