Jun 18, 2019

IEO Cryptocurrency: The New Wave Of Crypto Crowdfunding

Do you deal with cryptocurrencies?

Are you interested in the cryptocurrency world and have done significant research into it?

If you answer both of the above questions with ‘Yes’ then you probably know all about IEO and what it means. But if you don’t already know about what IEO is or what Cryptocurrency crowdfunding is, then read on, because we are going to tell you all about it.

What Is IEO?

If you are someone who keeps up with Cryptocurrency world then you’d already know about IEO, but in case you don’t, here is a brief rundown for you.

IEO, or Initial Exchange Offering, is a new and fresh method of Cryptocurrency crowdfunding. In it’s basic, it is a new method of cryptocurrency crowdfunding. A significant improvement over ICO or Initial Coin Offering, IEO enables the investor to enter the crypto world with a safe way of investing in projects.

It functions much like ICO, only in case of initial exchange offering, the entire campaign is backed by a cryptocurrency exchange platform. In this case, the crypto exchanges administer the entire fundraising process.

Unlike ICO, where anyone with a crypto asset can invest in the project, in IEO, the investors have to be registered with the crypto exchange that is backing the IEO.

This, however, is a brief description of how IEO works. Let’s look into the workings of IEO in depth.

How Does IEO Works?

Here is a brief description of how an Initial Exchange offering works-

Before launching the campaign, the crypto exchange that is backing the IEO is going to look into the startup that wants to launch a new currency through the exchange. The proposed project is analyzed by the exchange in-depth.

The IEO flow

Once the project is deemed authentic and valuable, the startup can move onto the next step, that is paying the exchange a listing fee and a percentage of the coins they want to sell through IEO. since the exchange collects a small percentage of the tokens sold by the issuer, they are encouraged to help the startup with the marketing operations.

Once the fees are paid, the token sale starts on the crypto platform. In case of an IEO, it is only the ones who are already registered with the crypto exchange platform that can start investing in this new token.

Where Did IEO Come From?

Nothing in this world just starts to exist suddenly. It all has a root and a history. So does IEO blockchain.

The need for another method of crypto crowdfunding was felt when the previous method of crowdfunding, ICO or Initial Coin Exchange went to bust because of rampant fraud. After the long wait, in 2017, the concept of IEO came into being when Binance Exchange helped Gifto and Bread raise $3 million and 6$ million respectively.

But in 2018, Binance issued a statement that said “There is a fundamental problem with IEOs, though. Namely, a high percentage of coins are held by a small number of people.” for the rest of the year, Binance put the concept on hold, until February 2019, when BitTorrent and Fetch.AI raised over $6 million each through IEO campaigns.

This success was enough for other crypto projects to now look into IEO cryptocurrency as well. Even though the success rate is high, the exchanges are still being cautious about this. Due to the ICO fraud tsunami in 2017, it is only natural that exchanges are taking extra precautions about launching new tokens from new startups.

According to data from ICO bench so far 35 IEO’s are complete and 10 are underway. However, there is still a little knowledge about how to start an IEO campaign and how to participate in one. So let’s see how to go about it.

ICO – What Is It?

It is important to take a look at what ICO or Initial Coin Offering is before going to the IEO vs ICO showdown.  

In terms of cryptocurrency crowdfunding, ICO industry was a groundbreaking success, initially. It enabled people from anywhere in the world with an internet connection and some cryptocurrency asset to invest in a project. But as time went on, more and more scams eventually ran the entire process to the ground.

How Does ICO Work?

The workings of ICO is pretty simple. When a startup company wants to raise funds for their new project through ICO, they would usually create a whitepaper, which is a plan including all the important details of the project, such as what kind of problems would the project solve, how much money is needed for the completion of the project, how long the ICO campaign would continue, etc.

During the entire campaign, crypto enthusiasts would buy the distributed coin from the startup company with fiat currency or with virtual currency. If the minimum requirement for the fund is not raised by the firm then the money is returned to the backers and the ICO campaign is deemed unsuccessful. However, if sufficient funds are raised, then the money is used to work on the new project.  

