What exactly are ICOs and IEOs? Like every other company, blockchain and crypto startups need money to build projects, retain a team of talented employees and run marketing campaigns, among other things.
What is an ICO?
An ICO (Initial Coin Offering) is a way a startup can raise money to build a new cryptocurrency, app or service by selling some of its tokens to investors.
Investors may use the tokens with the product the startup is building or trade it on a crypto exchange. Sometimes, they only represent a stake in the project or startup.
The first ICO was held in 2013 when the team creators of the Mastercoin project raised over $5 million. Then in 2014, Ethereum launched one of the most successful ICO ever when it raised $18.5 million.
What happens during an ICO?
During an ICO, several things happen:
- First, the project creators come up with an idea for the product or service.
- Then they write a whitepaper, which is a document that contains important details about the project and the fundraising. These include what the project is, how it benefits the crypto community, how much funds the team wants to raise, etc.
- Afterwards, they publish the whitepaper on their website. Other blockchain-focused online blogs, social media networks and forums also spread the news.
- The aim is to encourage fans and supporters to buy the tokens in exchange for either fiat or crypto like Bitcoin or Ethereum.
- Then they begin intensive marketing campaigns to attract more investors.
- After raising the amount they need, the team begins working on the project according to the laid-out plans.
How ICOs paved the path for IEOs
Over time, ICOs became very popular among small-scale investors. Unlike other investment options like venture financing, ICO funds had few procedures but high interest and liquidity.
Unfortunately, the tide turned against ICOs, and interest quickly dropped when investors began losing millions of dollars in scam ICOs.
Scammers masking as genuine blockchain developers would create a fake project, collect investors’ money, then withdraw it all and disappear into thin air.
Around this time, IEOs (Initial Exchange Offerings) emerged as a safer, more reliable and trustworthy investment option.
What is an IEO?
An IEO (Initial Exchange Offering) is similar to an ICO. But in this case, there is a vital intermediary – a cryptocurrency exchange.
So, IEOs involve three parties: the project creators, the investors and a cryptocurrency exchange (like Binance).
Like in an ICO, investors buy the tokens before they become publicly available. However, only registered members of that exchange may contribute to an IEO.
Because the startup that wants to launch the IEO uses an exchange platform, it would need to pay a part of the tokens sold during the IEO to the exchange.
Binance and its IEO platform, Binance Launchpad, were the first major exchange to offer an IEO and make it popular as a fundraising method for startups.
In 2019, it launched Binance BitTorrent Tokens (BTT) sale, which sold out in less than 20 minutes and raised over $7 million in funding.
A few days later, Binance listed the new coin (BTT), and its price rose by eight times more than the listed price almost instantly.
The success of the BTT token sale sparked a chain reaction in the crypto world, and other exchanges began to express their interest in hosting similar IEOs.
What happens during an IEO?
The first steps in launching an IEO are the same as an ICO but have a few differences. IEOs usually happen this way:
- The project creators come up with an idea for a blockchain product and prepare a white paper for their project.
- Then, they apply to the crypto exchange that would host the IEO.
- Specialists in the crypto exchange team examine the white paper thoroughly. They also check the other projects the team has built, as well as the prospects of the new project.
- If they approve, they set a date for the IEO.
- Both the crypto exchange and the project creators run a series of marketing campaigns to attract investors.
- The sale begins at the appointed time. Investors often use the token of the crypto exchange to buy the IEO’s token.
- The new coin gets added to the list of assets traded on the exchange a few days following the IEO.
The differences between ICOs and IEOs
Although both ICOs and IEOs are popular fundraising methods for blockchain startups, they have some key differences.
The main difference is that in an IEO, a crypto exchange serves as the middleman between the project creators and the investors.
It also evaluates startups that have applied for an IEO and manages their token sales. It does this by running a background check on the projects to detect and remove fake ones.
Also, in an IEO, the exchange lists the tokens a few days after it sells them. In contrast, ICOs do not publicly list the token immediately.
Sometimes, it lists them months after the conclusion of the sale. In some cases, the listing never happens, the project fails, and investors lose money.
In addition, since the sale of tokens for an IEO takes place on a crypto exchange, only verified users who have an account on the exchange can become investors.
With an ICO, the project creators handle their marketing campaign for the token. They often use paid advertising and social networks. With an IEO, the exchange takes over this role.
Lastly, a central authority (the exchange) runs and overseers an IEO, while individual project creators run their ICOs on their platforms.
There are currently several methods for raising funds for blockchain projects, and new ones continue to emerge as the technology advances.
While both ICOs and IEOs have their benefits and risks, many investors opt for IEOs because they have a broader reach, and are safer and more credible than ICOs.