We live at some of the most interesting and exciting times. This is a period when the whole world is united via the Internet, turning it to somewhat of a global village. You can reach literally anyone across the globe at the click of a button.
Even as this connectivity becomes widespread, there is also the need to provide a means for the interacting persons to transact. Well, traditional means like the fiat system have already proven that they cannot keep up with trends. We need more decentralization in a bid to get rid of control by third parties and mitigate transaction fees.
This need paved the way for the emergence of cryptocurrencies. In the most basic terms, this is an online-based medium of exchange via which cryptographic functions are used in conducting financial transactions.
Cryptocurrencies make use of blockchain technology to achieve immutability, transparency, and decentralization.
One of the most crucial features of cryptocurrencies is that it gets rid of the control by a central authority. Theoretically speaking, the decentralized nature of cryptos makes them immune to the usual government’s high-handedness in financial transactions.
With cryptos, you can send funds directly to another person through private and public keys. Since transactions are more direct, you can expect lower transaction costs, giving users an advantage over the high fees that traditional financial institutions impose on transactions.
Given that cryptocurrencies have solidified their position in society, this has paved the way for more funding options. Initial Coin Offerings (ICO) started out as a preferred method. ICO can be equated to Initial Public Offering (IPO).
Whenever a company seeks to raise funds for creating a new coin, service, or app, it would do so via ICO. Interested investors are welcome to purchase the offering and get new cryptocurrency tokens that the company issues.
Things have been changing in the past year as Initial Exchange Offerings take root. IEOs are the focus of this article. Read on to find out more.
What are IEOs?
Initial Exchange Offerings are simply a way to raise funds for crypto projects. In ICOs, interested investors would hand cash to the project team in exchange for some amount of the crypto released in the blockchain. However, this was problematic, mainly due to failed projects and scams.
The approach taken by IEOs is quite different. Just as implied by the name, there is a cryptocurrency exchange platform as the middleman. Cash is not given directly to developers. Instead, this goes to the crypto exchange team that collaborates with the developers.
Due to this arrangement, the project team does not directly allocate tokens. Instead, the crypto exchange platform does so.
The essence of IEOs is to promote only legit projects because the credibility of the entire exchange is put at stake. Thus, the vetting process becomes a must. Furthermore, not all ideas will receive support from the exchange. Also, exchange offerings are more accessible.
How do IEOs Work?
The working of IEOs is pretty simple. When the Initial Exchange Offering initiates, investors scan the tokens to be purchased from the exchange platform. These tokens are created, or rather minted by the developers long before the IEO and are remitted to the exchange.
Each project team has the option of coming up with its own terms, conditions, and arrangements with the exchange involved. Some of the arrangements involved tackle issues like level of charge, the rate for the trade, and showcasing costs.
However, that’s not to say that the exchange will accept all the terms brought forth by the project team and neither will these be presented to the potential investors.
If you want to take part in an IEO, you will find it to be far much simpler than getting involved in ICOs.
Follow these steps to do so:
1. Confirm that the Initial Coin Offering will be offered. A bigger percentage of cryptocurrencies are yet to move from ICOs as the means of crowdfunding. Therefore, you want to be sure that you are not wasting your time by making this confirmation.
2. Research the participating exchanges. Once you are sure that an IEO will be issued, the next step is to know the exact exchanges that will be involved in the offering. Conduct as detailed research as possible. This is particularly important because of Know Your Customer (KYC) procedures by the exchange. You might take a lot of time to sign up for the IEO.
3. Signing up on the exchange. Most investors dread the KYC procedures because they are quite time-consuming. Make sure that you create an account on the exchange a day earlier so it can be approved on time. Signing up on the due date might see you lose out on a golden opportunity.
4. Check the acceptable cryptocurrency. In most cases, the IEOs will require Ether for investment. This is so since almost all projects are being launched on the Ethereum network. However, this does not happen all the time. Just make a confirmation to avoid unwanted mistakes.
5. The IEO start. When you have the date when crowdfunding will begin, wait for it to launch then buy the tokens that you prefer.
Advantages of IEOs
IEOs are a recent development and their rapid uptake is a result of the benefits that they hold. Here is a look into some of the reasons why IEOs would be preferred over ICOs.
One of the most challenging parts is negotiating a good deal with the exchange or several exchanges. However, after the lead developer strikes a deal, then getting listed on the exchange becomes a piece of cake.
A project that is listed on the exchange has the best chances of being actualized. Generally speaking, this project would have to go via strict checks and procedures, which might sometimes go on for months.
Some exchanges may even need the project team to deposit a significant amount of fee in the form of BTC or Ethereum besides surpassing the procedures. Since your project has already passed the requirements, getting listed on the exchange is great.
In the online world, one cannot confidently state that they have tackled scams 100%. However, you can take steps that mitigate the chances of a successful scam event. Whereas ICOs were faced with most of such cases in terms of false projects, IEOs are much better at overcoming the challenge.
The Exchange puts its reputation at stake and will, therefore, do all it takes to maintain credibility. One thing you can be assured of is that the Exchange will not phish you out and that the smart contract you just entered into is not compromised. The fact that the tokens are just being bought from the exchange means there is increased confidence in the project.
To a greater extent, Initial Exchange Offering is designed to halt price manipulation.
Exposure to a Bigger User Base
Even though you have the most brilliant project idea, you must look for potential investors to sell to your idea. If you are a newcomer in the world of crypto, getting these investors can be pretty a hard thing to do.
Thanks to IEOs, your idea is sold existing customers of the exchange. This reduces your marketing expenses, which are some of the biggest costs you can ever face. You might find this to be a credible long-term investment that has larger returns on investment.
Demerits of Initial Exchange Offering
As good as the Initial Exchange Offerings may be, they also have their own set of disadvantages as a crowdfunding option. One major issue has to do with two participants buying most of the token’s circulation.
This mainly happens in the case of an unlimited exposure of one or numerous exchanges. This means that the investors who do not have an account in the participating exchanges will be excluded from the sale. Thus, the token’s sale is reduced to a smaller size than it actually is.
Trading begins after the end of the IEO. This is a problem of its own kind since most people prefer investing when the prices have declined. The overall effect is that the coin’s price is destroyed and the investors get the least profit possible.
There is also the disadvantage associated with making sure that the issued tokens support the cost of fees incurred. Furthermore, tokens must factor in the marketing costs involved in the offering.
It is a requirement that all investors comply with the Know Your Customers procedures. This is where most investors will find it challenging and dread the steps involved. To begin with, some investors might want to remain anonymous even as they participate in the crypto trade.
But that’s not possible with IEOs. Also, the KYC takes a lot of time and might easily lock you out of an offering in case you delay in creating an account.
Initial Exchange Offerings have their own set of advantages and disadvantages. However, the merits surpass the demerits, proving that this is a funding option that more investors and developers need to consider.
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