What is ICO and IEO - differences from each other

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2019-08-04 00:00:00:

More recently, in 2017, we saw a real boom in ICOs . However, from that time to the present day, many people managed to be disappointed in them. By the end of 2018, investing in ICOs had become a very risky business. Today, they were replaced by IEOs , which were designed to reduce the number of scam projects. Here, the sale of tokens is strictly linked to a specific exchange. Experts say that the emergence of IEO should not be considered an attempt to revive the ICO procedure, since this is one of its types. It seems that the time has come to understand this issue in more detail.

Attention! This article is offered by us as a general informational material. We do not give advice on investing, we do not encourage you to participate in ICO or IEO. Remember, any investment is a risk and you should get proper advice from the appropriate specialists before investing.

What is ICO

ICO (Initial Coin Offering) in translation means "initial coin offering" or "initial token offer". It is a fairly new type of investment, its emergence is associated with the emergence of cryptocurrencies and their development. That is, to the question of what an ICO is, you can answer that it is cryptocurrency crowdfunding, raising money for something on the side. Most often they are directed to the development of various projects. This is similar to a listing on a stock exchange. Investors exchange their Bitcoins or Ethereum for tokens, which are another cryptocurrency. Subsequently, it can be exchanged for the product of the company that carries out the ICO. It is also possible to trade it on exchanges. If there is a demand for this currency, the investor wins.

For clarity, you can give a specific example. Lets say you want to implement an idea into reality using blockchain technology. In this case, you will need to recruit employees, rent a room, purchase equipment, and then work for a long time to implement your project. All this, of course, requires investment. But the trouble is that you have no money. Of course, you can find a way out of this situation - find an investor, interest him with your idea and get financing from him. Everything seems to be very simple. However, those who have ever faced the search for an investor understand that this is not an easy task.

In this case, the following decision will be correct: conduct an ICO. To do this, you need to prepare a vivid presentation of your own project idea. In addition, you will need to conduct an advertising campaign (in social networks, electronic media, etc.). We can call the initial placement of tokens a subtype of crowdfunding (collective investment). Any network user who is interested in your idea, who has noticed something useful for himself in it, can invest his own funds in your project. Basically, during the ICO, cryptocurrencies Ethereum (ETH) and Bitcoin (BTC) are used . Instead, the contributor receives your project tokens. ICO does not have any regulatory framework under it. This means that any person or legal entity can be considered as the initiator of the initial coin placement. The activity is carried out online, the project does not pass any verification.

The whole process can be represented in the form of certain stages:

preliminary announcement. The initiator introduces his idea to the users. Moreover, it can exist simply "in the heads" of the startup participants. At this stage, it is determined how interesting the idea is to the public, answers are given to questions from potential investors. Active discussions of the project are underway;
offer, i.e. in our case, this is an investment offer. It must come from a legal entity, while the term for the implementation of the idea is announced, the amount of funds required for this, and the release of tokens is performed. For this purpose, create an independent website or presentation. In some cases, pre-sales of tokens are carried out, which are closed from outsiders. All this is needed to raise the funds required for the official launch;
marketing campaign. When the preparations for the initial token offer have already been completed, it is time to spin up the advertising "flywheel". At this stage, detailed information about the product is provided, technical details, investment conditions, etc. The advertising campaign is carried out on various channels;
start of sales (token sale or crowdsale). At the very beginning, the startup invites contributors to buy tokens within its own platform. After a while, the launch of sales on cryptocurrency exchanges begins, available to a wide range of users. If everything goes well, we can talk about the viability of the project. However, this does not guarantee 100% success.

He was the first in the history of ICO to hold the Mastercoin project. In 2013, he helped to raise investments in the amount of USD 5 million. Since that time, the financing of more than one thousand projects has been carried out by issuing tokens.

What is IEO

The cryptosphere is characterized by rapid development, and already in 2018, an alternative to ICO appeared - initial exchange offerings (IEO). Their full name in English sounds like Initial Exchange Offerings. They, unlike ICOs, are managed by an exchange, which, on behalf of a startup, wants to raise funds using its own tokens issued not so long ago. IEO gives crypto projects the ability to raise investments directly on digital exchanges. All this causes a lot of discussion on the net. Therefore, you need to try to understand what IEO is - a short-term hobby or a crypto trend that will become more and more popular.

