Crynet.io (project manager), EU structural funds, ICO/STO/IEO, NGO & venture, marketing projects
In 2016, ICO became the main way of financing innovation and blockchain startups. The first project, released on ICO, was Mastercoin in 2013. After it, thousands of projects attracted funding through the emission of tokens. According to ICODATA in 2017, the volume of investments raised through ICO (Initial Coins Offerings) were more than $6.2 billion, in 2018 — about $8 billion. After analyzing the data from the TokenData, it can be concluded that in 2018, unfortunately majority of the projects turned out to be a scam. Most tokens have lost their price and are trading now below their initial value. The bearish trend of the end of 2018 and the fall in prices of Bitcoin and Ethereum made investments in ICO an extremely risky business. In general, the forecast of the Bitcoin price does not inspire optimism, neither in the short term nor in the midterm. The hype around ICO was caused by the ability to make quickly “big money” and lost the function of a civilized fundraising for the development of blockchain projects. The hype attracted the attention of regulatory authorities and scam artists. The reaction of the regulator to ICO process is perhaps the only positive point that the ICO achieved in 2018. Detailed analysis of projects, discussions of start-ups on forums and supervision by the Regulator (mainly SEC, FINMA) of the ICO process make financing of projects more civilized, and investments more protected from fraudsters. However, the market did not wait for the Regulator to come out and allow only what it cannot prohibit. Blockchain industry is initially self-regulated and does not fit well with public administration. Which is both an advantage and a serious disadvantage. As part of ICO, an investor sends funds (in Fiat, in cryptocurrencies) in exchange for tokens to accounts or to a smart contract of project developers. The ICO (Initial Coin Offering) model allowed to projects to receive funds for development without the need for traditional venture financing and taking a bow to business angels and venture funds. However, the ICO has several controversial points that have led to appearance of other tools to raise funds from crypto projects, such as Security Token Offering (STO), which combine the best of both methods. Most recently, STOs have created a way for projects to tokenize assets and provide investors with a share of capital in the company. However, the cryptosphere is developing rapidly, and a newer financing model, called the “IEO” (Initial Exchange Offering) has recently emerged. IEO appeared in 2018. IEO allows crypto projects to raise funds directly on digital crypto exchanges, so there has been a lot of talking around it. The sonic ICO receives a rebirth in the form of a yet incomprehensible IEO. In fact, I do not see any fundamental differences, except for the absence of certain risks. The main difference between ICO and IEO is that the exchange actively participates in the fundraising process, allowing only the most promising and viable projects to be listed (though, in the opinion of the exchange itself). This approach allows you to get rid of several traditionally weak points of the ICO, such as:
- deferred listing of tokens at the end of the tokensale
- liquidity problems
When conducting IEO, tokens immediately appear on the crypto exchange, and, as a rule, they are having a large base of verified investors. Very important from the point of view of IEO security: the issuer of tokens is not a project team, but an exchange, which increases the level of control and quality (possible). The phenomenon of IEO seems to have gained momentum amid the shrinking ICO market. CoinSchedule reports that about 180 million dollars were raised by 23 IEO projects, most of which have been happening since the end of 2018.
Why did IEO appear? To answer this question, you need to look into the recent past, where the rapid growth of ICO popularity was accompanied by an equally intensive process of discrediting this tool for raising investment. Legal uncertainty, a huge number of scams, the lack of effective mechanisms to protect the interests of investors, undermined faith in the ICO. Liaison to the mechanism of attracting investments of large crypto exchanges is able to regain confidence in the tokensale. The main role of the exchanges here is to examine new projects, assess their investment prospects, risks and overall viability. Allowing the project to IEO, the exchange assumes the lion’s share of reputational risks, which increases investor confidence in the IEO. The key difference between IEO and ICO lies in the role of the exchange, which assumes the obligation to select promising projects.
