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IEO: Big Bang or Big Puff?

Last year’s Initial Coin Offering hype turned ICO into a household name for both investors and for crypto projects – and was followed by a new fundraising model – Initial Exchange Offering (IEO). IEO is the same as ICO, but run through an exchange, or set of exchanges, that conduct the token sale as a counterpart. What the new IEO era holds in store is investigated by The Fintech Times Associate Editor, Kate Goldfinch

Although ICOs have failed to achieve mass adoption, we see many predictions that Initial Exchange Offerings are the new trend, and the fundraising scheme of the future. Considering that exchanges are strengthening their role in IEOs as sole market players, we observe the fast-growing infrastructure serving Initial Exchange Offerings on the crypto market. Let’s consider the key market players.

IEO infrastructure

In reality, the IEO era began its history from December 2017 when Binance – as the biggest global crypto-currency exchange in terms of trading volume – hosted two IEOs – for Bread (BRD) and Gifto (GTO) token sales. In January this year, Binance hosted a BitTorrent token sale, and then conducted Fetch.AI (FET) and Celer Network (CELR). Moreover, Binance announced the upcoming IEO for Matic Network.

initial exchange offeringAccording to its official website, Binance is building a whole ecosystem in which each unit delivers specific benefits. For example, the Binance crypto-currency exchange provides a platform for trading more than 100 crypto-currencies, Binance Launchpad is the exclusive token sale platform, and pioneered the Initial Exchange Offering niche on the global market. On February 20th this year the giant launched the Binance Chain Exchange testnet, announcing its new decentralised crypto exchange BinanceDEX – able to support ‘millions’ of crypto assets, with low fees and no delays, and a promise of going live by the end of April 2019.

However, Binance is not the only exchange supporting IEOs. The popularity of IEOs is growing. Twelve crypto exchanges have announced that their IEO platforms are going live this year.  The IEO market players among them include Bittrex International, KuCoin, gate.io, Huobi, Bitmax, Bgogo, Bilaxy, Bitforex, EXMO and others. Most of them have their own coin, but a few do not. The majority of exchanges operating an IEO platform require from participants launching tokensales initially to purchase an exchange’s token.

initial exchange offeringExperts believe that the IEO frenzy is simply a re-run of the whole ICO story, with its origins in Binance’s offer of a successful and simple solution regarding the launch of token sales and raising funds via a crypto exchange model. “IEO saves ICO projects from running around the markets in search of users. Exchanges offer them a concentrated targeted crypto audience in one place – e.g. at the Launchpad (Binance’s integrated IEO platform),” Kir Kelevra, Bitcoin fundamentalist and cryptotrader argues. Even after the bitter experiences of ICOs, investors are still falling for the IEO bait – because the trading prices of many tokens currently is substantially higher than their original tokensale price.

IEOs’ Pros & Cons

IEO platforms are promising the following benefits to their participants:

  • using their membership base to recruit investment for projects
  • carrying out preliminary analysis and selection of projects, to lower the risk from scammers
  • to provide a fundraising route within a legal framework

In practice, IEOs don’t have the appearance of an ideal mechanism. “IEO does not bring any improvement for the cryptoindustry. For tokenised crowdfunding, whatever one may say, you still need manuals, which regulators must provide.  Until this happened, the exchanges began to take on too large obligations, conducting token sales, deciding from themselves which projects were scam and which were not. This is not fair!” Kir Kelevra concludes.

A further drawback is that, in the absence of regulation, IEO platforms can set up business models which are open to manipulation. Pavel Kravchenko, the co-founder of Distributed Lab, reminds investors of the important rules which govern traditional markets for raising capital;  

1. Independence of judiciary, legislative and executive powers.

2. Separation of an exchange, clearing house and custodian.

3. Prohibition on investing one startup shares into another to inflate the valuation.

4. Prohibition on the implementation of projects and audits by one company

5. The rule that claims that the company’s accountant and financial director are different people.

If you consider the working practices of decentralised market players, it turns out that their stability is a long way from that of the traditional sector. Furthermore, some players in the crypto world (such as Binance) are combining resources which should be kept separate. For instance, Binance went from being an exchange, custodian and clearing house, and decided to be an investment bank, underwriter, and even an auditor. These are just problems waiting to happen” Pavel Kravchenko argues.