In the considered method of raising funds, a cryptocurrency exchange acts as a counterparty. Thanks to this, the process of fundraising is facilitated, and some control is also carried out over it. Tokensale is carried out directly through the trading platform. In this case, smart contracts are not used (which is common practice in the case of ICOs). The exchange is launching a special crowdsale platform for this. A team of analytical specialists selects the most promising projects for it. User agreements are signed between crypto-exchanges and startups, after which they collect funds together.

Most often, the token issuer pays a listing fee to the cryptocurrency exchange, in addition, it transfers a certain percentage of the tokens sold using IEO. As for the exchange, it takes on obligations in return - to sell new tokens, and after the fundraising comes to an end - to add them to the listing. An important point is that token trading is much more active precisely thanks to the exchange, which receives its interest from this. In other words, effective marketing of tokens is of great importance for both the issuer and the exchange.

It so happens that IEO is carried out in several stages. It is worth noting that often during the transition from stage to stage, the cost of coins changes. The site administration has the right to establish additional rules, according to which coins must be placed on a specific exchange. It is known, for example, that the largest cryptocurrency exchange Binance made a statement that now the sale of coins here will be carried out in the format of a lottery.

It was thanks to this exchange that the IEO idea was realized. At the end of 2017, a platform called Binance Launchpad was formed here, which made it possible to issue and sell new tokens from the exchange directly. Less than a dozen seconds later, an IEO token sale based on this platform raised funds for BREAD in the amount of USD 6 million and GIFTO (in the amount of USD 3.4 million). This exchange already in 2019 made a promise - to conduct at least one token sale every month. Thanks to this success of Binance, the spread of IEOs started to happen at a very fast pace.

ICO and IEO - how they differ from each other

As mentioned above, user confidence in ICOs was shaken due to the existing legal uncertainty, as well as a significant number of fraudulent projects. The only way to regain the lost trust in token sales was to involve large cryptocurrency exchanges in the fundraising process. It is in the role of exchanges that the main differences between ICO and IEO lie . Lets consider them in more detail.

The main functions of the exchange:

examination of newly submitted projects;
evaluating their attractiveness to investors;
assessment of possible risks, as well as the viability of the project as a whole.

It is the cryptocurrency exchange that takes on a significant part of the reputation risks when it calls the project promising and decides to admit it to IEO. All this contributes to the fact that investor confidence in the placement of funds increases.

At first glance, it might seem that the differences between ICO and IEO are not so significant. It would seem - what is unusual in the fact that the exchange is engaged in the sale of projects? However, it’s not that simple. IEO projects assume that the sale of coins on the platform starts immediately. This is very encouraging for investors who have already had experience of participating in the ICO. Each of them will confirm that the worst stage in the whole process was waiting for a token to appear on the exchange of interest to him or not. In the case of an ICO, the listing of tokens on a cryptocurrency exchange is most often carried out not immediately, but several months after the token sale ends.

In addition, the differences are as follows:

the exchange requires the full KYC procedure only in rare cases. Most often, its simplified version is used, in which there is no need to provide a large package of documents. This is also an important difference between IEO and ICO;
investors are provided with fairly reliable protection against SCAMs. If we consider the ICO, there was a big drawback here - it was difficult for potential investors to understand which project to choose. The ICO was launched on various platforms, while the information required by investors in full could be found very rarely. It happened that the launch of the ICO was carried out by scammers. They were engaged in fundraising, after which they disappeared without a trace. One could also face another type of "divorce": depositors still received tokens in exchange for their money, but then the initiators abandoned the project. Thus, all that remained with the investors was digital candy wrappers. As for IEOs, fraudulent operations are much more difficult to carry out here. Before a project is launched on the exchange, it is necessarily checked for its reliability and viability. The team of analysts of any crypto exchange is responsible for ensuring that dubious startups do not fall on it, since the reputation of the exchange will greatly deteriorate if they fail. Nevertheless, some risks (team, as well as project) are still present;
it often happens that the exchange is able to promote even projects that are generally unpopular, with a weak own community. As for ICO projects, large investments were required here in order to develop the community before starting fundraising;
IEO investors are profitable almost immediately. This is not the case in the case of an ICO. Any coin becomes popular immediately after the successful IEO. This means that a token that is listed immediately increases the value of the coin and it is significantly higher than in the initial initial offering. The owner of tokens has a choice - he can either immediately sell the existing assets at their current value, or do it later, when the price rises;
due to the fact that with IEO exchanges are very responsible in choosing a project, a significant part of the burden is removed from investors;
a common price for all tokens is set. Thanks to this, the risk of a decrease in rates from the first investors decreases, in addition, threats from airdrop operators, as well as bountists, decrease.

