Initial Exchange Offerings, that is, offerings administered by a crypto exchange, on behalf of a startup—where the startup is trying to raise funds with newly issued tokens—has developed as an alternative to an older model, the Initial Coin Offering, where participants make their contributions to a smart contract.
Hirander Misra has written recently about this “newest kid on the blockchain,” making the case that the IEO offers a promising fundraising model. Misra is the chair and CEO of the GMEX Group, a leading influencer of blockchain technologies. He is also the chairman of the Mauritius-based International Derivatives and Commodities Exchange, MINDEX.
Crypto coins and blockchains generally offer, he writes, a “new form of fundraising” that allows those receiving the funds to avoid the hassles of excessive paperwork, financial modelling, or regulatory approvals. The year 2017 was “the year of ICOs.” In 2017, 875 projects raised a total of $6 billion through ICOs. It was also in that year that Antshares rebranded itself NEO, a name that suggested great hopes for the future. Various startups, researchers, and Fortune 500 companies created the Enterprise Ethereum Alliance (EEA) in 2017.
After Getting Burnt
Unfortunately, 2017 was also the year that, in Misra’s words, “some investors … burnt their fingers in fake ICO offerings.” This led to the next step in the development of the field, the Security Token Offering. STOs are asset tokens backed by the underlying security being tokenized. But this doesn’t change the fact that if an inferior company is subject to the STO, it will impose on participants the same issues that an ICO might.
The IEO is a further development along the same lines as the STO. The distinguishing trait is that it is exchange-specific. The exchange isn’t merely a listing venue. It is acting as a counterparty. Buyers must be participants on the exchange that is conducting the IEO and must use their account at that exchange for the purchase. The participants fund their exchange wallets with coins, or they provide fiat money to a legal escrow account.
The exchanges perform due diligence on each project and on those looking to invest in it. This includes KYC and anti-money laundering checks. Exchanges can leverage their existing network to shoulder some of the burdens related to the whole process, offering economies of scale that lowers costs.
ICOs and STOs, on the other hand, which are undertaken by the fundraising entities themselves, leave those entities with, as Misra explains, “all the associated costs related to due diligence, marketing and running the overall process.”
Misra and GMEX believe “that a credible exchange will look to vet projects and offer credible IEOs to keep its reputation intact, which will help weed out questionable initiatives.” Further, the new process is a lot simpler than the older processes. “There is no longer any need to register using questionable websites or look into what payment methods the project accepts. Nor is there any need to manage on-chain transaction with different wallets on different blockchains. Instead, you just log onto the exchange site and make your contributions in the appropriate manner via your account,” says Misra.
Misra and GMEX believe that as bona fide exchange operators get involved, IEOs may revolutionize fund-raising both for existing businesses and for startups. They will provide investors, both institutional and retail, with appropriate investment opportunities to satisfy an increasing demand for digital assets.
Another Take on the Issue
Sritanshu Sinha, a writer with Cointelegraph also recently addressed the issues raised by the distinct ways of “raising funds for crypto in 2019.”
As old-fashioned ICOs are no longer “partying like it’s 2017,” Sinha points out that there are still major ICOs, even in 2019. Algorand raised more than $60 million this year in a token sale.
Sinha also points out that ICOs cryptocurrency markets are philosophically wedded to the idea of decentralization, and that IEOs seem too centralized for many working in this space, similar to IPOs.
Sinha says that there may also be a way to get the benefits of IEOs and keep the decentralization as well. These are “initial DEX offerings.” A DEX, such as Binance DEX, is a decentralized exchange.
Will IDOs be the next big thing? What Sinha and Misra seem to agree on is that 2017 was the year of ICOs, that 2019 is the year of IEOs. But Sinha is more inclined that Misra to believe that IEOs, too, may look like a passing fad in the not-too-distant future, and that IDOs may yet have their year.