Pros and Cons of IEO
Planning a startup? Need fundraising options in the Blockchain space? You have probably heard about IEO (Initial Exchange Offering). Unlike ICO (Initial Coin Offering), which used to be popular a couple of years ago, this option is highly secure and profitable for people, who are ready to spend time on it.
You’ve heard about IEO. You want to take advantage of it. Is this crowdsale option as great as everyone is saying? We’ve taken a closer look at the subject to bring you all the pros and cons of IEO. Read on to make sure you are making the right decision.
What Is An IEO?
Before we dig deeper into the pros and cons, let’s identify IEO. This method involves the cryptocurrency exchange acting as the “third party” for the fundraising efforts, facilitating them while ensuring higher security.
Project developers send their tokens directly to the exchange they choose. The exchange conducts research and analysis of the project in order to deal with the biggest problem faced with Initial Coin Offerings – scams and frauds.
Then the exchange allows the investors to pay for the tokens, which credits to their accounts.
Since the token sale is done on the exchange, the project developer has to pay a listing fee and a percentage of the tokens sold during the IEO process. After IEO is over, the developer’s coins are listed on the exchange.
Accordingly, all three parties involved in the process win:
- The developer gets access to investors and gets the coins listed.
- The investor gets assurance from the exchange about the credibility of the project.
- The exchange gets new clients and percentage of the tokens sold.
All contributions sent by IEO participants end up on the account created on the exchange platform rather than on smart contracts.
Advantages of IEO
What are the key advantages of an IEO for all parties? Let’s take a closer look.
1. Developer: Access to Investors
One of the toughest challenges faced by startups is finding an investor. With an IEO scheme, the project developers get access to the existing investor database offered by the exchange.
This key advantage allows formidable cost cutting especially for the developers, who put their project up for investment solutions for the first time.
2. Developer: Cutting Costs
Project developers have to pay formidable amounts of money to run an ICO. It costs between $1 million and $3 million to list a token on the exchange. While these numbers are rough, the amounts are definitely high.
When working with an exchange, developers still have to pay high fees for IEO. However, the costs are likely to be lower.
3. Developer: Saving Time
Getting access to the investor database and cutting costs on the fundraising matters allows the developers to focus on the actual project development rather than on fundraising and marketing.
By saving time, money, and effort, they have more chances to make their project highly attractive and profitable.
4. Exchange: Joint Marketing
For exchanges, IEO has its own advantages. When a token with high potential is launched, the exchange appears in the spotlight. Even though only a small percentage of IEOs are likely to achieve exceptional results, just one is enough to promote the exchange considerably.
5. Exchange: Listing Fees
Depending on how big the platform is, IEOs can bring the exchange formidable amounts of money in fees. Accordingly, even if the token doesn’t turn out highly efficient, the exchange gets its profits from the developer.
6. Exchange: New Clients
When participating in an IEO, the exchange acquires new clients, who come on board in order to participate in the investment process. Even if all they do is consider the investment, these clients have to create an account on the exchange. This can result in them sharing contact information for marketing efforts and possibly becoming regular customers.
7. Investors: Fewer Security Risks
Since exchange does the preliminary checks of the project, the investors don’t face as many security risks as they do with an ICO.
According to IEO experts at IBC Group, exchanges don’t want to risk their reputation by dealing with fraudulent projects. That’s why they do extensive checks before accepting.
8. Investors: Time Saving
In order to find worthy projects, investors don’t need to deal with different wallets on different platforms. With IEO, all they have to do is register with the exchange and make a purchase.
Disadvantages of IEO
Even though IEO seems to be a flawless fundraising system for project developers, exchanges, and investors, it comes with a couple of downsides.
1. Limited Options
Since IEO is usually conducted on just one platform, some investors may decide not to bother with creating accounts and waiting for the verification to be completed. Sometimes the process can take up to a week.
2. Questionable Ownership
When conducting an IEO, the developer doesn’t own the tokens. The exchanges fully control the users’ private keys. In case of a hack attack, all your tokens may be lost.
3. High Minimum Holdings
IEOs have higher minimum native token holdings than ICOs. These minimums can keep some investors from participating in the IEO.
New opportunities to raise money in the world of cryptocurrencies appear every day. However, this industry is still relatively new and lacks the necessary regulations. Even though IEO appears to be an excellent way to raise funds today, it’s important to be aware of possible downsides.
Both developers and investors must spend sufficient time on research in order to avoid frauds, money loss, and disappointment. Due diligence is always a top priority for all participants of the IEO.