Risks of participation in ICO and IEO

Investors are still in demand for participation in the ICO, but it remains only for reliable projects. Now contributors are carefully studying the history of the project, its team, and assess the existing prospects. Despite this, as experts note, ICO investors may face a lot of problems. They can be associated with an incorrect assessment of the viability of the project, deliberate "bookmarks" in the codes, and even hacker attacks.

Next, we will consider the risks of ICO in more detail:

the first, the most common, are the risks of incorrect valuation of tokens that are placed during the ICO. This is primarily due to the fact that ICO projects for the most part are only at the stage of idea (84% of the total) or prototype - model (11%). They begin to be implemented, as a rule, 12 months or even more after the ICO. There are also working projects, but their number is very small (5% of the total number of ICOs). Experts warn that when evaluating a token, a large number of variables should be taken into account, so if we are talking about a project under development, it is very difficult to give an adequate estimate. Experts advise, first of all, to assess whether the task set by the project is real, whether the existing team can solve it in reality. To understand this, you can study her past experience in a similar field;
the problems of the bad faith of those teams that carry out the ICO. In the course of research carried out by experts, it turned out that in many cases in the program code ( smart contract ) containing the terms of the ICO, there are vulnerabilities or deliberate "bookmarks" (this is how they call hidden conditions that are not directly disclosed to investors in an accessible form). It is quite problematic for investors to independently check how the declared and real conditions coincide - only a qualified programmer can read what is contained in a smart contract. You can reduce this risk if, before investing, you study the information provided by cryptocurrency funds investing in the same project. They usually have the technical ability and knowledgeable people to study and evaluate the code, and therefore their conclusions are reliable;
the risk of being subjected to a hacker attack. Hackers have an increased interest in ICOs, so the problem of cyber threats is very acute. According to experts, about 10% of all ICO funds are lost as a result of attacks. This is possible due to the excitement created around projects, the lack of centralized settlement. This is also facilitated by the irreversibility of transactions made in the blockchain. The main task facing the organizers of the ICO is to attract investors, while security issues, most often, remain practically unattended. It should be noted that the largest and most popular projects are the most attractive for hackers. It should be noted that there are many dangers for investors as well. The main ones are replacing the wallet addresses of certain projects. Hackers can find out the keys of wallets and then steal money from them. In addition, exchanges can also be hacked. You can avoid all this if you keep your private keys safe and keep them in a safe place. In addition, you need to use only official resources and not follow dubious links. It is necessary to carefully check the website address (for a phishing website it will differ from the official one by 1-2 letters), and also double-check the wallet address before transferring funds to it.

The most common IEO risks are:

investors still risk their own funds. Despite the fact that the exchanges choose the most promising projects, no one can provide investors with guarantees that the profit will be large;
the number of crowdsales held from 2018 to the present is not yet significant enough to draw conclusions about the benefits of new sites;
all the same, as in the case of the ICO, legal uncertainty remains. Regulators of various countries still cannot decide on the best way to control the activities of organizations implementing IEO.

