An initial coin offering, or ICO, is raising funds through cryptocurrency. The company pitches in their idea for the project and creates a new token. Interested investors buy into the ICO and receive the newly created tokens. However, ICOs lack solid regulations making them the perfect hub for scams. An initial exchange offering (IEO) is the same concept but happens through established crypto exchanges. Does that make IEOs more secure than ICOs? Let’s unpack.
What Is An Initial Exchange Offering?
An initial exchange offering is a way to raise funds through crypto exchanges. Again, in ICOs, you get new tokens as a result of your investment through the project’s website. However, it is risky because you don’t know if these tokens are legit. The team might just take the money and leave.
However, in IEOs, the sale of these tokens happens through known crypto exchanges, like Binance, which is more secure. The exchange usually conducts an in-depth evaluation of the project to make sure it’s credible and viable before going through with the IEO. So, IEOs are more secure than ICOs.
The first initial exchange offering took place in January 2019 when Binance launched the BitTorrent Token (BTT). The offering sold out within 15 minutes of its launch, raising more than $7.1 million in funds.
How Does An Initial Exchange Offering Work?
Exchange platforms organize the initial exchange offerings. So, the team has to fully focus on their project and the exchange platforms will handle the offerings. That being said, these platforms have a reputation to protect so they won’t do IEOs for any projects. In fact, they conduct a thorough selection before accepting any project.
The overall process from start to end is like the following:
- The team comes up with an idea that would make a successful project.
- They write the project’s whitepaper containing all the details regarding the project: team, roadmap, project vision, funds needed, etc.
- The team then pitches their idea to the exchange platform whereas in ICOs the team pitches their idea directly to the public.
- The exchange platform conducts a full analysis of the project: solid team, viable project, legit tokens, potential market demand, etc.
- Once the platform accepts the project, it starts with the IEO and announces the token sale.
- Interested investors create an account on the platform.
- When the IEO starts, investors can directly buy the tokens through the exchange platform.
- After the token sale ends, investors can trade the tokens on the exchange platform.
There are different types of IEOs depending on the type of token allocation. Some IEOs have fixed allocation whereas others have dynamic pricing.
- Fixed allocation: The team has agreed on a set supply of tokens and on the price per token. Investors buy tokens until the supply runs out.
- Dynamic pricing: The price per token is not predetermined. In fact, it varies based on multiple factors such as supply, demand, and market conditions. In this case, investors are more likely to join early on to catch the tokens at a low price.
- Tiered allocation: In this type of IEO, investors are grouped into different tiers based on the amount they contribute. Each tier has its own allocation limit, pricing, and incentives.
- Lottery system: This type of IEO is adopted when the demand is high but the supply is limited. Investors express interest in the initial exchange offering and the exchange platform randomly selects those who can purchase tokens.
Token Lock-up Periods
Initial exchange offerings also have different token lock-up period, referring to when you can use your tokens post-purchase. Some IEOs impose lock-up periods which can vary from weeks to months. During this time, investors are not allowed to trade their tokens.
Projects or exchange platforms impose these to avoid investors dumping all the tokens they purchase at once causing the price to tank. This often acts as a comfort blanket for investors as they’re assured the price won’t suddenly drop 3 secs after the IEO ends.
How to Make Sure your Project Gets Selected for the IEO?
Now that you know what initial exchange offerings are, you might be thinking you want to start your own. However, as already mentioned, getting accepted by an exchange platform is a tedious process.
So, here’s how you can make sure your project gets selected:
- Conduct an in-depth market research to understand what the market needs and who your target audience is.
- Develop a strong, viable project that fills an existing market gap. This way you ensure your project or service is in demand.
- Have a minimum viable product (MVP) ready.
- Make sure you’re versed on the legal requirements and that your project applies them.
- Craft a clear detailed whitepaper containing everything about your project. This is your “pitch paper” so ensure that it’s perfect-like.
- Have a clear funding goal. Exchange platforms are more likely to accept you if you’re clear about your money needs.
- Have a strong social media presence. This way you ensure you already have potential investors.
- Design your website to make your project more credible.
Your main focus should be on developing your project and being confident about all its aspects. At the end of the day, no one would think your project is viable if you’re not confident about it.
Pros and Cons of Initial Exchange Offerings
Initial exchange offerings have their fair share of pros and cons.
- Gain investors trust by conducting their IEO through well-known cryptocurrency exchanges.
- Get access to a wider audience as these crypto exchanges have a large user base.
- Don’t have to worry about the hassle of handling the token sale.
Also, investors can rest assured that the project is credible. And, because the exchange platforms handle the sale, this reflects potential price stability.
- Exchange platforms limit who can participate in these initial exchange offerings. IEOs are far more limited to ICOs that offer open access to the public.
- Projects have less control over token sales’ decisions.
- Market manipulation, and pump and dump schemes, are inevitable.
- Project’s success is tied to the exchange’s reputation. If the latter falls, the project crashes.
So, if you’re an investor and looking to take part in initial offerings, IEOs are less risky than ICOs. They’re more regulated, and projects go through thorough background checks. Of course, always do your own research before investing in anything. Just because a project is doing an IEO, doesn’t mean it’s a good investment for you. Anyway, if you have your crypto and you’re ready to start trading, be aware of crypto transaction fees.