Since Coinmaster funded themselves in 2013, the ICO (Initial Coin Offering) method has been the most popular and effective fundraising route for projects oriented towards blockchain and cryptocurrency. But this trend seems to be changing.
The previous model
ICOs are a simple way to raise the capital necessary to start running the project: the project creates their own token, based in the ERC20 protocol and running through the Ethereum network, and the customers that decide to invest are repaid in an amount of these tokens, which would later be used for certain functionalities within the platform (in the case of utility tokens) or to raise profits depending on how the project performs (for security tokens).
This model has been successful enough to become the most popular one in the crypto environment, with more than 2,000 projects reaching enough funding in 2018. But since the investor has no way to predict how the project will work after launch, most of them are very cautious when deciding to directly invest in one of these projects. IEOs represent an alternative where the investments are safer.
The fundraising revolution
In this model, an exchange analyzes the project’s whitepaper, coin distribution, initial coin value, total coin supply, marketing efforts, and many other factors, in order to decide if the project is promising enough. If it is, then the coin is created within the exchange, and a sale date is established. On the date, the users in the exchange can buy the project’s tokens with other cryptocurrencies (normally BTC or ETH), while the exchange charges a small fee for each purchase and for holding the sale in their platform.
Not only does this represent benefits in terms on trust, given that the project is previously analyzed, and the token sale is performed on a stable platform, but if a big exchange decides to hold an IEO for a project, it can work in great benefit of said project due to the popularity of the platform.
The crypto-trading powerhouse Binance already offers IEOs through their Launchpad platform and has successfully funded projects for BitTorrent and Fetch.AI by raising $7.2 million and $6 million respectively, and only in a few minutes for the first one and mere seconds for the latter.
Other big names like LBank, Liquid, Coinbene and Coineal, which are among the top-rated exchanges in terms of trading volumes, also have IEO platforms, and have managed to fund projects like
Tutor’s Diary (TUDA): a blockchain-enchanced online education platform that reached their hard-cap of $2,400,000 through LBank.
AIDUS: a platform oriented towards raising decentralized funds for international projects funded via Coinbene.
Platin: The revolutionary Proof-of-Location (PoL) platform that offers geo-location solutions for digital assets, granting users additional security measures while managing their assets was completely funded (~$2,000,000) via Liquid.
ZeroBank: A Coineal-funded project that focuses on creating a legal ecosystem for international transactions, blockchain services and smart contracts provision. It has already sold out their first session, and it’s expected to be listed for trading in the next days.
The dark side
Of course, nothing is completely good and there must always be some drawbacks to these systems. In the case of IEOs, the possibility of the project failing some time after launching with the funds raised during the token sale still exists, but it’s greatly reduced by the prior analysis performed by the exchange itself.
Another drawback would be that launching a project through an exchange would mean to reduce the potential audience of the purchase to the userbase of said exchange, while also increasing the chance of big investors purchasing high percentages of the overall sale, thus gaining leverage in manipulating the price of the token itself.
Some people also worry about issues regarding the security of the project during and after the initial token sale, because these factors end up depending on the stability and safety measures of the platform. A hacker attacking the exchange puts the entire project at risk, because the investors’ balances could be compromised.
All in all, IEOs take the basic principle that made ICOs so popular, while also taking some responsibilities away from the project and trusting them to a renowned cryptocurrency exchange. And they seem to be gaining popularity as bigger names start following the trend. Whether IEOs end up taking the spot as the main way of fundraising for blockchain-oriented projects will depend on how many top exchanges start to offer the service.
UPDATE - return rates of ieos
BitMex performed a study about the return rates of IEOs in their first months of trading, and most of them have amassed great return rates for their investors.
Most of the tokens have generated more value compared to the price they were sold during the offering. However, once they were listed for trading, the value of the token decreases gradually. What this means is that the best way to generate profit out of IEOs has been to sell the token as soon as the token releases for trade (if it does).
An important insight is that, in average, only 4.4% of the tokens for projects are out for sale in an offering, which means that the ones that generate more revenue are the team that works on the project, which keeps a relevant percentage of the total of tokens.
So far, it seems that IEOs are showing better signs of growth than ICOs, but it’s still an early stage, so more studies like this will need to be thoroughly read and analyzed.