Positive aspects of ICO and IEO

After analyzing a large number of ICOs, experts came to the conclusion that there are a number of positive aspects for investors in them:

there is sufficient legal sophistication from the position of establishing the obligations of the issuer of tokens, as well as the rights of those who acquire them;
most often, comparison of analogs of ICO projects, their weaknesses that ICO projects can solve;
there is a precise definition of the risks for investors;
the use of smart contracts, as well as a detailed explanation of the principles of their use - a guarantee of the transfer of funds, simplification of monetary transactions and their efficiency;
after the legislation regulating the activities of organizations carrying out ICOs is nevertheless stabilized, ICO projects will be as promising as IPO projects. The most important thing is that it will be possible to quickly collect a large amount of money from various investors.

These conclusions were made after studying some of the largest ICO projects. Those were named Graft, Bee, Caviar, Bitrent, Digmus, Smart City, Telegram, Dencity.

As for the positive aspects of IEO, there are quite a few of them:

investing in IEO is very simple - you just need to have your own account with a participating exchange. It is necessary that the KYC check is successful, and you are not a subject of a state in which it is prohibited. If the requirements are met, nothing prevents you from investing in IEO;
existing IEOs refuse from the mandatory opening of wallets on external resources. They are filled out on the exchange platform. The exchange has built-in wallets, so IEO purchases can be carried out directly on its website;
trust is the main advantage of IEO. Since the crowdsale takes place on the exchange platform, the issuers of tokens are thoroughly checked by the analysts of this exchange;
token issuers can forget about concerns about the security of the crowdsale. This is due to the fact that the exchange manages the IEO smart contract. In addition, the exchange also handles KYC / AML processes, since a significant portion of service providers perform KYC / AML for customers after the accounts are created;
simplicity for projects. Those startups that decide to launch their own IEOs need much lower advertising and marketing research costs than in the case of ICOs. An important point is that token issuers have the opportunity to take advantage of the reliable customer base that the exchange has. This helps them get more input into their own projects;
token listing is always included in the deal. And therefore, it is quite understandable that the exchange on which the IEO is carried out after the crowdsale completes lists the startup tokens;
if the exchange is not decentralized, "GAS war" between the parties is not possible. Currently, all transactions after a certain time are included in the block, it is worth noting that the speed is affected by the size of the commission that is paid for the transaction. Consequently, there is active competition between investors, they set significant GAS limits. Thus, they become leaders in the transaction queue. They need all this in order to be the first to acquire tokens. In addition, gas wars in IEO do not arise because exchanges do not use Ethereum, but their own cryptocurrency to conduct a token sale;
very simple investment process. There is no need to register on the project website. You also do not need to purchase Ethereum, and then transfer them to a smart contract, about which nothing is known. All you need is to top up your balance on the exchange. Then you need to wait for the token sale, and then create a buy order.

Who benefits from ICO and IEO

Lets consider the main benefits of ICO and IEO, their attractiveness for startups, investors and exchanges. When it comes to ICO projects, the following can be noted here:

first of all, their attractiveness lies in their low entry threshold. If there is no point in investing, for example, $ 10 in an ordinary investment project (most often this is impossible due to the established high entry barrier), investing the same amount in an ICO can bring a good profit. This is possible if, for example, the cost of tokens is 0.02 US dollars per unit. The risk of losing the $ 10 invested is offset by the possibility of multiple profits;
profit margins. In 2017, analysts studied the profitability of ICOs. After that, it turned out that their average profitability (including unprofitable ones) reached 1320%. That is why many investors are not afraid of high risks, unprofitableness of at least 25% of all ICO projects, and a small probability of investing in a truly promising startup. When it comes to the opportunity to make colossal profits, all these risks fade into the background;
startups do not yet need any “sky-high” funds in order to conduct an ICO. For example, they can collect part of the necessary funds on a persale. This opportunity becomes a reality if the start-up already has any groundwork that he can acquaint the investor with;
investors have the opportunity to be part of the community;
the possibility of diversification into various assets;
the benefits of ICO for the cryptocurrency community are that there is great competition in the cryptocurrency space, which means that its participants must work as rationally as possible. In the end, only those who are able to adapt better than others will remain.