IEO has several advantages:
- Investors are better protected from scams. One of the main drawbacks of ICO was that potential investors could not understand which project would be better to invest. ICOs were launched on separate platforms on which all necessary information was not always placed. Often, scammers who collected money from people and then disappeared launched the ICO. There was another way of fraud: for the money spent investors still received their tokens, but then the founders suddenly threw the project, which turned the acquired tokens into “digital candy wrappers”. In the case of IEO, doing so is much more difficult. The project is launched on the crypto exchange, passing before this a serious test of reliability and prospects. Crypto exchange analysts do not allow questionable start-ups to be realized, because in the event of failure the reputation of the exchange will suffer greatly, but the project and team risks still remain
- New tokens are much faster to be listed on the exchange. In 2018 there were quite a few cases when, at first glance, a promising project raised the necessary amount of investment, while simultaneously receiving a solid army of its followers, but popular stock exchanges did not list it for a long time, which negatively affected the popularity, liquidity and price of distributed tokens. Some tokens did not start trading on exchange platforms at all. This naturally led to the collapse of startups and losses among investors. Another situation is with IEO. If the project was in principle allowed to be implemented, then the exchange already trusts it, and therefore — will quickly list tokens itself.
- According to Autonomus Research, ICO issuers have to spend between $1 million and $3 million to add a token on the exchange. In addition, there are additional costs associated with hiring consultants and marketing campaigns. Although the exchanges still charge a huge fee for conducting IEO, the team behind the crypto project can shift the focus from marketing and fundraising to developing their project, that is plus
- Fundraising speed. The initial distribution of tokens with ICO always took several days. Sometimes the deadlines reached a week or even a month. The uncertainty of potential investors, a poor marketing campaign, a dubious news background around the project, and often-dubious organizers explained all this. When you start IEO, the set number of tokens finds its owners in just a few minutes (or even seconds). That is, startups do not stay in limbo for a long time, and the first investors do not wait for weeks, until the project they have chosen collects the stated amount. People know in advance that they will invest in a specific project and already trust it (there is a guarantee from the exchange)
- The investor almost immediately goes into a plus. This is something that classic ICO can’t give. If IEO is successful, then the tokens already has popularity. Thus, when a token is listed, it already costs more than the initial offer. Therefore, the holder of tokens is free to choose what to do: immediately sell it at a bargain price or wait until the value rises even more.
- No need to get a third-party wallet. Wallets for storing tokens automatically appear on the exchanges where a particular project is launched.
- IEO launches give additional hype to the development of the exchanges themselves. In such projects, a model of ideal cooperation is practically built. The founders of start-ups are promoting their projects on popular trading platforms, which ensures high confidence in them. The exchanges get a monopoly on token trading. If the tokens added to the listing are well shot, the platforms will receive an influx of new users, and this will lead to an increase in income. And the placement on the resources is also not free. In general, the pros remain all: the organizers, the owners of the exchanges, and investors.
- The investment process is as simple as possible — for example, you do not need to register on the project site, buy ethereums and send it to an unknown smart contract — just replenish the balance on the stock exchange, as usual, wait for the tokensale and place a purchase order
- Tokens are sold to everybody at one price — which reduces the likelihood of a fall in rates from early investors who were purchased first, as well as from the bounty and airdrop hunters
In turn, the projects receive a huge base of potential investors — an active and advanced audience of the exchange + the help of advisors and professional support for the tokensale, that is, they take off most of the work on organizing and promoting the campaign, which means save time and budget.
- to participate in IEO on large exchanges is quite difficult — good projects collect millions of dollars in just 10–30 seconds, so most users simply do not have time to come to the tokensale and place an order
- IEO is quite rare- so far, such tokensales are not mainstream and certainly still not so popular as ICO or STO for accredited investors. At the same time, not every exchange is ready to undertake such amount of additional work, and far not every project will undergo such thorough screenings; risks remain
- IEO requires verification of identity — even if verification is not necessary on the exchange itself. This rule is associated with the peculiarities of the legislation of a number of countries, and also allows you to avoid a situation where all tokens are bought by 1–2 people with their army of bots.
- As for projects, for them the main disadvantage is the price IEO services — not every team, even if it is three times talented, can roll off a million dollars for placing on the crypto exchanges. Well, the exchanges still carry great reputational risks, because if the project presented by them gets stuck in scandals, a huge wave of negativity from users will spill over them, right up to lawsuits and attention of law enforcement agencies
- Startups go through a complicated project submission procedure. On each exchange project requirements may vary. The marketplace, at a minimum, shifts the costs of marketing to founders, and as a maximum, can request a percentage of all funds raised. IEO projects go through a complex verification process. For this exchanges need to keep in the staff of highly qualified specialists and analysts, which is associated with high salary costs.
