Initial Exchange Offerings (IEO)
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is an initial investment collection event administered by a cryptocurrency exchange. Unlike the traditional Initial Coin Offering (ICO), the IEO startup team does not launch a fundraising platform and does not conduct it, but undergoes a financial and legal check on the exchange. If the test is passed, the site launches a tokensail in which all its users can participate.
This approach allows to solve the main problem of ICO
- a large number of SCAMs. According to 2017 research by Satis Group LLC, 80% of ICO are fraudulent projects. The data from the TokenData site for 2018 says that there are more than 90% of these (normal teams have switched to IEO and STO). No scammers have yet been discovered among IEO projects.
81% of ICO - scam, 6% - failed, 5% - died, and only 8% entered stock listings. Source of the image
It is possible that the new method of attracting initial investment
will be a natural result of the development of ICO
, will repeat its success and restore investor confidence in the market. At least, this conclusion is reached by experts studying the differences between ICO and IEO, as well as the advantages of the latter for startups, investors and stock exchanges.
Key differences between IEO and ICO
1: The presence of an intermediary
The main difference between ICO and IEO
is the intermediary between the issuer and investors in the form of a cryptocurrency exchange
. The trading platform undertakes to check blockchain startups through the Due Diligence procedure: registration of a legal entity, statutory documents, investment potential, market demand, financial condition, investment risks, project viability, and the like.
An agreement is concluded between the parties, in which the key terms of the holding of tokensale are prescribed:
- start and end time of the sale of coins;
- maximum amount of tokens per investor;
- base price for Fiat or main cryptocurrencies (BTC, ETH);
- softcap and hardcap, actions after their achievement;
- listing fee, percentage of sales;
- lottery procedure.
When an investor buys tokens during IEO,
he transfers money to a startup wallet on the exchange. These funds are under the complete control of the exchange. Funds are allocated to a startup in the form of several tranches. Each tranche usually has a specific objective, for example, to finance the development of an MVP, a marketing campaign
, or a product deployment. If the goal of the tranche is not achieved, the remaining money is returned to investors.
2: Market centralization
Since IEO is administered by cryptocurrency exchanges, this market is subject to two trends:
- The organizers will try to hold IEO on exchanges with the largest user base, as this increases the chances of collecting the necessary funds in full.
- Investors will try to participate in IEO on exchanges with the best reputation and the largest number of tokensails held, as this increases the likelihood that the project is not a scam.
These trends will push the market towards centralization.
This will also contribute to the general trend for the entire cryptocurrency market - the desire to trade on the most secure exchanges. There are very few such sites, if not the only one - Kraken.
Thus, there is a high probability that in a few years almost all IEOs will be held on 3-5 trading floors. If this happens, then the exchanges will begin to dictate their conditions to the organizers and investors, as do the central banks, stock and trading markets.
To launch ICO,
a blockchain startup team
does not have to disclose at least some information about the company and the owners. It is enough to create a website, write a whitepaper and launch a fundraising platform. Such a high anonymity and big money contributed to the fact that the fraudsters began to use the ICO. And judging by the Wall Street Journal
, they managed to lure more than $ 1 billion from investors.
Key aspects of the Due Diligence procedure
In the case of IEO, this is impossible, because a startup team must go through a Due Diligence procedure, which involves disclosing information about the company, its employees and owners. Thanks to this, it has become much more difficult for fraudsters to cheat cryptoinvestors
However, not only the organizers of IEO should disclose information. Since the fundraising occurs through cryptocurrency exchanges
, investors also have to go through verification of identity, that is, the KYC procedure. So exchanges want to protect themselves from possible participation in money laundering and / or terrorist financing.
4: Fundraising procedure
Let us take a simple example of how the procedures for raising funds through ICO and IEO
differ. For example, we plan to launch a blockchain-based freelance platform and we are sorely lacking money. To collect it using ICO or IEO, you need to do the following:
5: Lottery instead of "gas" war
The first IEO appeared at the end of 2017. The Binance trading platform
held two tokensales on its specialized Binance Launchpad platform - BREAD ($ 6 million) and GIFTO ($ 3.4 million). Startup coins managed to sell in a very short time, which caused a great wave of criticism from investors who did not have time to take part in the tokensale.
In the course of ICO, such a problem was solved by “gas” wars: investors overestimated commissions (gas) to become the first buyers who were entitled to a big discount
- usually the earlier you enter the project, the greater the discount. In the case of IEO, the problem of competition between buyers was decided by a lottery. An investor may randomly win a ticket that gives the right to purchase tokens among the first bidders.
The lottery is conducted using a transparent and randomized system, however, the distribution of tickets
for participation in the lottery is carried out in accordance with the number of exchange tokens on the user's deposit in the last 20 days. Such a system was first tested on the Binance Launchpad site during the IEO Matic Network (MATIC).