What Are The Differences Between IEO And ICO? Which One is Better?

Despite achieving the same goal, the difference between the two procedures, Initial Exchange Offerings and Initial Coin Offerings, have lots of differences. These differences are

Accessibility

When it comes to accessibility, IEO and ICO have very distinct differences.

In case of an ICO or Initial Coin Offering exchange, anyone with some crypto asset can take part and invest. Basically, it is accessible to anyone and everyone.

But in case of an IEO, only the registered users of exchange can take part in the fundraising. If you absolutely want to take part in an IEO campaign, you need to have an account and funds in that account with that specific crypto exchange platform.

Presence Of A Third Party

One of the main differences between an ICO and IEO is the presence of a third party.

When it comes to ICO industry, there is no intermediary between the startup and the investor. The investors send the funds directly to the token issuer.

In case of an IEO, the cryptocurrency exchange work as the regulatory body. They are the third party existing between the startup and the investors. In this case, however, the third party exists to regulate and authenticate only the legit projects and save the investors from scam.

The Fund Raising Technique

There is a major difference when it comes to the fundraising techniques between IEOs and ICOs.

When it comes to ICOs, the funds are directly sent to the company from the investors, whereas in the case of an IEO, the funds the investors invest go through the exchange.

Market Centralization

There is a serious difference in market centralization in case of ICO and IEO.

In case of an ICO, the market centralization is not possible because the fundraisers are being held on separate platforms, and there is no intermediary party in between the startup and the investor.

Compared to ICO the IEO market is subjected to two types of trends. The organizers want to hold their IEO campaign on the best crypto trading platform that has the largest user base. And the investors want to participate in IEO campaigns held on the most secure exchange platforms that have the best reputation and a large number of tokensails held on it.

These two trends push the market towards centralization, contributing to the general trend of the crypto market, that is to trade on the most secure exchanges.

Which is how in a few years there is a high chance that most IEOs will be held on a select few exchange platform. This will give those selected exchange platforms too much power and they would start dictating their conditions to the investors and organizers like the central banks and trading markets.

Transparency Of The Process

It is no doubt that the two processes have some serious differences when it comes to the entire matter of transparency.

As for ICOs, there is no need to disclose all information related to the company and the startup to the investor. All the startup needs is a landing site and a whitepaper to get them started. This lack of transparency is what gave rise to the ICO fraud in 2017.

In case of an IEO exchange, on the other hand, it is impossible, because the startup has to disclose all information not only related to the project but also related to the company and its employees. The company needs to go through the due diligence process to be listed on the exchange platform, decreasing the chances of frauds with a higher level of transparency in the process.

Lottery And “Gas” War

During the first IEO campaign, it was noticed that the startup coins tend to sell very fast. This gave rise of criticism among the crypto investors who didn’t have a chance to take part in the tokensale.

Such a problem was solved with “gas’ wars in case of an ICO. the first buyers in an ICO campaign were entitled to big discounts, so the investors would overestimate the Gas price to become the first buyers.

But in case of an IEO, this problem is solved by a lottery. This lottery is performed using a randomized transparent system. The distribution of the tickets of participation in the lottery is carried out according to the number of exchange tokens on the user’s deposit in the last 20 days.

The Reputation Of The Process

Last but not least, there is a major difference between the two methods when it comes to reputation.

The increased fraudulent activity in the ICO has somewhat diminished the reputation of the process. The unchecked, sketchy startups have succeeded in raising around $1.34 billion through ICO fundings, which is close to being 11% of the entire amount raised by the blockchain industry through ICO.

The process of IEO is, however, extremely regulated. The diligence process any project needs to go through to get listed on the exchange platform is more than enough to filter out any of the scammy and fraudulent projects.

What Are The Benefits Of IEO?

Initial Exchange Offering is considered to be an improvement over Initial Coin Offering. So it is obvious that IEO definitely has some serious benefits. But what are these benefits? Let’s check them out.

