In the summer of 2017, during the peak of the ICO craze, the amount of money raised by ICOs surpassed angel and seed VC funding for the first time.
It was clear that the value proposition of the ICO: the possibility of massive returns on investment, the completely unrestricted access, and the immense demand at the time was truly changing how fundraising worked. The excitement around this new innovation would be short lived.
The ICO or crowdfunding in general was the first use case for live blockchain networks that truly tested the networks’ capacities. Because most ICOs launched their initial sales or conducted their sales on the Ethereum platform, the Ethereum network was pushed to its maximum limits. Even now, Ethereum remains the platform on which most crypto projects are built on top of.
During some of the largest and most popular ICOs, the Ethereum network ground nearly to a halt and at times very large asset holders were able to manipulate the network by pushing through huge transaction fees so they could buy their tokens before everyone else.
Scams, fraud, and legal issues were the worst part of the ICO boom of 2017 and the beginning of 2018. One of the triggers that spelled the end of the ICO era and also the end of the crypto bull market was the regulatory or legal crackdown on ICOs by regulatory authorities such as the U.S. Securities and Exchange Commission (SEC).
Though ICOs have been in decline, the Initial Exchange Offerings (IEOs) have been gaining a lot of attention recently because of the rise in popularity and the extremely quick sales cycles that are reminiscent of ICOs.
An IEO is basically an ICO except that it is launched and managed by an existing exchange instead of the organization that created the token. The exchange holds and sells the token on behalf of the project team. This small change has significant effects on the entire process. In a typical IEO, developers send their tokens to the exchange and the exchange sells them to its platform users at a fixed price.
Exchanges have an existing community and promotional resources, which the IEO teams can take advantage of.
The exchange’s existing audience and resources for marketing make it easier for a new project to get discovered by a larger audience and thus launch its token offering successfully. Ideally, with exchanges assisting with fundraising and marketing, project teams can focus more on building a great product.
The exchanges benefit in that they receive new interest from those people who want to invest in the IEO, but were not already on their platform. Essentially, both the exchange platform and the IEO project are promoting each other in a way that wouldn’t have happened during a normal ICO.
Projects that choose to launch an IEO are curated and vouched by the exchanges. Though every exchange has a different reviewing standard, this process is a major difference from ICOs, which commonly had no external review processes at all leading to greater risks for investors.
In general, if you believe that an exchange is trustworthy, there is a reason to believe that it will select projects that have some degree of trustworthiness or credibility.
Exchanges are one of the only services or products in the crypto industry that have consistently generated revenue and do not rely solely on the appreciation of crypto assets. The teams behind exchanges may offer unique insight from running a legitimate revenue-generating blockchain business as well as being exposed to such a wide variety of different crypto projects that would greatly benefit the IEO teams.
Exchanges will commonly have a well-organized legal structure that protects them from regulatory consequences. For a young startup seeking initial funding, this is a protection that they normally would not have access to or resources for. Well-developed exchanges can offer legal advice and clarity as well as access to a full legal team to help nascent startups traverse through the minefield that is the blockchain industry.
The speed of centralized exchanges and technology far eclipse those of the completely decentralized platforms such as Ethereum where ICOs were commonly launched from. This evolution in user experience seems to be a natural maturation of the technology. As we shall see, exchanges have been closing token sales in minutes and sometimes in only a matter of seconds thanks to their streamlined and centralized systems..
Major Exchange Platforms:
||Binance Coin (BNB)
||KuCoin Shares (KCS)
||Huobi Token (HT)
The tokens are ‘minted’ solely by the developers before the initial exchange offering and sent to the exchanges. Each project floated in the market has its unique terms, deals, and conditions set in conjunction with the exchanges. The terms could be a percentage for the exchange, a flat fee, marketing expenses cover, or any other viable conditions.
Nevertheless, the project investment launched at any given time can minimize organizational, marketing, or security expenses. Therefore, it may become a great investment in the long term. A majority of the initial coin offerings rules are applicable to the initial exchange offerings. But, the deals and conditions are different depending on the current project.
A variety of the projects will demand a fixed token price in the whole IEO process. They may additionally demand a token limit per investor to get rid of the whales and any possible chance of price manipulation. These strict rules and regulations are primarily set up to guarantee that the entire process runs in order.
Crypto exchanges that host these projects need developers to create a hard cap and a soft cap for every project. The set limits enable a greater result of the IEO. Whenever excessive coins are on offer, that particular token economy is mostly doomed from the start.
The Initial Exchange Offerings are not open to the general public.
Therefore, only the active users of the participating crypto exchange platform can participate.
How Initial Exchange Offerings Function
The exchange that plans to host and oversee a token sale on their platform always strives to reach an agreement with the developers before the process starts. The exchange will then does an exhaustive and effective review of the token project at hand. They use a variety of parameters to check and authenticate the worthiness of the IEO.
After the exchange confirms that everything is in perfect order, they accept the project. Then, they set and announce the date for the token sale and the fixed price for every token. All the initial exchange offering participants must always have active and adequately funded account wallets on the exchange platform.
The Binance Launchpad platform is popular among IEOs. A featured project hosted and overseen by the platform is reported to have raised an incredible $5.5 million in 18 minutes.
Binance is well-known for being one of the best cryptocurrency exchanges and it has also been an innovator in the area of IEOs. Binance has recently popularized the concept with the success of its Binance Launchpad platform. Binance’s founder, Changpeng Zhao (also known as CZ), believes that fundraising is ‘a killer app for the blockchain’ and its potential will be ‘many times bigger than the VC industry in the future.’
Binance Launchpad is essentially a streamlined platform and process for new projects to launch their initial token offerings and then get subsequently listed on the Binanceexchange. Binance Launchpad offers full advisory services for startups using its platform for an IEO.
In order to participate in an IEO on Launchpad, users must complete verification so that they conform to a user’s jurisdiction as well as use specific coins such as BNB in order to participate.
Each IEO is limited to some specific and limited supply, which increases the demand. The more restrained funding model drip feeds these young projects the resources that they need without burning out all the investors or underlying asset value, which should also be a sign of a maturing industry. However, it could also be taken that this is the ecosystem maturing and offering much-needed improvements in standards and user experience. It could also be argued that the regulators and extreme market conditions had stopped the initial ICO craze too early when in reality there was still underlying demand that was simply being suppressed.
The energy and speed in which new IEOs are being launched and closed could signify that this is just an outlet for the demand that had been simmering beneath the surface this entire time.