In her op-ed, Maria Stankevich, director of business development and communications at the EXMO cryptocurrency exchange, tells about the advantages and prospects of initial exchange offerings (IEO) as a new financing tool for blockchain projects offered by market-leading crypto exchanges.
The main high-profile news of the end of February was the success of the Fetch.AI project, which raised $6 million in 22 seconds within the framework of an IEO on the Binance exchange. The previously unprecedented excitement allowed selling the entire amount of BitTorrent tokens worth $7.2 million in 18 minutes using the same platform. And on March 19, the Celer Network (CELR) will hold a token sale for users of the Binance Launchpad platform, who will be able to purchase tokens of the new project for BNB. Let’s figure out what an IEO is and what its fundamental differences from traditional ICOs are.
Last year, the primary method of raising funds was the ICO, or the initial coin offering. Today, it cannot be said that interest has completely disappeared, but the situation is, of course, completely different than at the end of 2017, when 50–60 new ICOs were held every day. This is partly due to the fact that, according to the Statis Group study, about 80% of ICO projects turned out to be scams, and in total, they attracted a tenth of all investor funds (out of the $11.9 billion raised in 2017, the fraudsters received $1.34 billion of funding). In addition, legislative regulation in most countries has not reached a new level, and investors are still not protected from fraud.
But since the need for funding has not disappeared, the projects today follow two paths. The first is private placements when a project collects the necessary amount in a private round (Telegram), which implies a fairly high initial interest in the project. The second way is an agreement with the exchanges on the initial placement on the exchange, or an IEO.
What Is an IEO?
The critical difference between the IEO and the traditional ICO or closed sale is the emergence of the exchange as an intermediary of the process. The exchange team conducts a preliminary audit and technical verification of the project and tokens, assesses the investment attractiveness and potential of the project, and then announces the start of the token sale on the exchange. Those who want to purchase tokens do not send funds to a smart contract (as it happens in the case of the ICO), but register on the exchange and buy coins directly from their personal account.
Why do projects need this?
The main advantage of this tool for projects is a large number of existing customers of the exchange, who automatically become potential investors.
What are the benefits for investors?
A key advantage of IEOs for investors, in addition to trusting the exchange as a safe intermediary, is simultaneous listing on the exchange since the trading venue is the key partner in organizing the sale of tokens. In the case of some trading platforms, investors have the opportunity to enter the project with fiat money.
What are the benefits of IEOs for exchanges?
For the exchange, the main advantage is a massive influx of new users and their contributions. Some of them may end up becoming loyal customers.
How does the distribution of coins take place?
Most often, the distribution of coins occurs on the same principle as in ICOs. But both projects and exchanges may impose additional restrictions. For example, the developers may require a fixed price to sell tokens during the entire IEO process or set limits on the amount of tokens for each investor. The exchanges, in turn, may be asked to correct the hard or soft cap if they see the potential threats or success of the token sale.
How to participate in an IEO?
The rules for participation in the IEO on each exchange may be different, but the basic steps for users are the same:
Register on the exchange;
Complete the KYC/AML procedure (if necessary);
Find out in which currency the funds will be accepted, exchange them on the platform or immediately deposit the necessary coin to an account, and wait for the start of the token sale.
How are projects being screened?
In fact, the process is no different from the traditional due diligence of coins that ICOs had undergone. As we noted above, raising money in an ICO does not guarantee the future success of the project. Usually, exchanges consider projects based on the work done, whether the idea is interesting and promising, at what stage the product is now, and so on. The second vital point is the team and the community. Other critical factors include assessing the value for the market and the project’s readiness to conduct joint marketing campaigns (ranging from the airdrop of coins on the exchange to joint special projects in the media).
Which trading platforms offer IEOs?
Today, only a few exchanges offer the service. Among them are Binance, EXMO, GBE, and OKcoin.
The most well-known in the information space was the Launchpad platform of the Binance exchange, where in 2017, the BREAD ($6 million) and GIFTO ($3.4 million) token sales were held within seconds. In 2019, the BitTorrent project tokens sold out in 18 minutes, with $7.2 million received as an investment, and the Fetch.AI project collected $6 million in 22 seconds.
The EXMO cryptocurrency trading platform launched an IEO in February 2019. The first partner project will be Paytomat. An IEO of the PTI coins is scheduled for early March. Given the quality audit and high trust to the coins on the exchange (there was not a single delisting), the launch of the tool caused increased interest among market participants. In addition, since there is fiat money on the exchange (USD, EUR, RUB, TRY, UAH, PLN) and a large number of payment methods, projects can immediately withdraw tokens from fiat, and investors can purchase tokens for fiat money.
Seven token sales were already held on the Gibraltar blockchain exchange (GBE). The tool on the platform is called GBX Grid—Token Launch Center.
OK Group has invested more than $100 million in the creation of a capital-raising company for startup projects, which works closely with leading digital assets of the industry.
The risks of buying project tokens using IEOs are significantly lower than when buying as part of a regular ICO since most of the projects that run ICOs do not have any listing agreements with the exchanges. But, of course, no one can be insured against hacker attacks, the subsequent possible delisting of coins by the exchange, and the poor quality of projects that might cause the price of an asset to decrease.