For The Investor

The entire process of IEO has some really amazing benefits for the investors. These are-

  • Minimized Effort

For the investor, participating in IEO takes minimum effort on their part. It is almost like buying a cryptocurrency on the exchange. All the investor needs to do is to create an account on the exchange platform, go through the KYC process and they are ready to start investing in IEO.

Related Read: Building a Bitcoin Wallet App will be a Piece of Cake with this Strategy. Know How

Additionally, the investor doesn’t have to perform a thorough check on the startup, study the various conditions for investing in a project and learn how to buy startup tokens. They can start investing in IEOs very easily with minimal effort.

  • Security

The obvious benefit for the investor when it comes to an IEO is the security it provides. The investors could not always verify the authenticity of the project. The lack of transparency in the process made it a heaven for the scammers to raise money from the investors who knew next to nothing about the company and its projects.

But to hold an IEO, the startup needs to go through a due diligence process to get listed on the exchange process. This weeds out the frauds, giving the investors a safe environment to invest in.

For The Project Team

Compared to ICO, the IEO benefits to project team in many ways. Whether you are building a blockchain wallet or a P2P payment app, this process can provide startups with benefits like legitimizing the token sales to increasing reputation, the major benefits are-

  • Less Effort In Matters Of Kyc/AML

The project doesn’t have to put in too much effort in the matters of setting up its own KYC/AML process, because they would be using an exchange platform to hold their IEO.

  • Direct Access To A Large User Base

Through initial exchange offering, the startups would get direct access to the large user base of the crypto exchange platform. This way they can reach more people, increasing their chances of raising the amount of fund they need.

  • Direct Access To The Expert Teams

With the help of the crypto exchange, the project would have direct access to teams that are experienced in matters of smart contracts, listing, marketing, etc.

  • A Sense Of Authenticity And Credibility

Being verified by an exchange platform to be listed on their site makes the startup company seem authentic and credible.

Related Read: Want to Build a P2P Payment App? Find Out How in this Article

This definitely increases their chances of raising the funds and gain the trust of the investors.

For The Exchange

The process holds some serious advantages for the exchange as well. These benefits are-

  • Raising The Bar To Enter The Market

The due diligence process that every exchange performs on the startups wanting to be listed on the exchange platform raises the bar to enter the crypto exchange market. This way the exchange would ensure that only the credible projects go through and get featured on their site.

  • Increase Of Revenue

The direct listing of new projects gives the exchanges an increased chance of attracting new clients. This means an influx of capital that only translates into the generation of more revenue.

Now that we have talked about what IEO is and what you need for IEO development for your own Blockchain startup, let’s take a look at ICO and what it is.

Related Read: Why do you Need Better UX Design for Your Blockchain App? Find Out Now!

So, if you are convinced enough about IEO, let’s talk about how you can launch a successful IEO campaign.

Steps For Launching A Successful IEO Campaign

Step 1: Choose your crowdfunding option

Step 2: Choose the right cryptocurrency exchange to hold your IEO campaign

Step 3: Negotiating and preparations- technical, marketing and legal aspects

Step 4: Token Minting

Step 5: After IEO- secondary trading and market making.

How To Launch An IEO Campaign For Your Startup?

Knowing about IEO and launching an IEO campaign are two different things. So let’s see how you can launch an IEO campaign for your own startup.

Here are the steps of creating an IEO campaign for your startup.

Step1: Choosing Your Crowdfunding Option

Before you jump onto the IEO blockchain bandwagon with your brand new startup idea, consider other options.

Not because there are any problems with IEO like ICO, but because IEO is not suitable for all kinds of projects. This specific fundraising method is especially beneficial for the blockchain developers who already have a functioning business with serious turnover. There are two major reasons for it-

  1. The crypto exchanges are only willing to share their client base with proven businesses with reliable projects.
  2. When launching an IEO, the company has to pay a significant fee to the exchange to get the listing. This fee can be hard to pay for the first time fundraisers and brand new start-ups.

Whether you are a big business or a brand new startup, if you have already decided on IEO for your crowdfunding, then let’s talk about the next step.

