What is an IEO? How does it work?
What is an IEO?
IEO (Initial Exchange Offering) is a fundraising method that conducts token sales on centralized exchanges (CEXs). It comes along with the reputation of the CEX, where a project launches its IEO.
Investors participating in IEO will be able to purchase the project token directly from their exchange accounts. The accounts have to meet requirements from the exchanges such as KYC, joining period, etc.
Since CEXs own a large number of users, IEO will be able to leverage the user base by offering them exclusive token sales. It is common to kickstart an IEO on only one CEX so as not to ignite mutual conflicts among them.
The IEO fundraising method was made to feed the demand for funds from nascent startups in crypto. Most crypto builders are experts in only technical aspects, and they need to bootstrap their ideas as fast as possible. IEO might be a reliable choice.
How does an IEO work?
In this section, we will go step-by-step through the process of launching an Initial Exchange Offering. This might be a long journey for crypto projects to raise funds. We think you will get to know something behind the curtain after this article. Each IEO platform is different, but there is a framework for this.
First, the IEO demand is a must. A crypto project can apply to exchange platforms for conducting an Initial Exchange Offering. The team has to follow a multi-step process given by the exchange. Many checkboxes have to be completed, such as who the team is and which problem the project solves.
Characteristics of Initial Exchange Offering (IEO)
Initial Exchange Offering allows retail investors to join the early-stage fundraising round to bootstrap the project. This can increase the success rate of the project token after being listed on the exchange.
Retail investors are able to purchase project tokens at a price that is closest to that of the insiders (the team or early investors). As a result, they can earn massive returns on their investments.
More importantly, for some IEO platforms, it is vital to hold their platform tokens to be eligible for buying allocated project tokens. Thus, IEO can boost the demand for CEX tokens such as BNB, BIT, FTT, etc.
Initial Exchange Offering contains risks. Nothing can give investors a guaranteed ticket to win in the crypto world. Therefore, managing risks is an indispensable skill to be wielded.
Pros and Cons of IEO
Advantages of IEO
Since IEOs take place on CEXs, it has to go through a comprehensive audition. They have to protect users from potential scams and rug-pulls. Thus, IEO participants can trust the project listed on reputable exchanges.
IEO is an open door for projects to get a green light from the exchange. Exchanges are likely to list the token after the IEO sale in order to bootstrap the initial trading volume. The token’s trading volume, when listed, can be up to billions of dollars, depending on how big the user base is.
Exchanges capture value from the trading volume. When the token first gets listed, in the mania, dozens of users jump in to increase the trading volume. Thus, besides the trading fees, exchanges also rank up in the high-volume exchange leaderboard.
Information about IEO projects is transparent. Exchanges conducting IEO are responsible for due diligence, balancing every party’s benefits. As a result, IEO partially eliminates asymmetric information.
Initial Exchange Offering is considered legal since it takes place on CEXs, which are regulated by governments. Therefore, this fundraising method is widely used by crypto projects. ICO and IDO are facing potential risks of being a form of security sale by the SEC as they come to the U.S. market.
IEO projects can leverage the availability of the user base. Thus, it can reach a huge number of potential users on CEXs without huge marketing costs.
The demand for exchange tokens such as BNB and FTT increases as the IEO trend is yet to be put off. On each exchange, the game is set up a little differently, but holding the exchange token is one of the requirements to join IEOs.
Risks of IEO
Contrary to the aforementioned benefits of Initial Exchange Offering, there are potential risks when investing. Speculating in startups can yield massive returns but might go sideways.
However, high liquidity when listing on top exchanges is not a guarantee for a project token after the IEO launch. The listed token will be highly volatile, but in which direction is hard to predict.
There are numerous high-yield investments, causing widespread mania. Some crypto natives love joining the quick-rich scheme with high risks. Hence, investing in projects at an early stage is so tempting. However, investors should consider it carefully before taking actions.
IEO vs. ICO vs. IDO: Which Is Better?
As the names suggest, IEO, ICO, and IDO have differences in the middle letters, Exchange, Coin, and Decentralized. One of the biggest differences is that IEO depends on centralized exchanges, which are regulated by governments.
As a result, crypto projects might choose IEO for a regulatory reason. In the future, IEO might not be an obstacle for a crypto project to go public, while projects using ICO and IDO methods are under the radar by the SEC.
Currently, the SEC is strongly focusing on charging ICO issuers and projects that launched ICO. This surging regulatory movement of the SEC makes crypto founders shift to safer methods such as IEO and IDO.
Learn more: What is an IDO?
How to participate in an IEO
Centralized exchanges such as Binance, FTX, Bybit… are where IEOs are launched. As a result, there is a similar framework that they apply to kickstart the fundraising process. However, due to each exchange’s policy, the process might vary. Let’s break the IEO process down.
Do research on the project and the IEO platform
Before taking any action, investors should go through the project and the IEO platform to get the most basic details about what they are.
Check every information about the project which will launch Initial Exchange Offering. We can start from the most entry-level questions, such as who the team is, what the project does, what it solves, and how active their social media is. It is important to know at which transparent level the project is.
