1
What is an initial exchange offering?
In 2018 an alternative to ICOs emerged: initial exchange offerings (IEOs). The crucial distinction lies in the central role of the exchange, which screens projects it considers promising and viable.
With ICOs, token listings on an exchange may not occur immediately and can take months after the token sale ends. In an IEO, by contrast, the exchange is a key partner from the outset. The organiser issues tokens and transfers them to the exchange, which distributes the assets to interested investors who are verified users of the trading platform.
Instead of sending funds to a smart contract, an IEO participant must register (and typically verify) on the exchange, deposit funds, and, once the sale begins, purchase tokens directly from the exchange.
The agreement between the exchange and the IEO organiser can set terms such as a maximum allocation per investor, a pre-set token price, hard and soft caps, the platform’s fee structure (a percentage of proceeds and/or a fixed payment), and how marketing costs are shared.
2
Why have IEOs if ICOs already exist?
The ICO market expanded rapidly over recent years, but by late 2018 had largely run out of steam. Reasons included legal uncertainty, a glut of hollow projects, fraudulent token-sale organisers, a lack of investor protections and tougher measures by financial regulators.
A more structured way to raise funds could be the next step in the evolution of token sales, potentially restoring trust and repeating the early success of ICOs.
3
Why are IEOs attractive to investors?
Exchanges conduct due diligence on projects, assessing investment appeal, product viability, risks, financial health and market position. The fact that the trading platform assumes reputational risk raises investor confidence.
Private token offerings, often accessible only to large investors, increasingly replaced ICOs. IEOs democratise access to digital-asset investments for a broader audience.
On a centralised exchange, so-called “gas wars” are avoided—situations in which participants sending Ethereum outbid one another with higher gas limits to speed transactions and be first to buy the coveted tokens.
4
What are the advantages of IEOs for exchanges and organisers?
For organisers, the chief benefit is access to the exchange’s large user base of potential participants, which reduces marketing costs.
Marketing is handled by both the exchange and the IEO organisers. This saves money and creates a synergistic effect that improves the efficiency of bringing tokens to market.
Exchanges earn primarily from trading fees. More users and more listed assets mean more trades and higher fee income. Hosting IEOs on their own platforms lets exchanges attract new users and offer, at times, exclusive tokens not found elsewhere—boosting volumes and revenue.
With ICOs, an exchange listing typically follows the token sale. Listing can be costly and time-consuming, with no guarantee of a swift appearance on a popular venue or of liquidity.
IEOs streamline a token’s path to market. The asset tends to become at least somewhat liquid shortly after the campaign ends, as it is listed on, typically, a major exchange.
This fund-raising method benefits both exchanges and token issuers. Despite seemingly higher upfront costs for organisers, IEOs can improve a project’s odds of long-term success.
5
What are the drawbacks of IEOs?
Nothing comes free: token issuers must pay substantial, and variable, listing fees. The trading platform may also take a cut of the total funds raised.
The bulk of marketing costs falls on the startups distributing tokens via IEOs. These expenses can be hefty, easily reaching $100,000 or more.
Exchanges need qualified, technically savvy analysts capable of assessing long-term potential and business-model viability—implying higher payroll costs. If a campaign flops, the exchange bears significant reputational risk.
Only holders of verified exchange accounts can participate; it is not open to all. Moreover, most exchanges are centralised, requiring users to entrust assets to a third party, with attendant risks of outages and hacks.
Some experts believe that, amid widespread legal uncertainty, the IEO model is only a temporary alternative to ICOs.
6
How to take part in an IEO?
First, confirm that the project is conducting an IEO, not an ICO, and identify the exchanges hosting it.
Choose a suitable exchange, create an account and complete KYC (Know Your Customer) checks.
Find out which cryptocurrencies the IEO accepts and deposit them to your exchange account. Then wait for the token sale to begin and purchase the new assets directly on the exchange.
7
Which trading platforms run IEOs?
It was recently reported that the largest cryptocurrency exchange, Binance, is relaunching its Launchpad token-sale platform. Originally launched in August 2017, it hosted IEO token sales for BREAD ($6m) and GIFTO ($3.4m) that sold out within seconds.
Launchpad is preparing token sales for BitTorrent and Fetch.AI. Binance said it would, in 2019, run at least one IEO per month.
Authorities in Paraguay, together with South Korea’s Commons Foundation, also plan an IEO to fund construction of the “world’s largest” cryptocurrency-mining data centre. Commons Foundation promises investors payments in MicroBitcoin tokens equal to 30% of mining profits and 70% of daily profits from a crypto exchange.