If we consider the existing benefits of IEO projects, it turns out that there are also quite a few of them:

there are many advantages regarding the exchange - there is access to new markets, which are likely to be profitable;
inclusion of a startup coin in the listing immediately after the end of the crowdsale. In other conditions, it is practically impossible to achieve this quickly. Not only does the procedure itself take months, but you also have to pay a commission to the exchanges (for many, this is a prerequisite);
the exchange already has its own client base, which means that every registered user can be a potential investor in the project;
it is very easy to participate in IEO. It is enough to establish which exchanges conduct IEOs. Often, one project is carried out on several exchanges. Then you need to create your account on the exchange and go through verification. Also, in some cases, a whitelisting procedure is required - with its help, developers can choose the most attractive investors for themselves. These are usually those who have a wide range of contacts or those who have expertise relevant to the area of the project. After that, you need to add to your account the cryptocurrency that was approved by IEO. Now you can wait for the start of IEO and the purchase of tokens;
Since both the IEO organizers and the exchange itself are engaged in marketing, you can observe the synergy effect, thanks to which tokens are promoted to the market as efficiently as possible. In addition, this approach allows each party to save additional money.

Why exchanges need IEOs

It is worth considering separately why IEOs are needed by exchanges. In addition to the already mentioned joint marketing with IEO projects, the exchange gets the opportunity to attract new users along with their funds. Very often they become permanent traders, which means that the revenue from commissions will grow.

In addition, other benefits are worth noting:

thanks to the launch of IEO, exchanges receive an additional impetus for their own development, since such projects already have a model of optimal cooperation. Startup projects are promoted on well-known trading platforms, which means that confidence in them increases. The exchange has a monopoly on the sale of the asset. If the tokens that the exchange added to the listing are successful, the platform will have many new users. Accordingly, incomes will also grow. In addition, a fee is also charged for the very placement on the resource. Thus, not only the exchanges benefit, but also the organizers and investors;
exchanges are eager to participate in IEOs as they develop an innovative scenario for using their own platform. An example is Binance Launchpad, which is popular because of the success of most of its IEOs;
the exchange chooses IEO also in order to become the first platform to list the token. Taking the same Binance Launchpad as an example, you can see that it became possible to trade two popular tokens (BitTorrent and Fetch), which were not previously known. Thanks to this, today Binance is the first platform that makes it possible to trade these tokens. This is what allowed this exchange to gain a great advantage over its competitors;
the next benefit is free advertising provided by IEO;
to more effectively attract and retain users, exchanges offer exclusive coins that cannot be found on other sites. This helps to increase trade turnover, which means the income received;
the total fees charged by the exchange are quite impressive. It is worth noting that they can be charged as a flat lump sum or as a percentage of the amount that has been collected.

Examples of successful ICOs

At the beginning of 2018, studies were carried out, based on the results of which it was possible to establish which of the ICO projects were the most successful. It should be noted that it was the volumes of the collected funds that were considered, and not the further success of the projects. There are cases when the organizers of the project managed to collect huge amounts of investment, however, this did not save the project from collapse.

So, the most ambitious and successful ICOs were:

EOS, the purpose of which was to raise funds for the implementation of a project to automate business processes in the financial sector, create services and applications for assessing the scale of the transaction and other things important for business. The realization of the goals was made possible by innovative blockchain architectures. It should make it possible to apply horizontal and vertical scaling of decentralized applications. As the head of the block.one company said, the main task of EOS is to solve the most important tasks and problems of the blockchain. The developers managed to raise the amount of 883.4 million US dollars;
the Tezos project raised US $ 232 million . It only took two weeks to do this. It happened in July 2017. the goal of this project is to create an alternative to Ethereum. This is the smart contract platform on its own blockchain. Thanks to the existing built-in system of consensus of the parties, it will be able to develop independently, automatically, and there will be no hard forks. It becomes possible to control at the protocol level. For this purpose, a special language of smart contracts was created. This was necessary in order to facilitate formal verification. It is worth noting that the Tezos developers retain the authority to make changes to the system, but they charge a certain fee for this;
The Filecoin project, which raised an impressive $ 205.8 million, was launched by Protocol Labs back in 2014. It is based on the IPFS decentralized network protocol. The developers claim that, thanks to him, the hypermedia peer-to-peer communication protocol can replace HTTP;
the Status project raised $ 108 million. This ICO was carried out by a company that develops a decentralized application of the same name. It, in fact, can be called an analogue of Telegram. At the same time, in order to interact with the blockchain, it is not necessary to be a programmer - the graphics system helps in everything, as well as software modules;
Bancor is a project that raised $ 140 million in just 3 hours. Later, the amount continued to grow until it reached a value of 153 million US dollars. Bancors benefit for users is the ability to link an account in any token to their own bank card. In addition, each member of the system has the opportunity to issue their own tokens, which are quoted immediately after the release.

