While it is true that ICOs are not quite yet dead, they enjoy far less hype than they did in 2017. And as interest in initial coin offerings wanes, a new player has arrived on the scene in the form of the Initial Exchange Offering (IEO). What is this beast, you may ask, and how does it work?
The Fetch.AI project is an IEO that has received a lot of media attention, not least because it raised $6 million in 22 seconds. The fundraiser was held on the Binance exchange. BitTorrent also raised $7.2 million in 18 minutes via an IEO. These heady figures are bound to draw the attention of those who feel the air has almost completely leaked out of the ICO balloon.
An alternative to the ICO
However, the need to raise money for blockchain-related projects remains. Which is where the IEO comes in — as an alternative to both the ICO and private placement. With the latter, the project raises funds via a private investor, rather than going to the public with tokens. The downside of choosing private placement is that there needs to be a very high level of interest in the project by investors with very deep pockets, such as those who funded Telegram to the tune of $850 million.
How does an IEO work?
An IEO is “an agreement with an exchange on an initial placement via the exchange,” writes Maria Stankovich on Medium. It is possible to simplify this explanation even further and say it is a token sale held on an exchange, which acts as an intermediary. And that is one key difference between the IEO and the ICO.
The exchange, it could be Binance or one of the others, assesses the project from a technical perspective to ensure it is legitimate, and they look at how attractive they believe the project will be to the exchange’s clients and a wider audience as well. If they are satisfied with the quality of the project, they make an announcement about the token sale on the exchange.
The upside for token buyers is that unlike with an ICO, they don’t need to send funds to purchase tokens via a smart contract; they can buy them directly from their personal account on the exchange.
The benefits of an IEO
There is a big benefit here for the project needing to raise funds, in that an exchange has a ready-made base of potential investors. It also means that the token is listed on an exchange — something that many ICOs have struggled with, despite promises to their followers. And the investors feel a higher level of trust, because the sale is taking place via the exchange that they already have confidence in. They also don’t need to go through more KYC, exchange fiat for crypto etc etc. It’s easier for everyone.
And of course the exchange benefits, or they wouldn’t do it. They potentially get a whole bunch of new customers who want to buy tokens. And these token buyers may stay to become long-term users of the exchange.
At the moment, only a handful of exchanges are offering IEOs. These include Binance, EXMO, GBE, Bittrex and Huobi. The Gibraltar Blockchain Exchangeis another leader in IEOs, and has conducted seven of them so far, using its GBX Grid — Token Launch Centre tool.
It is early days for IEOs, but the way forward seems promising: after all, unlike with an ICO, any proposed project will go through a more rigorous analysis before the sale begins, and that should boost investor confidence in the mechanism and the project.