What is an IEO?

April 23, 2019, | AtoZ Markets - Against the background of the ICOs downfall the newer, more promising method to raise money from investors and crypto enthusiasts - Initial Exchange Offering (IEO) appeared. What is an IEO?

What is an IEO in a brief?

Initial Exchange Offering (IEO) serving as an intermediary between contributors and projects. The IEO as a fundraising event has evolved from ICO. The initial exchange offering is administered by a cryptocurrency exchange on behalf of a token issuer.

A token issuer in his turn is a new venture that is creating a cryptocurrency as an asset class to raise much-needed capital.

The token issuer usually pays the cryptocurrency exchange a listing fee and percentage of the tokens sold on the exchange through the IEO.

In return, the IEO is obliged to sell the newly issued tokens and also list the token on the exchange after the fundraising event concludes. In addition, the exchange is incentivized to actively market the tokens as it receives a percentage of the tokens sold in the offering. As a result, both the exchange and the token issuer engage in token marketing.

IEO gains its popularity in 2019

About two years ago, Initial Coin Offering (ICO) represented the best alternative in raising money. However, last year, it was subsequently affected and rendered ineffective due to the drop in the price of cryptos in the market and other reasons relating to its operation.

On the contrary, although it had been in existence since 2017, the Initial Exchange Offering (IEO) market is presently doing excellently well as the number of IEOs launched increased beyond 50 in 2019.

According to one of the ICO rating platforms, IEO market has unexpectedly experienced a mouthwatering increase in exchange offering globally. The data revealed that Exmarkets launchpad launched the highest number of IEOs (11), followed by Probit launchpad with 10 IEOs.

The leading exchanges such as Binance, Bittrex, Kucoin, and Houbi were also involved with lesser number of IEOs. According to the experts, IEO ability to outgrow ICO’s past achievements is a matter of time.

Why an IEO is better than ICO

In March 2019, in the tweet, one of the crypto content news channels named reasons why IEO is presently better than ICO and why the world will continue to see the rise of IEO in 2019. The media mentioned the following advantages afforded by conducting an IEO :

  1. Prevention of “gas war” between participants in the sale, provided that the exchange is not decentralized (up to the present time, NOU have not been conducted on decentralized exchanges).
  2. IEO complicates the scammers who know that they can only buy a token from the exchange.
  3. It functions as a vote of confidence on the part of the exchange and the sponsor, which should conduct its own expertise of the project developer.
  4. The listing on the exchange where the IEO was held is the next natural step.

IEO disadvantages

It is worth to remember, that nothing is free. Token issuers must bear the cost of the benefits appreciated by the cryptocurrency exchange and token purchasers.

Additionally, the exchange collects 10% of the funds raised through the IEO conducted via its exchange. Token issuers also bear the brunt of token marketing costs. These costs can exceed the US $100K and must be bourne irrespective of the quality of the listing IEO exchange.

Experts opinion on IEOs impact on the market

Bill Shihara, chief executive officer of Seattle-based exchange Bittrex, agrees that IEO, which was pioneered by Binance, has the potential to be larger than the ICOs of 2017.

The largest cryptocurrency exchange in the world launched an IEO earlier this year with the popular software file sharing application BitTorrent, which raised $7 million in less than 15 minutes. On the contrary to the Bittrex CEO’s opinion, Zach Fallon who worked on ICO issues at the US Securities and Exchange Commission said that IEOs “take everything from an ICO and make it worse.”

Supporting Fallon’s statement, Jeff Dorman, a partner, and portfolio manager at Los Angeles-based Arca Funds said that the fundamentals of an IEO are directly at odds with the decentralized ethos embedded in crypto. Nejc Kofric, CEO of Luxembourg-based exchange Bitstamp, added that his company is “staying away from IEOs.”

However, Aaron Bron, an investor, and author of the Bloomberg Opinion noted that due diligence conducted by the exchanges in relation to IEO is unclear and controversial. He added that the process revolves around convincing investors that the coins will be traded - without taking into account the basic cost of the project. These conditions allow buyers to shift the risk to the next buyer at a profit.

Despite the differences of opinion regarding the IEO, many experts believe that this new investment model will maintain its position in the market. In March 2019 alone, more than $ 80 million was raised, and the market could begin to see the next wave of the Initial Exchange Offerings.

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