An initial coin offering (ICO) is a relatively new method for blockchain startups to raise funds. ICOs, on the other hand, started to lose steam after a meteoric rise in popularity. Owing to a lack of oversight, several fake ICOs have arisen, and the cryptocurrency market's crash in 2018 has caused investors to lose confidence in new blockchain ventures. New fundraising strategies, such as IEOs and STOs, have been developed in an attempt to entice investors back to the blockchain industry.
ICO and IEO: The Difference
A serious problem inherent in ICOs is the prevalence of fake ICOs, as well as the unclear prospects for even those startups that aren't scams. One way to address these issues was to enlist the assistance of a third party who could root out fake ICOs and assist aspiring startups in attracting funding. This third-party position was taken over by cryptocurrency exchanges. Initial Exchange Offers (IEO) were first introduced in this manner.
An IEO is a form of crowdfunding in which a cryptocurrency exchange takes on the task of evaluating a project, attracting investors, and managing token distribution.
Despite the fact that an IEO is a form of ICO, the two fundraising approaches have some main differences.
The main difference is that a company seeking funding through an IEO has a key partner, namely a crypto exchange that serves as a middleman between the project's developers and investors. The cryptocurrency exchange assesses startups that have applied for an IEO and oversees the token sale.
Since fraudulent and unpromising projects are most likely to be omitted by exchange analysts, an exchange's preliminary assessment of projects significantly reduces investors' risk. As a result, investors have more faith in validated startups, which is good for the blockchain industry's development.
After tokens are sold, they are listed on the exchange within a few days. Tokens from an ICO are frequently not listed on a cryptocurrency exchange right away, but rather months after the token sale has ended. In certain cases, the project fails because the listing is never completed.
Only users who have an account on the exchange and have been checked may become investors since the selling of tokens for an IEO takes place via a crypto exchange.
Developers use an ICO to launch a marketing campaign. They do this by using paid ads, forums, and social media. For an IEO, the exchange assumes this responsibility.
A central authority: an exchange, manages an IEO. It enhances the process' centralization, which goes against one of the blockchain ecosystem's core concepts of decentralisation.
STO (Security Token Offering)
In addition to ICOs, the Security Token Offering (STO) model has recently emerged as a viable alternative. It is distinct from an IEO in that it does not involve a third party and instead aims to transform tokens into actual financial instruments. This model addresses the issue of crypto token legal compliance with stock market requirements to some extent.
A security token offering (STO) is a method of selling digital tokens on a blockchain that meets the requirements for securities. This means that the owner of the token has the same rights as a stockholder, including the right to a stake in the company, a portion of its income, and input into business decisions. In light of this, security tokens are entirely legal assets under most legal systems, and are on par with shares. This also ensures that the distribution of such tokens adheres to the stringent regulations that ICOs do not.
Conclusion
All three of the previously listed fundraising strategies are currently used by the blockchain industry. As you can see, each strategy has its own set of benefits and drawbacks, so which is the best? The response to the question is not as straightforward as it may seem at first.
While IEOs have a higher level of investor trust than ICOs, they have a number of drawbacks. To begin with, when following their own commercial interests, exchanges will filter out projects with high potential simply because the developers could not provide the exchange with an appealing commercial bid. Second, IEOs increase the barrier to entry for startups by being more costly to run than ICOs. Finally, participants in the IEO are limited to those who are able to register with the exchange.
While an exchange's selection of a project may improve investment security, it is by no means guaranteed. Under this model, there is still a possibility of fraud.
The STO fundraising model, though safer for investors than IEOs and ICOs, has its own set of issues. To comply with legal requirements, a developer must spend both time and money. While an ICO can be achieved for a low price, a STO may cost as much as a stock's initial public offering (IPO), negating the blockchain's gain. Furthermore, one of the major drawbacks of STOs is that they are only open to approved investors, making them unavailable to the general public.
As a result, we can conclude that naming one of these three fundraising strategies as the "best" is difficult. Each of the three has its own distinct characteristics that appeal to various types of investors. IEOs and STOs will most likely usurp ICOs' current dominance, but they are unlikely to do so in the near future.
