What is Initial Exchange Offering (IEO)? — The Evolution of IEO Market

Abstract

The Initial Exchange Offering (IEO) has been catching the interest of traders, project teams, and exchanges after the Initial Coin Offering (ICO) fad has cooled off. Currently, major trading platforms such as OKEx, Binance, Bitrrex, Bitmax, Huobi, and KuCoin have conducted their own IEOs, and some of them have performed well after the issued tokens were listed on the exchanges. This article will walk you through the rise of IEOs, focusing on its unique nature, its current status quo, its advantages and limitations, and what should be done to make it more efficient.

1. What is an IEO?

An Initial Exchange Offering, as its name suggests, is conducted on the platform of a cryptocurrency exchange. An IEO is administered by a crypto exchange on behalf of the startup that seeks to raise funds with its newly issued tokens and will be listed on the exchange afterward. Compared with ICOs, risks have been transferred to the exchanges. Plus, crypto exchanges have a larger user base and will do complete due diligence before carrying out any IEO. This innovative pattern of raising money could mitigate risks of phishing, DDoS and other malicious attacks.

Users could buy the issued tokens directly from the exchange after completing the KYC procedures. Considering the hype of the newly issued tokens, exchanges usually set an individual buying cap. Besides, the token issuer has to reach agreements with the exchange on terms, such as fees, issuance price, and the issuance volume, etc. In fact, the scope of IEOs is expanding, allowing projects who have gone through private sales (Celer Network) to perform IEO, and IEO projects to carry out airdrop events (BitTorrent).

IEOs are similar to STOs on certain aspects, but the biggest advantage of IEOs over STOs lies the better liquidity provided by the exchange for users trading right after the IEO as a large user base is already guaranteed.

2. Status quo of IEOs

Next, we will make comparisons among several major IEO projects (BTT, FET, CELR) to check the current status quo of IEO development.

Individual buying and fundraising caps

The initial exchange offering share of BTT, FET, and CELR are around 6% with an individual buying cap. In fact, tokens are concentrated in a few big holders, therein they could manipulate the price. The limited amount of the newly issued tokens makes it hard for retail investors to get them at its initial issue price, and some of them have to resort to extreme efforts (buying KYC or account in the grey market) in order to buy the tokens in the secondary market.

Private/public sale prices

Also, there is a price gap between a private sale and public sale they were conducted at different times. Most of these private sales were carried out last year when market sentiment was better than it is now. However, you can see that the public sale price of FET is higher than that of its public sale price, which was probably propped up by the speculation hype.

Pre- and post-IEO trading volume of FET

Trading volumes of tokens pre and post-IEO varied significantly. E.g., trading volumes of FET were rising continuously before IEO, climbing up to its top on its IEO launch on Feb 25, and then saw two lower highs after IEO. IEOs also motivate users’ interest in crypto, bring user traffic to the related exchanges, and lift market sentiment under the current lackluster market performances.

On the compliance side, some countries have banned IEO activities, among some of which have a large user base of cryptocurrencies. Any IEO activities should shy away from these countries, which, otherwise, could face potential penalties.

3. What is the role of native tokens in IEOs?

Native tokens play an important role in IEO. The prices of native tokens are usually pushed up leading up to IEO process.

First, as the tokens issued by the exchange itself, native tokens have inherent advantages. As the medium of the IEO process, the exchange will make the full use of its native tokens to facilitate the implementation of the IEOs. Plus, native tokens bonds the project teams and the exchanges, and the project team tends to cash out when the coin price is high while the exchange tends to maintain the market stability.

IEO and price trend of native token

Second, IEOs expand the forms of the utility of native tokens. As the essential tool of raising money for projects, native tokens are in large demand in the IEO process. Besides, native tokens are also used to incentivize users and projects. With the increasing number of projects onboarding the IEO to raise money, the ecosystem of native tokens is expected to be expanded exponentially.

Third, IEO and native tokens could strengthen as well as hurt each other. Native tokens will possibly be pumped and dumped in the overheated hype if they are concentrated in few hands of whales, which not only cause investors to suffer huge digital asset losses but also put the trust in jeopardy between them. In extreme cases, both the projects and investors will dump their native tokens, causing the token’s price to collapse.

4. What are the advantages of IEOs?

A successful IEO could be an all-win case for token issuers, trading platforms, and users.