Examples of successful IEOs

As for IEOs, there are also some of the largest and most successful among them:

BitTorrent (BTT) is a tokenized asset. It was positioned as a digitized version of the largest p2p network protocol used in the exchange of BitTorrent information. The main functional responsibility is to pay participants for the distribution of files. This should help keep them online as seeders. In addition, you can use coins to download files faster, to buy the full version of the program without ads, to get protection from viruses, as well as the ability to convert files. IEO of the project was held at the end of January this year. In total, they managed to collect an amount of 7.2 million US dollars and it took only 18 minutes. Already on the last day of January, the coin appeared on the exchange, while its value increased by 1683% in comparison with the original;
IEO project Fetch.ai (FET) is a personal assistant based on decentralized AI, machine learning, and scalable blockchain. It adapts to the users existing tasks, can be used as the basis for a smart city system, as well as for creating a digital world. In February of this year, the project managed to collect 6 million US dollars in 22 seconds. In four days, the value of the coin increased by 438% in comparison with the base one;
One of the last successful IEOs can rightfully be considered the April CNNS project. The target for fundraising was $ 3.6 million. This IEO managed to reach $ 112 million in subscriptions, which was 31 times the cap.

As you can see, IEO is developing at a rapid pace. According to data provided by the ICOBench portal, the total number of completed campaigns has reached 37. Four more are preparing to launch, and eleven are actively involved in fundraising.

Currently, this method of attracting investment is supported by many large and well-known trading platforms within a separate pool. However, some have difficulties associated with the lack of the required number of qualified specialists able to choose truly promising projects that can become successful.

Warning against losses on ICO and IEO

At the end of the article, I would like to mention some rules, compliance with which will help reduce risks or even avoid losses on ICO and IEO. So, in order to minimize the risks of ICO, you will need:

conduct a serious legal check of the project of interest. The volume of such work should be the higher, the larger the volume of investments is planned to be made;
get confirmation that the web application is under reliable protection, and there are no errors in the smart contract. To do this, it is better to seek help from a third-party organization that has the ability to check the project for vulnerabilities, and if any are found, fix them. The most important stage in this, according to experts, is to protect your own site from DDoS;
you need to secure your corporate network. The use of IPS or IDS solutions will help to reduce the likely threat of intrusion into it. Thanks to this, it will be possible to detect and prevent intrusions into the corporate network. For the same purpose, it is advisable to call special trainings for the team;
for investors, it will be correct to have a backup of their private keys, encrypted using PGP;
in the case of using exchanges / ICO sites, remember to check the URL, as well as the SSL certificate. The best solution is to bookmark the legitimate domain right away;
investors in the process of working with cryptocurrency are better off not using Windows;
if you need to transfer cryptocurrency, you cannot use mobile applications for this.

Compliance with some rules will help to avoid risks on IEO:

the exchanges themselves need to select a team of professionals capable of adequately assessing the viability of projects. In this case, of course, there will be considerable costs for their labor. However, if the project is misjudged and the campaign fails, it will lead to huge reputational risks;
in order to participate in a token sale on legalized exchanges with an impeccable reputation, it is necessary to undergo full identity verification, including passport data verification. This will provide reliable protection against fraud;
it is best for newbie investors to follow a simple and understandable algorithm of actions: register and verify on the exchanges of interest; select the desired IEO projects; study all the documentation on them in order to understand if they are not a simple speculative token offer; if the funds are really collected for the implementation of a technological project, then you can invest.

By following these recommendations, you will not succumb to an artificially created rush and will be able to form a successful investment strategy in the cryptocurrency market, which, apparently, has a great future.