Step 2: Choosing The Crypto Exchange

Once you have decided on IEO, it’s time for you to choose the crypto exchange.

initial exchange offerings

Choosing the exchange is an important step because it is going to administer the entire IEO process for you. The choice of exchange is going to affect your fundraising so consider these factors before choosing an exchange platform-

  1. The more prominent the exchange is, the more it will cost you to get listing with them. Also, they will be stricter with their vetting process of your project.
  2. Some centralized exchanges can be vulnerable to the negative consequences of malfunctions and cyber attacks.
  3. The exchanges are going to be thorough with the vetting process, so make sure to create an authentic and valuable project.

All these factors make it seem like it is really hard to choose an exchange for an IEO campaign but it really isn’t. These factors only make sure that the quality of the offered projects is high, unlike in ICO, where the quality of projects used to be sketchy and unreliable.

The are many IEO platforms including Binance, Huobi, OKEx, which are more popular than the rest.

Once you have gone through all the factors and picked a proper exchange for your IEO campaign, you have to move onto the next step.

Step 3: Negotiations And Preparations: Technical, Marketing, And Legal Aspects

Once you have decided on a crypto exchange platform to hold your IEO campaign, it’s time for negotiating and preparing for technical, marketing and legal aspect of it all.

initial exchange offering legal aspects

There are going to be some serious cost to list your app listed on any exchange. This cost depends on the different exchange launchpads. So make sure to clarify the matters of the listing fee before going any farther.

There is also the marketing fee, which the token issuer and the exchange share. Along with that, there is a legal fee as well. All these fees are the main reason why IEO is more suited for a business that already has an annual turn over.

Step 4: Token Minting

Once the token issuer has jumped through all the hoops and got verified for listing on the crypto exchange launchpad, it’s time for them to mint tokens.

initial exchange offering token minting

While minting tokens, they have to keep two things in mind.

First, they have to decide on a hard cap for the funding. This goal needs to be practical and tangible. Having an unrealistic goal is only going to make it hard for the token issuer to reach that goal.

Second, the number of tokens to be minted and their price needs to be fixed according to the hard cap fixed by the company.

After you have passed the selection criteria and have minted your token, it can be listed on the platform. This, however, is not the last step for launching an IEO campaign. There is one last step after this.

Step 5: Secondary Trading And Market Making After IEO

After a successful launching of the IEO campaign, you now have to take care of two different things-

  1. After launching and getting listed on the exchange, you now have to work to market your project. A lot of times the exchange itself will help you with the marketing of the project. You can use multiple marketing strategies such as social media marketing, press release, etc.
  2. The investors should be able to use the tokens for its original utilitarian purpose. The intention of a crypto crowdfunding is not just to raise a good amount of money in a short amount of time. It is to use that money to create a functioning infrastructure, where the issued token can be used to acquire goods and services.

Now that we have talked about how to launch an IEO campaign, it’s time to find out the real benefits of IEO.

IEO, Hot, Or Not?

So, what is the last word in the matter of IEO then?

It is very obvious that when you compare, Initial Exchange Offering is definitely a better method of crypto fundraising than Initial Coin Offering. It is safer, and there is a higher chance of ROI.

But that does not mean that IEO exchange has no flaws at all. The three major downsides of this process are

  1. The cryptocurrency exchange platforms can be vulnerable to cyber attacks.
  2. The diligence process may weed out the weak projects and scams., but it can’t stop the serious fraudsters.
  3. The crypto trading platform may check the project and host the IEO campaign, but it will not guarantee a refund in case of any catastrophe.

On top of that, the new tokens that are available right after the IEO campaigns are vulnerable to market manipulation. IEO would only expose the coin to a selected number of investors, (the users of a certain crypto exchange platform) and this can lead to market manipulation.

However, despite all the downsides of IEO, it is still a very new method of crypto crowdfunding and still evolving.

Whether it rises to be the best way of raising funds in the blockchain industry or drowns in frauds and scams like its predecessor, is something we all have to wait and see for ourselves.

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Pratip Biswas

Founder, Unified Infotech

I am an Entrepreneur and a Tech Geek with more than 1500 successful projects launched. I share my experience through my love for writing and help other entrepreneurs reach their business goals.