In conclusion

Overall, the IEO market is extremely unstable, very unpredictable, and only now being structured. Its primary characteristics are non-transparent partnerships, manipulation, and collusion.

One of the greatest issues in the current IEO market is the possibility of partnerships between the founders of one of the fastest-growing crypto-currencies, Tron, and the owner of BitTorrent Inc (a young Chinese entrepreneur named Justin Sun = widely tipped as the next Jack Ma, the well-known Alibaba founder) and also the founder of the Binance exchange Changpeng ‘CZ’ Zhao.  Both have been repeatedly accused of crypto-currency pumping and holding non-transparent crowdsales. (The BitTorrent Token crowdsale on the Binance Launchpad platform was closed in seconds, to prevent investors from purchasing).

Overall, the IEO market is extremely unstable, very unpredictable, and only now being structured. Its primary characteristics are non-transparent partnerships, manipulation, and collusion.

Alongside that, Justin Sun and ‘CZ’ are the most forthright opponents of Vitalik Buterin and the Ethereum network – claiming that the Binance chain will soon force Ethereum out, and that TRON and the Binance Coin will replace Bitcoin.“There is no reason for a project team to issue ERC-20 tokens on Ethereum, because Binance chain is faster and cheaper,” Binance CEO Changpeng “CZ” Zhao say on Binance’s official website.  

Can Binance Chain replace Ethereum in terms of issuing ERC-20 tokens and will it result the end of Vitalik Buterin’s era?  It is more to be seen as a marketing gag or in other words ‘each bird likes his own nest best’, experts believe. “We have yet to see the role of Binance chain in crypto ecosystem, however it is highly unlikely that it would become ERC-20 analogue both from technical and business perspective as each exchange uses its own token and I do not see any reasons for them to use competitive chain,” Andriy Velykyy, Business development director at Paytomat argues. “Such the statements pump the Binance’s token. However on the practice Binance is not the only one exchange for IEOs.”

“In the short to medium term there is no smart contract blockchain that is likely to usurp Ethereum, but as far as funding offerings there is no reason – no moat – to protect Ethereum,” Dave Hendricks, CEO and co-founder, Vertalo says. He believes, the amount of talent and infrastructure built around Ethereum is impressive but “we are still in the early days and should not count out Binance, Hedera, NEO or any of several others over the longer term.”

I consider the BNB token to be the largest and most beautiful scam in the history of the cryptoindustry – Kir Kelevra

Kir Kelevra believes, that Binance Coin – a very ambiguous cryptocurrency, in essence resembling a ponzi schemes. “Binance Coin will never replace Bitcoin, as TRON’s head Justin Sun can count on. BNB is more like Ethereum in its market behavior.  For example, previously “Fiat people” bought ETH tokens to invest in ICO. Similarly with Binance Coin nowadays: to participate in the Launchpad platform tokensale, you need to purchase BNB. While users will no longer participate in IEO and they will have to change tokens back, the rate of cryptocurrency will accordingly start to decline significantly.  I strongly disagree with the opinion of the head of TRON, Justin Sun, and I consider the BNB token to be the largest and most beautiful scam in the history of the cryptoindustry, not counting of course Bitcoin Cash. In my humble opinion hype with IEO will end soon, because specific cryptoexchange tokens will sooner or later be recognised as securities and trading platforms will have to respond to the fullest extent of the law.”

However, while the market is putting everything in its place, anyone investing in IEO tokensales on IEO platforms should exercise the greatest caution.  “IEOs are typically non-equity, fast liquidity fundraise schemes that may provide the liquidity and volatility that we saw with ICOs,” Dave Hendricks, CEO and co-founder, Vertalo, explains.  He advises to look at each IEO to separate out the good projects.  “There is potential for abuse wherever you have projects raising easy money with no history to back up their claims for future success.  However, we will probably see some real projects launch this way that couldn’t find capital from otherwise constrained markets.”

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