Check the credibility of the exchange where the Initial Exchange Offering is launched. In the crypto space, centralized exchanges are abundant, and it is fast to find an IEO platform. However, finding a crypto exchange with a high level of credibility and authenticity is hard.
Complete the requirements
After choosing a crypto project and an IEO platform to join, investors need to register an account on the platform. There are some requirements that you might come across when registering to join IEO.
KYC (Know Your Customer) is a verification process that requires users to provide personal information such as an identity card (or passport), residential evidence, portrait scan, etc. The process eliminates ineligible users. In addition, AML (Anti-money Laundering) regulation and KYC effectively prevent criminal activities.
Participate and follow the IEO
After fully registering an account, investors should check the date of Initial Exchange Offering and wait for it. Remember, exchanges often use their tokens as IEO commitments.
This means users have to hold the CEX’s tokens for a period of time to be eligible for IEO. Then keep following the IEO if you get allocated tokens.
Best IEO exchanges
Binance Launchpad
Binance is one of the pioneers who ignited the IEO trend. Backed by a large user base, Binance can leverage it to help crypto projects bootstrap at light speed. As shown in the below infographic, projects launching IEO on Binance Launchpad received massive traction and high ROIs (3x to 100x).
Binance Launchpad allows founders to raise funds in hard cap or a soft cap. A hard cap is a specific amount of funds that the founder wants to raise. On the other hand, in a soft cap, the raised fund will be exceeded if more investors join.
We can name some notable projects launched on Binance Launchpad, such as Axie Infinity (AXS), Alpha Finance (ALPHA), Coin98 (C98), etc.
FTX IEO
FTX is an order book exchange specially designed for trading derivatives assets. It could not stand still for the IEO trend to pass by. The first IEO on FTX was the FTX Token (FTT) in July 2019. Thus, FTX supports this fundraising method quite early.
At the moment, IEOs on FTX have impressive performance, as it is shown in the above table. Here are some ROIs (Current Price vs. IEO price, updated May 7th, 2022):
- FTX Token (FTT): 175x
- Serum (SRM): 16x
- Star Atlas (ATLAS): 5x
Other IEOs on FTX performed well on the day of listing. However, in market selloffs, they struggle to keep the price on the right track.
Bybit IEO
Bybit Launchpad facilitates the fundraising process for crypto projects with prominent ideas to launch IEO directly on its platform. At the time of writing, it launched 12 projects from various categories.
To join IEOs on Bybit, investors need to complete KYC at a specific level and hold an amount of BIT in the Spot wallet before the IEO starts. The IEO performance of Bybit Launchpad can be described with some top-yield tokens, including (PLY, KASTA, REAL, and CBX):
- Total No. of participants: ~27,000-77,000
- Avg First-Week Return: ~1,200%-2,000%
Other IEO platforms
There are other exchanges that have their own IEO platform. However, the success rate of IEO is heavily dependent on the credibility of the exchange where it is launched. As a result, do your own research before making any investment decisions.
IEO FAQ
Is IEO safe to invest in?
Projects kickstart IEO on centralized exchanges that are responsible for maneuvering all activities. Investors coming to join IEO have to meet initial requirements from the exchange, including KYC, and comply with the state policy.
As a result, participating in IEO can be considered to have fewer risks compared to ICO and IDO. Both users and projects are backed and supported by the exchanges.
How to invest in IEO safely and effectively
Before speculating on IEO projects, investors should do research and calculate every possible parameter. It is vital to be aware of potential risks that can cause you to lose all your investments.
You can participate in the IEOs on exchanges or invest in project tokens listed afterward.
Even though the exchanges do due diligence with the projects that launch IEO, investors should be responsible for every decision.
Why do Blockchain Projects prefer IEO?
As the benefits of IEO are mentioned in previous sections, crypto projects are now preferring IEO and IDO to ICO. IEO can give them a high chance of immediate listing on exchanges where it is organized. This also bootstraps the liquidity of the IEO tokens when being first traded publicly. Therefore, this shapes a big flywheel for projects to launch IEO.
How much does an IEO cost?
In any IEO, there are often three sides, the exchange platform, the project team, and the investors. Each is responsible for a role in the IEO launch and the cost to join.
When an exchange wants to kickstart an IEO, it has to vet the project and the process in order not to face regulatory problems. This costs the exchange a lot of money to get things to work.
For a crypto project to have an IEO on any exchange, especially top-tier exchanges. They have to go through a long and complicated process conducted by the CEX team.
To join IEO, investors have to meet the specific requirements given by the exchange. They can be KYC, a specific amount of exchange token, etc.
How to track the progress of IEO
For the latest updates of an IEO, we recommend following the web link where it is launched. In addition, you can follow the social media (website, Twitter, blog, etc.) of the IEO-launching project. We hope this will help you not to miss any dues of the IEO.
Conclusion
That is everything you should know about IEO and its pros and cons. IEO and other similar fundraising methods are just for fundraising purposes. It is not compulsory for investors to join. Last but not least, be aware of the potential pitfalls that can cause you losses.
If you have any questions about IEO, please leave your thoughts in the comment section below. We will respond as soon as possible!