- Modern IEOs are subject to regulatory obstacles as much as their predecessors, ICO. IEO has become an alternative token offer model, when a centralized crypto exchange acts as a guarantor of placement. The exchange usually organizes sales, having previously checked the projects, and evaluating the willingness of potential investors, although IEO is really effective due to the “prudent third-party approach”, the new model is no less burdensome in terms of regulatory requirements than ICO. Back in 2017, when ICO was popular, the sites of “centralized ICO” appeared. IEO idea was borrowed from there. Initial asset sale through exchanges is not a new concept. The only minor amendment is the use of cryptocurrency instead of fiat money. Now, experts are also trying to weigh the potential shortcomings of the new IEO trend, saying that placing on the exchange may further encourage regulators to consider such offerings as sales of securities. Others point to the paradox that intermediaries in the form of exchanges are involved in IEO, while in general crypto philosophy values decentralization. There are those who say that exchanges simply stimulate sales and seek to use their own tokens (for example, like Binance token — BNB)
- When the ICO bubble was blown away, many tokensales, including STO, became available only to a closed circle of major players. At the same time, some projects resorted to the concept of SAFT, which did not guarantee complete safety for investors and full approval from regulators. IEOs were designed to democratize the distribution of tokens, making them accessible to a wide audience. However, soon the situation began to change rapidly and one by one the exchanges began to change the rules. Significant advantages on the side of investors with a large number of native tokens of the exchange. This approach allows you to cut off many small investors, reducing the hype around the crowdsales, reducing the pressure on the Launchpad. It also stimulates the demand for exchange tokens for which you can purchase tokens of IEO projects
- By participating in IEO, investors still risk their money. Even if we take into account the fact that experts from popular IEO platforms (Launchpad) crypto exchange are selecting projects for crowdsales, no one can guarantee investors a profit. In addition, since the advent of IEO, not so many crowdsales have passed so that you can objectively compare different platforms with each other.
- Another problem is the legal uncertainty inherent in this area. Regulators in different countries have not yet found an optimal way to control the work of exchanges that conduct IEO and other types of tokensales. Recently, IEO tokens of stock exchanges have risen by an average of four times. Nevertheless, the business model of tokens of centralized exchanges has disadvantages. For example, such tokens as assets are not tied to anything, so there is a risk of manipulation of the course by issuers. The methods used by the exchanges that motivate users not to sell tokens, but to keep them “for long term periods” are also doubtful. The growth of IEO tokens depends not so much on the exchange’s profitability, but on the market supply of these tokens.
- The IEO model is not without flaws. There is no guarantee that regulators will not engage in this area in the near future, as in the cases with ICO. Thus, the new hype can be completed as quickly as it began.
IEO Success Examples
BitTorrent (BTT) — is a tokenized asset that is positioned as a digitized version of the largest p2p-network protocol for exchanging BitTorrent data. Its main function is to pay users for the distribution of files so that they remain on the network as seeders. Also, tokens can be used to purchase the full version of the program without advertising, faster file downloads, streaming in HD quality, file conversion, virus protection, etc. The IEO project passed on January 28, 2019 and collected more than $7.2 million in 18 minutes. Tokens went public on January 31, and in just one week it went up by 1683% compared with the base rate.
Fetch.ai (FET) — is a personal assistant based on decentralized AI, machine learning and a scalable blockchain that adapts to your current tasks and is the basis for a smart city system and the digital world. The IEO project passed on February 25, 2019 and collected $6 million in 22 seconds. The base price of tokens was 0.008584 BNB, that is, approximately ~ $0.08. Tokens went public on February 28, 2019 and after four days it went up to $ 0.4307, that is, up to 438% compared to the initial quotes. Today, this method of raising capital is supported by many large trading crypto platforms within a separate pool:
- Bittrex — Bittrex International IEO;
- BitMax — BitMax Launchpad;
- Huobi — Huobi Prime;
- KuCoin — KuCpon Spotlight;
- OKEx — OKEx IEO
Table ‘’IEO and ICO Specifications’’
The main advantages of such a mechanism for raising funds are:
- Marketing savings of the project, as it is possible to interest directly existing customers of the exchange
- Increasing the level of confidence on the part of potential investors, since the exchange assumes reputational risks and conducts due diligence of the project.
