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What is an Initial Exchange Offering (IEO)?

BitForex Editor
Jan 11, 2021

One thing that has remained constant on the cryptocurrency scene is the unending innovations and improvements- in terms of how cryptocurrencies operate and are used. All these are important because they facilitate increased confidence in this technology, which would consequently be a major factor that will drive increased adoption and use.

In 2017- when the initial coin offering (ICO) concept became popular, there were a few observable loopholes and inadequacies in the way it operated. These inadequacies cost many investors their monies and eventually seemed to erode the true benefits of ICOs. Since then, crypto analysts and experts have gone back to the drawing tables, to see how companies can successfully raise funds using digital assets, without putting willing and intending investors into huge and unnecessary risks.

There were quite some suggestions, but the use of Initial Exchange Offering (IEO) modules, seems to be one of the most practicable that could solve the prevailing challenges.

How does an IEO work?

Primarily, IEOs have a framework that resembles those of the initial coin offerings. However, a few modifications are essentially what brings about the huge difference. In initial exchange offerings, tokens are also issued out in exchange for investors’ funds, but the companies behind the tokens do not do this directly by themselves- like in the ICOs. Recall that in the ICOs, a company that decides to raise funds using tokens, would go public, woo investors, and organize the sales by itself.

In IEOs, however, this is not the case, as the companies have to carry out this coin offering through an exchange. Hence, they would not interact directly with the public, as this has become the responsibility of the organizing cryptocurrency exchange. Hence, if company X wanted to source funds from the public through a cryptocurrency token offer, it has to contract the work to a cryptocurrency exchange that relates with the public and carries out most of the processes involved in executing the initial token sales. Thus, IEOs may be summarily referred to as ICOs that are managed and executed by a cryptocurrency exchange.

Now, the following are important highlights of how an IEO works:

1.Firstly, the company that intends to raise funds, speaks to a cryptocurrency exchange about their project and its aim to raise funds through token sales.
2.If the cryptocurrency exchange decides that the company is genuine and has met its requirements, it then agrees to a deal with the company. Usually, the company would have to pay a fee for this service, as well as offer some of its tokens to the exchange.
3.The cryptocurrency exchange then takes up all the responsibilities of marketing the tokens (wooing investors), verifying investor identities, handling proceeds from the token sales, etcetera.
4.Once the stated period for the IEOs is over, the exchange remits funds to the company, and then the main phase of the contract is done.
5.However, after the IEO is concluded, part of the agreement is usually that the cryptocurrency exchange would list the tokens on its platform for trading. At this point, how well the token performs on the general market, is not directly the responsibility of the listing cryptocurrency exchange.

Advantages of using IEOs

There are distinct advantages of using an IEO, as far as fundraising via cryptocurrencies is concerned. The main advantage that stakeholders- especially investors, consider most important is the fact that IEO operations are designed in a way that makes them more trustworthy. This is true since the cryptocurrency exchanges organizing the IEOs are usually those that have built a solid reputation (and would likely do everything possible to maintain such reputations). Hence, these exchanges are expected to have carried out thorough due diligence aimed at determining whether the fundraising company and its products are worth investing in, or not. The fact that a popular cryptocurrency exchange lists a new IEO, which is quite an indication the token is genuine.

On another hand, IEOs are managed by exchanges with secured platforms. Hence, there are fewer chances for hacks and theft of tokens, as was common during the ICOs. Unlike the ICOs where the companies may be inexperienced as to what it takes to effectively secure a cryptocurrency framework from theft, cryptocurrency exchanges are more experienced on how to handle the operations in a way that keeps all funds and tokens intact. So if you are investing in an IEO, you may not need to worry about your tokens suddenly getting disappeared, unlike if the token sale was handled directly by the issuing company.

Additionally, IEOs have shown an important edge over the Security Token Offers (STO), because it allows more investors to come in, unlike the STO designs that seem to favor mostly high worth individuals or investors.

Asides from these, IEOs facilitate liquidity of token assets immediately after the IEO periods are over. Since the tokens are almost immediately listed for trade, owners of the tokens may begin to trade the tokens, with interested investors or traders. This was not the case in the ICOs, as trading of the tokens may take some more time before they are being listed on any cryptocurrency exchange and traded.

Disadvantages of using IEOs

So far, there are relatively few demerits of using initial exchange offerings. However, analysts and stakeholders have noticed that running an IEO may be more expensive for the token issuing companies. This is because they would need to pay the organizing exchanges for the services they would be receiving. If you consider the benefits of pushing token sales through an exchange at this stage, however, you’ll likely agree that the price for conducting IEOs is probably worth it.

Another striking disadvantage of using IEOs could be the fact that it may cut off certain investors from investing- especially based on location differences. This means that if the organizing cryptocurrency exchange does not offer its services to users in some countries, them intending investors in those countries would not be able to participate in the IEOs.

Overall, IEOs are generally considered to be great innovations in cryptocurrency creation, distribution, and use. The fact that they even offer some flexibility is another reason why they would continue to be in use. For instance, an issuing company may decide to carry out an ICO-IEO mix. In this, tokens are firstly sold to high worth investors in a private ICO, before they are released to other members of the public through the IEO. This flexibility allows companies to become more strategic and consequently hit their finance raising goals through cryptocurrency sales.

About BitForex:

BitForex is an exchange service platform that can be classified as one of the Top 10 cryptocurrency exchange services. It is focused on providing millions of users with a digital currency trading and investment tool that is not only safe but also professional and convenient. BitForex has a high customer-oriented culture and state-of-the-art financial technology.

BitForex is programmed in a way that it can quickly adapt to the changes of the Crypto market while introducing new features like margin trading, enhanced trading charts,  derivatives, and a host of others. The headquarter of BitForex is located in Hong Kong, while there are branch offices in countries like the United States, South Korea, and Singapore.

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