An initial exchange offering (IEO) allows companies to sell tokens to investors to raise capital. This makes them similar to initial coin offerings (ICOs), but there are a few key differences. It is a new approach to crypto-banking that is catching the attention of ICO investors around the world.
IEOs can provide many benefits compared to ICOs. They offer greater security for users, improved transparency, bring about a fairer system that can benefit newcomers, and give users a sense that it is a reliable banking system.
Difference between IEOs and ICOs
In many ways, ICOs and IEOs are similar. They both allow companies to sell tokens to investors who are willing to finance projects. In this case, the counterparty for ICOs is the developer, but for IEOs, start-ups are able to handle the fundraising process themselves. They do this by relying on either one or multiple exchanges to complete the campaigns.
With ICOs, it is up to the developer to ensure all smart contracts are correct, everything goes to plan, and security is tight. But with initial exchange offerings, all of these obligations can be handled by the exchange, making it hassle-free for the developer involved. Both of these crowdfunding options are not perfect – each has their own flaws. However, many say IEOs are the better option.
Benefits of participating in an IEO
One of the most beneficial concepts of IEOs is that they offer a more streamlined process for developers and start-ups. ICOs can often be difficult to manage and can turn into very complex tasks. With IEOs, developers are shielded from many of the issues faced in ICOs. Allowing an exchange to be in charge ensures the token sale proceeds in a timely and secure manner.
Scams can’t always be prevented, but when using an IEO, the potential for scams is reduced. With exchanges, security is at its highest and smart contracts are unable to be compromised, meaning a developer will know their money is safe.
IEOs have also proven to be a fairer system for customers. They provide a variety of options for newcomers and enable traders to have more freedom and transparency. Newcomers are also able to test the waters of these exchanges with ease to allow them to see the best option out there for them.
Projects and start-ups that issue IEOs also have an increased credibility factor due to the exchange that is backing them. Exchanges help developers to have confidence in making sure everything is running smoothly. Having this type of trust allows developers to know that no scams will be allowed.
What are the benefits for the exchanges involved?
We have covered the benefits IEOs bring to consumers, but why do exchanges get involved in this type of crowdfunding? Exchanges benefit from exposure when joining forces with these projects. The project’s marketing team will also market the exchange, which in turn brings more customers to the exchange.
These additional customers will then increase volume on the exchange because of the trading fees involved. The exchange will then receive money deposits from investors and new users, turning some into regulars.
Finally, exchanges make money when listing new tokens and helping projects. Even though all exchanges will have different types of requirements, they will all benefit. Some exchanges ask for a listing fee, operation fees, or a percentage of the profit from the sale of the tokens.
Disadvantages of initial exchange offerings
As good and useful as IEOs have proven to be, there are still some disadvantages to this crowdfunding option. One of which is the issue of two participants owning the majority of one token’s circulation. This can happen due to the limited exposure of one or several exchanges, meaning people who don’t own an account at these exchanges are excluded from the sale. This makes the sale of the tokens smaller than it potentially could be.
When IEOs end, this is when the token trading starts. But because of the nature of IEOs, people who want to invest have to wait for the price to drop. This then destroys the price of the coin and all the profits of smaller investors.
Another disadvantage of initial exchange offerings is that the tokens issued must support the cost of all the fees. Token issuers also have to deliver all of the marketing costs for the token.
Final thoughts and the future for IEOs
Initial exchange offerings have proven to have the potential to help restore the negative image of ICOs. But there is still no perfect crowdfunding mechanism out there. However, because of the advantages IEOs have over ICOs, they may be able to restart the industry. Get ready to see more of IEOs in the future.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.