An IEO, as its name indicates it, is carried out through an existing cryptocurrency exchange, which is in charge of the launching of the tokens
The boom and decline of the ICO
ICOs or Initial Coin Offerings have been one of the most used fundraising tools by startups to gather money to develop their projectsfor a long time.
Some time ago, investing in astartup was limited to big investors that had a solid network and enough capital to participate in the rounds of venture capital crowdfunding, which meant participating in an Initial Public Offering (IPO), an initial sale for a company in the stock market, which was limited to certificated investors only. This situation changed radically with the appearance of the ICO, which transformed the way anyone can participate in this mix between IPO and a round of venture capital crowdfunding.
The year 2017 is remembered as the year of the crypto-market boom, a fact that called people’s attention during a period where the ICO had great growth. However, many ICOs were classified as scams and the first“institutionalized” forms of cryptographic fraud, which led many countries to enforce strict regulations for their execution.
A secure alternative to fundraise
For the startup creators, especially the cryptocurrency developers, this can’t prevent the growth of a market that has been increasing considerably, and as an alternative forICOs, the Initial Exchange Offering(IEO) emerged, an increasingly popular trend in the medium.Both the IEO and ICO are developed to carry out cryptographic crowdfundingthrough the offer of tokens to a great group of investors. But this doesn’t mean that they’re necessarily the same thing or have the same implications.
As its name indicates it,an IEO is carried out through an existing cryptocurrency exchange, which is in charge of the launching of the tokens, holding and selling them in the name of the project’s owner. This means that, unlike ICOs, the risk is transferred from investors to the stock exchanges, mitigating the risks of phishing or theft of confidential information.
The guarantee of an intermediary
However, the participation of an exchange in an IEO gives it an intermediary category, a situation that threatens the decentralized nature of cryptocurrencies and Blockchain, but there’s no doubt that this inclusion may turn out to be the best option for crowdfunding systems.
These are some requirements that must be fulfilled if exchanges want to participate in an IEO:
- Purchases must be made through the native token of the exchange, which allows it to generate demand that increases its value andthe volume ofoperations, which generates an increase in trust, as it becomes more attractive to the market.
- The exchange provides its security and trust conditions because the users participating in the IEO must abide by the security protocols of the identity register, which generates a more secure investment. Additionally, the exchange ensures the permanence of its regular clients by carrying out a serious investigation of a project before making the offer, for which it also carries out a negotiation process with the issuers of the asset subject to the signing of an agreement, with which it is possible to eliminate potential scams and doubtful projects.
- An exchange also brings legality and stability to an IEO because they have legal advice and clarity in the process, as they work under the legal structure of the country where they operate.
- Given that an exchange is the main financial service of the cryptographic industry, the projects that want to carry out an IEO will achieve an effective administration.
Features, advantages, and disadvantages of an IEO
The IEO, unlike the ICO, contemplates the payment of commissions to the participating exchangeas remuneration for the services provided as a facilitator, manager, and marketer in the project. Additionally, marketing represents a mutual benefit, since the exchange provides a suitable space for accreditation and credibility to the project, and this can engage more customers, which would increase the value of the native token.
An IEO has many benefits provided by the use of an accredited platform, but this doesn’t mean that they are exempt from fraud, scams, or losses for investors. Besides, they runthe risk of losing the decentralized nature of the digital asset, because a high percentage of it can be left in the hands of a small group of people, since a project marketed with IEO usually doesn’t handle extreme financing rounds or goes limitless, but with specific and limited offers in order to increase demand.
It’s expected that more and more projects will use an IEO as a method of raising funds for Blockchain projects due to the increase in restrictions imposed on ICOs. However, for the critics of this type of operations the outcome will be the same for both strategies, due to the lack of regulations in the majority of the countries that still don’t make the right decisions about this activity of money collection.
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