You already know about initial coin offerings (ICOs). And, you’ve likely heard about security token offerings (STOs) as well. However, initial exchange offerings (IEOs) are a lesser-known type of token sale that has been gaining steam in 2019.
This year, IEOs have already raised over $2 billion, and their run doesn’t seem to be ending anytime soon. Let’s take a look at what exactly this type of token sale is and why it’s begun to infiltrate the cryptocurrency space.
- 1. What is an IEO?
- 2. So, why are IEOs on the rise?
- 3. How are IEOs performing?
- 4. Should you conduct an IEO?
What is an IEO?
An initial exchange offering, or IEO for short, is simply a token sale that operates through a partner exchange. It’s identical to an ICO in almost every way except that investors who can participate in the sale are typically limited to users on the associated exchange.
It works exactly like how you’d imagine.
The IEO process kicks off with an agreement between a cryptocurrency project and an exchange. Because of the popularity of IEOs, exchanges usually require potential partners to complete (and pass) an application process before partnering with them.
Once the two parties iron out the details of the agreement, the work begins. Often, the cryptocurrency exchange already has the infrastructure in place to collect KYC/AML information, facilitate the sale, and distribute the tokens once it’s complete. So, for token teams, conducting an IEO is simple as providing some information to the exchange with which you choose to partner.
The details of the actual token sale are identical to a traditional ICO. If an investor doesn’t already have an account on the exchange, they sign up. Then, they send funds (typically bitcoin, ether, or a platform-specific token) in exchange for the new crypto. Once the IEO is complete, the exchange distributes the newly-created cryptocurrency to the investors.
Because the exchange hosts the IEO, you’re able to trade the new token on the platform immediately.
So, why are IEOs on the rise?
There are a few reasons that IEOs have become the go-to fundraising option for several cryptocurrency projects.
Most importantly, by partnering with an exchange for a token offering, crypto projects receive additional publicity, which, in turn, leads to more investors. While tokens are generally unknown before conducting their sales, exchanges have a solid reputation and an established user base.
An exchange offering also brings an enhanced level of trust to the project behind it. Investors tend to put more faith into tokens that have the backing of a reputable exchange such as Binance. In fact, Binance IEOs have garnered so much interest that the company has implemented a lottery system to limit how many users can participate in their token sales.
Operating a token sale through an exchange also simplifies the investing process for many participants.
Countries around the world are continuing to crack down on token sale regulations. So the parties conducting the sale need to collect investors’ personal information to avoid legal repercussions. In a typical token sale, these regulatory requirements add numerous steps to an already complex investing process. Since exchanges typically already possess the personal information of their users, there’s no need to collect it again during an IEO.
Although not guaranteed, IEOs tend to provide a higher level of security than typical token sales. Generally, the exchanges that host the offerings have the experience of previous ones and have implemented several precautions against cyberattacks. These safeguards should come as no surprise as an exchange’s reputation is on the line if something goes awry.
Some exchanges even treat IEOs as a form of incubation. In doing so, they provide consultation, technology resources, and marketing help, among several other bonuses to the teams launching on their platform.
The advantages don’t only apply to cryptocurrency projects, either.
Exchanges that run IEOs receive plenty of benefits, as well.
Primarily, hosting token sales on your exchange pulls in users that may not have otherwise known about your platform. Because IEOs restrict non-exchange users from investing, the platforms who conduct them usually receive an uptick in sign-ups with each consecutive token sale.
Additionally, many exchanges utilize IEO services as another revenue stream. They may charge a fee for their help or take a percentage of the tokens that are sold.
How are IEOs performing?
Although IEOs comprise just a small slice of token sales, they seem to perform significantly better than their traditional counterparts. Even in our current flat market, the average IEO return on investment is well into the positives.
Because exchanges vet their IEO partners and help them with promotion, almost all of them reach their minimum fundraising goal. And many obtain the hard cap that they’ve set as well.
Should you conduct an IEO?
At this point, you’re probably wondering whether an IEO is right for you. And if you operate an exchange, you’re likely considering adding IEO services to your platform. While it does provide numerous advantages, there are a few negative IEO aspects of which you should be aware.
Due to the strict regulatory guidelines of the U.S. and other countries, many IEOs restrict who they can take investment from. Additionally, partnering with a certain exchange for your token offering may limit which platforms you’re able to list on down the road.
That said, the immediate liquidity, enhanced security/trust, and guaranteed exposure tend to outweigh the cons. If you’re not looking to raise an insane amount of capital (most IEOs raise under $5 million), then an IEO could be right for you.
As an exchange, setting up IEO capabilities can be rather costly, and it does take a significant amount of time. But the benefits are well worth it. Hosting IEOs brings additional visibility to your platform and, as we mentioned earlier, can become a lucrative revenue stream.
Partnering with a white label exchange provider, like skalex, allows you to implement IEOs for a fraction of the time and cost it would take you to do so internally.