If you follow cryptocurrency news, you probably already know what are Initial Coin Offerings. But have you heard of Initial Exchange Offerings?
An initial exchange offering is a new crowdfunding method where a project sells its digital assets through a cryptocurrency exchange. Other than the fact that cryptocurrency exchanges back them, IEOs are mostly similar to ICOs.
Here are two instances where this new trend has been mentioned in mainstream media:
- “Crypto exchange Coincheck to launch Japan’s first IEO”
Coindesk, August 26, 2020.
- “Life after the ICO hype: What’s in store for the collective investment market?”
Forbes, October 25, 2019.
In an IEO, a crypto exchange takes on the same duties an investment bank would take in an Initial Public Offering (IPO). The exchange acts as an administrator and evaluates potential sales before they take place. The project compensates the exchange for the role it plays in the sale of their tokens.
Some of the platforms offering Initial Exchange Offerings include: Binance, OKEx, Huobi Prime, Bittrex, Kucoin Spotlight, Coineal, and Exmarkets Launchpad.
Advantages of IEOs
IEOs are considered to be more trustworthy than ICOs. This is because exchanges have to thoroughly vet a potential project before allowing them to launch their IEO through their exchange. Most exchanges already have a reputation to maintain. So, they would not want to back a questionable project as it would negatively affect the trust they have already established with their clients.
In an ICO, all a project has to do is publish a convincing whitepaper and get the funding they need.
Another pro of using an IEO to launch digital tokens is that the token is available for trade sooner than in an ICO. With ICOs, most of the tokens did not even get to an exchange. But with IEO, the project’s tokens are available for trade within a week.
Additionally, the exchange promotes the project, therefore putting it in front of the eyes of many potential investors. This significantly increases the volume after launch and reduces startup costs.
Moreover, users do not have to perform additional KYC procedures because the exchange has already vetted them.
Disadvantages of IEOs
On the cons side, investing in an IEO does not mean that the tokens will increase in price. Although most projects that have launched their tokens in an IEO have seen an increase in the value of their tokens, there are no guarantees, you are still taking a risk, and your capital is still at risk.
Another drawback of an IEO is that exchanges have proven to be major attractions to nefarious actors. So far, these platforms have lost over $ 80 million to cybercriminals. Accumulating even more digital currency will increase their appeal to hackers.
IEOs have also been criticized for encouraging the centralization of digital asset offerings in the hands of cryptocurrency exchanges. Most advocates of cryptocurrencies and blockchain technology are attracted to their decentralized nature, so introducing a central point of failure is far from desirable.
Overall, IEOs are beneficial for those who would like to invest in new digital assets while avoiding crypto scams that are common with ICOs. Nonetheless, IEOs do not guarantee that the tokens bought will appreciate in value. It is an investment like any other so it comes with risks.