- In case the exchange is not decentralized, a “Gas war” cannot occur between the participants. Currently, all transactions sooner or later are included in the block, but the amount of transaction fees affects the speed. Thus, in order to buy tokens first, investors compete by setting high gas limits, thus becoming the first in the transaction queue.
- The distribution of tokens follows the same principle as in ICO. But both projects and exchanges may impose additional restrictions. For example, founders 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 hard or soft cap if they see the potential threats or success of the upcoming tokensale.
How to participate in IEO? The main stages of participation:
- Determine which exchanges are running IEO. Often, several exchanges are running IEO of the same project.
- Make an account on the exchange and pass verification (KYC). Complete the whitelisting procedure. It is initiated by developers so that they can select the most attractive investors for themselves.
- Depositing a cryptocurrency approved by IEO into the account.
- Waiting for IEO to start and buying tokens
Table ’’Essential characteristics of IEO and ICO for customers/users’’
Many market experts believe that IEO is only a temporary fundraising model, an alternative to ICO, since both formats have legal uncertainty. Many countries and governments have long ago banned the ICOs because they often turn out to be fraud and harmful both investors and trust in the crypto industry as a whole. Many governments are cautioned with the new IEO model. It is still too early to talk about the attitude of other regulators, since IEOs occupy a niche too small. Definitely, one can only say that in such a model, startups undergo a more serious test that plays for the benefit. The excitement around IEO is growing like an avalanche. More and more exchanges are making tokensales as a new format and, despite the technical difficulties, attract thousands of new cryptoinvestors worldwide. The investors, for the most part, seek to obtain speculative profits without conducting any fundamental analysis of projects and without thinking about the long-term prospects of tokens based on them, which in the future may become a negative factor for the development of the tool. However, at the same time, it should be noted that the market has significantly revived with the advent of the first IEO. This is due to the fact that to purchase the cherished tokens, native tokens of exchanges are needed, which also used to be bought. Thus, new money poured into the market. Nevertheless, in the long term, these native tokens can play a negative role in investor access and costs. Apparently, in parallel with IEO, there is a market for bots that allow you to buy token offerings in a second. After all, it is unlikely that every “live” market participant can acquire tokens in just a few moments. And it will also slow down the prospects for the development of the tool. However, despite all these risks, IEO still recommends itself well.
Conclusions on IEO:
IEO can hardly be called the next stage in the development of ICO, since it is based on completely different technical solutions adding centralization and openness to the process of fundraising, which contradicts the ideas of ICO, where there are no obstacles between investors and companies that go to ICO. If ICO has already managed to completely discredit itself because of what the form of collecting investments with the help of ICO is already prohibited at the level of legislation of some countries, then IEO still holds the level of legitimacy before the law due to the rigorous selection of applicants for leading crypto exchanges. When IEO arrives on the second or third tier exchanges, IEO can repeat the fate of ICO, when both abbreviations are associated with deception and will be banned at the legislative level. Today, IEO can be called the most progressive tool for ordinary investors in which restrictions are minimized, but there are elements of protecting the interests of investors, which can play a big role in further promoting crypto worldwide.
It is also possible that even with the first deep drawdowns in the prices of new tokens and signs of a decline in activity in the IEO sphere, the growth of the entire crypto market will also slow. This has already happened during the ICO boom in 2017 — early 2018. The excitement turned out to be fleeting, because in this area a lot of projects, dummies and ordinary scam.
Are there any perspectives around IEO? This is still difficult to answer. However, some problems are already emerging that call into question the potential for the development of IEO. The new model is likely to “take everything from the ICO and make it even worse”. Moreover, crypto exchanges allegedly use IEO as a pretext to stimulate sales and use their own tokens, either forcing IEO issuers to raise funds using their exchange tokens or requiring IEO issuers to have large balances of their own token to participate in sales. This practice can make the model even more problematic for regulators and increase the likelihood of their recognition as securities in the end.
Sergiy Golubyev (Сергей Голубев)