Summary

When a new cryptocurrency project wants to launch a cryptocurrency or blockchain product but requires huge investment funds to go online, it usually conducts an IEO.

Unlike an initial coin offering (ICO), an IEO requires the support of a cryptocurrency exchange like Binance. Such projects can raise funds with the help of the exchange’s customer base and start trading their tokens soon after.

Introduction

Today, thousands of digital currencies and blockchain projects have been launched or are still in the development stage. Most projects need to introduce economic incentives to attract developers and contributors to continue to participate. After all, not all projects can obtain generous donations or contributions from asset holders, and it is usually only a matter of time before external financing is introduced.

Developers can raise funds in a variety of ways. Getting funding from venture capitalists (VCs) takes time and effort and yields little in return. Minting tokens before the project launches (called “pre-mining”) and storing them in a treasury is also a viable option, but it is often criticized by the community.

IEOs are often an attractive option, assuming that the developers have a concrete plan of activity and are committed to the project’s vision.

What is an Initial Exchange Offering (IEO)?

As the name implies, an Initial Exchange Offering (IEO) is a process of raising funds for a new project through a cryptocurrency exchange. It is common to trade assets on these platforms, but usually only after the developers have raised funds and successfully launched the project.

Through IEOs, potential investors can buy into these assets before they are listed. Through the exchange platform that facilitates the token sale, registered users who provide KYC information can purchase tokens before they are available for trading on the open market.

IEOs are supported by exchanges, so startups that choose this option must take their plans seriously. In most cases, IEO proposals are strictly reviewed by participating exchanges. In a sense, exchanges are guaranteeing approved IEO activities with their own business reputation.

How is an IEO organized?

Although blockchain technology is still in its early stages of development, thousands of digital currency startups and companies have emerged in the industry, many of which are competing to attract potential investors through ICO or IEO activities.

If the developers of a cryptocurrency project decide to organize an IEO, they must follow a complex set of procedures before raising the first funds.

The project team must meet multiple requirements: a solid and reliable business model, experienced team members, viable technical use cases and providing a white paper are the most important indicators. Organizing an IEO is equivalent to declaring that you will work hard to lead the project to long-term success.

Additionally, they need to determine whether the ICO will have a hard cap or a soft cap. A hard cap ensures that the investment amount cannot exceed a certain limit. A soft cap sets an initial target that must be reached, but allows for additional investment later.

Once you’ve made these decisions, you need to choose the ideal exchange for your IEO. Binance Launchpad has helped dozens of projects get the investment funding they need. Some examples include BitTorrent (BTT), Band Protocol (BAND), Axie Infinity (AXS), Alpha Finance Lab (ALPHA), and WazirX (WRX). Other exchanges have also established dedicated IEO platforms, each with their own advantages, requirements, and potential pitfalls.

Why do blockchain projects conduct IEO?

Raising funds for a new cryptocurrency or blockchain project can be quite difficult. As with every other industry, there is a lot of competition to attract investors. Not everyone can successfully bring in investment funds through traditional methods.

This is where IEOs come in, catering to existing cryptocurrency holders. The exchanges involved can bring a certain level of credibility to the projects raising funds, so IEOs are trustworthy to a certain extent. After all, the exchanges are guaranteeing IEOs with their own business reputation. Even so, everyone should conduct in-depth research before making any financial commitments.

For projects that want to raise funds through trading platforms, IEO is undoubtedly a reliable solution. Most initial exchange offerings will sell out quickly, depending on the project vision and use cases. The project tokens will also be listed on the trading platform after the sale.

➟ Want to start your digital currency journey? Welcome to Binance to buy Bitcoin (BTC)!

IEO vs ICO

In theory, the concept of an IEO seems similar to an ICO. During the Ethereum ICO bubble of 2017-2018, ICOs were launched every day. Many projects successfully raised millions of dollars, but there were also a large number of misleading products and outright scams. Because no one publicly "reviewed" ICOs, the concept eventually evolved into IEOs, which many people believed to be more trustworthy. Many ICOs violated US securities laws, spawned various lawsuits, and triggered investor refunds.

ICOs have proven to be extremely risky. Investors must send Bitcoin or Ethereum to a smart contract or website in the hope of receiving tokens. Anyone with some basic knowledge of smart contracts and web development skills can throw together a fancy website, a promising-looking roadmap, and start raising money. This is far from ideal and poses a huge risk to all ICO investors.

IEOs significantly reduce these risks. Investors inject funds through the trading platform’s wallet rather than sending money directly to the project. Due to the very stringent requirements, projects that lack credibility or teams that lack commercial awareness will not be able to successfully implement an IEO.

In addition, IEOs reduce risks and increase flexibility compared to ICOs. Tokens are guaranteed to be listed on the exchange that organizes the sale. It is easier for investors to exit the market when necessary.

Risks and Opportunities of IEO

Even if exchanges conduct rigorous scrutiny of every IEO they participate in, this does not eliminate investment risk. There is a high probability that a project that raises funds will not achieve its vision. Regardless of the value of the token during the IEO, this issue will generally have a negative impact on the price.

That being said, IEOs can create favorable investment opportunities. Being able to buy tokens that are about to be listed in advance, and knowing that they will be listed in the market with excellent liquidity, can indeed bring some opportunities. However, not all IEO tokens will appreciate in value after they start trading.

Summarize

The low frequency of IEOs has helped eliminate a few less popular projects in the digital currency and blockchain space. However, no method is foolproof, but IEO is at least on the right track.

Of course, the existence of IEOs does not mean that everyone should invest in these products. Regardless of how companies and projects raise funds, you should always conduct due diligence. There are indeed many advantages to providing funds to IEOs, but the risks behind them should not be ignored.

Do you have any other questions about crowdfunding and crypto? Visit Ask Academy, our Q&A platform, where Binance community members will patiently answer your questions.