Token issuer startups benefit from the more flawless process of launching IEOs on exchange platforms — compared to doing their ICOs “on their own.” Plus, the exchanges will help the projects with marketing, improve their brand with their own influences. The large user base could naturally bring buyers to the issued tokens. However, token issuers still need to go through a prolonged negotiation process with the exchanges to ink the deal of on the IEO terms, such as the percentage of issued tokens and the listing fees. But IEO is still a more ideal fundraising model considering the risks of ICOs are grappling with.

One of the main advantages of IEOs is trust. As the crowdsale is conducted on a cryptocurrency exchange platform. The counterparty screens every project that seeks to launch an IEO on its website. Exchanges do this to maintain their good reputation by carefully vetting token issuers. Therefore, IEOs can eliminate scam and dubious projects from raising funds via cryptocurrency exchange platforms, and it becomes much harder to scam users with IEOs.

Besides, token issuers do not have to worry about the crowdsale security as the exchange is managing the IEO’s smart contract. The KYC/AML process is also handled by the crypto exchange as most service providers do KYC/AML on their customers after they create their accounts. The relative security is also guaranteed for the investors, as the exchanges will wash out the ineligible projects that may pose risks to investor’s assets, thus creating a safer crypto investment environment.

5. The limitations of IEOs

Currently, different countries hold varied attitudes towards the crypto industry, and most countries have yet outlined a clear legal framework for regulating the crypto industry. Since the bubble burst of the ICO, several countries have not taken their stances toward the IEO. While China has firmly banned the crypto activities, some countries, such as America, Japan, and South Korea, require licenses for crypto-related firms to operate. Countries like Malta and Switzerland hold an open attitude towards cryptos. In order to protect investors’ interests, it is essential for exchanges operating IEOs to acquire necessary licenses or comply with the laws and regulations of their origin countries.

Currently, Only South Korea has released a guideline on IEOs, covering the protection of investors, projects’ development planning, technical materials, compliance, and security issues. The guideline sets an evaluation score package for IEOs, totaling 1,000 points. If a token issuer gets a score of below 700 points, it can only raise a hard cap of KRW1.5B (~USD1.4 million), while those who get a score above 700 points do not have a fundraising cap.

Besides, as some governments deem IEOs and ICOs similar, it is uncertain whether or not major countries will step in and regulate the market, causing concerns for token fundraising events.

Furthermore, it has been reported that some people are buying and manipulating KYC qualifications to get involved in IEOs, which severely goes against the decentralized and transparent nature of blockchain technology. For investors, it is important to opt for exchanges that have a comprehensive and reliable KYC verification system that can guarantee fair participation in token sales.

As mentioned, since the number of an issued token is limited in an IEO, it induces risks that large token holders might manipulate the token’s price and cause volatility in the market and losses to the retail investors. To manage such risks, investors must fully understand the token distribution of a project before investing and participate only in IEOs hosted by exchanges with recognized investor protection measures and sufficient market liquidity.

While the number of fund-seeking token issuers and the associated benefits increase, chances are exchanges may compromise on the quality or the real fundamentals of projects in order to launch as many IEOs as they can. To ensure the quality of project selection, investors may turn to exchanges that operate IEOs with a transparent and trust-worthy project evaluation system. However, investors are always advised to do their own research before making any investment decision.

6. Conclusion

As the ICO frenzy has cooled off, the IEO provides a new fundraising method for blockchain projects. Acting as the counterparty to investors, IEO provides an extra layer of trust and security for the latter. However, the lack of a regulatory framework in most countries still causes uncertainties to this fundraising practice, which is also the major reason for shying investors away. Exchanges have to rely on themselves to screen every project and select the high-quality ones to launch IEOs.

In simple words, IEOs could create all-win cases for the projects, the exchanges, and investors. However, as IEO is still in its infancy, all stakeholders, including the legal authorities, need to step in to make the all-win outcome happen.

Countries and regions that currently ban IEOs:

Albania, Afghanistan, Ethiopia, The Republic of Belarus, Bosnia and Herzegovina, Burundi , North Korea, Congo, Congo, The Republic of Guinea, Guinea-Bissau, Canada , Zimbabwe, Cote d’Ivoire, Lebanon, Liberia, Libya, Malaysia, Macedonia, the United States, Myanmar, South Sudan, Serbia , Sri Lanka, Sudan, Somalia, Thailand, Trinidad and Tobago, Tunisia, Venezuela, Uganda, Ukraine, New Zealand, Syria, Yemen, Iraq , Iran, Central Africa, Mainland China.


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Disclaimer: This material should not be the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Please make your own investment decisions and take only the risks you can afford.


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