The cryptocurrency industry continues to develop and despite the recent fall in the digital asset market, more and more people are thinking about what crypto to buy. Many new projects for which developers attract third-party funding appear in the industry every day. That’s why they issue cryptocurrency with the aim to sell it. The most popular type of such fundraising is IEO.
The history of crypto projects fundraising begins with Initial Coin Offering (ICO). It’s when the sale is held directly by the project in order to raise funds. The peak of ICO popularity was in 2017, when $4.9 billion was raised in just a year.
At the same time, the lack of any regulation and control has led to cases of fraud and increased the need for new approaches with more reliable forms of control. The solution was found in Initial Exchange Offering (IEO), a way to raise funds among investors in cooperation with a cryptocurrency exchange that controls the process and acts as an intermediary between a crypto project and investors.
During IEO, a cryptocurrency exchange selects and checks promising projects and promotes their coins among its users. Of course, exchanges value their reputation and aim to prevent possible fraudulent schemes in the digital payments of their clients.
IEOs are available on many well-known exchanges. Binance was one of the first to launch an IEO platform, Binance Launchpad. Following it, platforms of other well-known exchanges were opened: Bitmax Launchpad, KuCoin Spotlight, Huobi Prime, etc.
Examples of successful IEO placements for investors include the case of the Polygon (MATIC) project. During the IEO on Binance Launchpad, $5 million was raised. The price of the coin at the time of placement was $0.00263, and by the end of summer 2022 it increased by 36,000% to $0.952. At the same time, the All Time High of the coin was $2.92.
It is also worth noting Axie Infinity (AXS), the cryptocurrency of the gaming metaverse, which was sold at a price of $0.1 on the same launchpad, then showed an increase of 18,900% to $19.
How does it work?
As mentioned above, the concept of IEO was born as a result of the search for a safer and more convenient way to raise funds by a crypto project. Let’s take a look at what the main features of IEO are and what benefits it can offer to both startups and investors:
- High level of security: to maintain a good reputation, cryptocurrency exchanges carefully check the project. Thus, IEOs can exclude fraudulent projects. Tokensale implies mandatory verification of investors, and startups are paying the exchange for listing;
- Easier for projects: IEO requires much less effort and marketing budget than ICO. In addition, by conducting an IEO on a cryptocurrency exchange, a startup can rely on the existing customer base of the exchange. This is more efficient than trying to raise funds on different platforms from scratch;
- Liquidity: in most cases, the IEO of a project is a sign that the exchange is going to list the token. This usually happens at the time of its launch. Thus, investors do not waste time on transferring of the purchased tokens to other platforms or wallets and looking for a liquid market for this asset.
The difference between IEO and IDO
IDO (Initial DEX Offering), a method of raising funds in which the launch of the coin occurs through a decentralized exchange, is similar to IEO. The main difference between IDO and IEO is that in the case of IDO, there’s no need for an exchange’s permission. In fact, the role of an exchange is performed by community members who check projects and tokens. Then, the tokens issued through the IDO are placed on the DEX.
Most IDOs go through a few standard steps:
- Decentralized approval: a project is checked for compliance with the requirements of the platform and receives permission to conduct an IDO;
- Public sale: users get access to purchasing “IOUs” of the token from the token pool. In fact, investors pay for their tokens in advance, but only receive them after the Token Generation Event (TGE), which usually happens after the IDO;
- Listing of tokens: after IDO and TGE, a listing on DEX follows. The listing takes place on automated market makers such as Uniswap and Balancer, as they are decentralized and do not require permissions or fees.
- Liquidity incentives: in order to speed up the launch of the proposed product, some projects resort to liquidity stimulation. By providing liquidity to the platform, users can earn tokens.
It is also important to note that in the case of IDO, many projects resort to simultaneously launching IDOs on multiple platforms and issuing tokens on various smart contract platforms. Thanks to this, investors are provided with more flexible options for participating in fundraising, and the projects themselves can attract a wider range of investors and place their shares on several blockchain platforms.
Investments in cryptocurrencies are associated with increased risk due to market volatility. There are, of course, a lot of young projects that may not be of any value. At the same time, participation in the process of choosing projects for a token sale of developers of well-known crypto platforms can serve as a help in choosing an object for investment. However, do not forget that in the case of cryptocurrencies, no one can guarantee investors any profit. Do your own research.