We summarize the differences (table)
IEO Benefits for Investors
Minimization of effort
. For investors, participation in IEO is a simplified procedure that looks more like a regular purchase of a crypt on the stock exchange, rather than investing in an ICO. You create an account on the trading platform
, go through the verification procedure and KYC / AML and then participate in any IEO.
In addition, to participate in IEO is no longer necessary every time:
- conduct economic and legal verification of a startup;
- study the conditions for investing in a specific project;
- think how to buy startup tokens.
The main problem of ICO
was that potential investors could not always verify the reliability and prospectivity of the project. Startups usually launched ICO through landing sites, where there was a minimum of information about the organizers. And even if the initial placement was carried out on specialized platforms, there was also not enough information.
As a result, quite often ICO
was launched by scammers who collected investors' money and then simply disappeared. And since investors did not have information about the organizers of tokensale, it was not possible to return the money. There was another way of cheating: fraudsters made tokensail, handed out tokens to investors, but then threw in the development
, which made such investments in “digital” candy wrappers.
In the case of primary stock exchange placement, such a number is much more difficult to turn. Marketplace analysts
do not allow the inclusion of dubious startups in the listing, since their reputation will suffer if fraud is detected. As a result, investors will go to another platform, and normal startups will follow them.
ICO is usually carried out in three stages:
- Private Sale - only large investors (whales) are allowed.
- Pre-Sale - large and accredited investors are allowed.
- Main Sale - everyone is allowed.
Typically, during Private Sale,
investors buy tokens with a maximum discount of 50% or more, Pre-Sale - 30–50%, Main Sale - 20–30% at the beginning of sales and 0% at the end. Such a system discriminates small and medium investors.
The IEO investment
scheme removes this discrimination, allowing everyone to participate in the tokensale at any stage, leveling the entry barrier for all investors. If tokens are sold by lottery tickets, the entry barrier will be present, but it will be insignificant: in the case of the IEO Matic Network at $ 1,250.
Investment return rate.
With IEO, purchased tokens can be sold almost immediately after the end of the tokensale, in the case of ICO - from one to six months after the end of the tokensale.
Such a speed of getting into trade listings greatly increases the rate of return on investment, which is beneficial to all market participants.
IEO benefits for startups
The fact that the exchange conducts Due Diligence
and distributes the collected funds greatly increases investor confidence. That is why many IEOs end in record time - from 20 seconds to one day (ICOs have been collecting money for several months or a year).
New tokens after IEO are listed on stock exchanges much faster, usually during the day, sometimes a week. With the usual ICO, this process took months, as the project had to go through Due Diligence, which had already been completed with IEO. And there was no guarantee that the project after ICO will pass IEO.
By launching the usual ICO, a startup must independently attract potential investors to its fundraising platform.
That is, you need to create and implement a marketing strategy that is worth the time and requires skills. In the case of IEO, a startup immediately gains access to a large number of potential investors who are ready to invest in a start-up project.
IEO Benefits for Exchanges
IEO Platform Gets Revenue:
- charging a fee or a fixed fee from the project for listing;
- charging commissions on transactions, the volume of which increases with each new tokenail;
- increasing the demand for the native token of the site, which is needed to participate in IEO and increase the chances of winning the lottery.
Promising IEO-startups contribute to the growth of the client base of the exchange and the number of references in the specialized media. This in turn attracts even more startups who wish to run IEO on a popular site.
Thus, a positive relationship is created, where the growth of one of the parameters contributes to the growth of the second parameter, which again contributes to the growth of the first parameter, and so on.
After IEO, the platform receives an exclusive token that is not being traded anywhere else. Exclusive coins attract new investors to the site who want to invest money in this particular project. So the exchange increases the customer base and trading volumes, that is, profit.
In terms of investment attractiveness and reliability, IEO is undoubtedly better than ICO. However, do not think that the initial exchange placement
will save from scammers or guarantee a return on investment. And that's why:
- Cryptocurrency exchanges are vulnerable to hacker attacks.
- Due Diligence eliminates obviously weak projects, but it is unlikely to help against serious fraudsters (proven by fraudulent IPO schemes, where verification and project requirements are much stricter).
- The exchange checks projects and holds IEO, but does not guarantee a refund in case of force majeure.
In addition, the scheme where tokens appear on trade listings almost immediately after a tokensail
is vulnerable to market manipulation through Pump & Dump technology. This is a fairly simple and old way of making money on the stock exchanges, implying “pumping” of the demand for an asset, which leads to an increase in its quotations, and then a sharp “reset” of the asset.
Based on the report from Business Inside
, such manipulations are a frequent occurrence in the cryptocurrency market. Many Telegram communities (PumpKing Community, Pump.im, AltTheWay, We Pump, Crypto4Pumps and others) have been identified, which are coordinated to artificially increase the rate of a particular cryptocurrency,
and then reset it at the right moment and earn.
There is no doubt that such a high demand for tokens during IEO
will be used in Pump & Dump schemes and others. Consequently, even if you invest in initial stock exchange placement, this does not guarantee the project “cleanliness” and return on investment.