And why do you need a reliable tech provider to do it
What is an Initial Exchange Offering and how it works?
One of the main buzzwords in crypto space in 2019 alongside with STOs, IEO concept has been attracting a lot of attention as a new fundraising method and a million-dollar opportunity for blockchain startups. (Some also refer to it as a new wave of scam and the last relic of ICO era).
Despite multiple holy wars on the legitimacy of IEO essence and discussions around Binance and other major exchanges piloting their launchpads, there is little understanding of what the process itself implies and what projects can use it to the benefit of their own and their investors, staying reliable, compliant and safe.
As an ultimate tech provider for token offerings, in this article Daonomic team decided to break IEO process down step by step for those who are looking into this fundraising option for their project.
IEO: the roots
The concept first emerged as long ago as early 2017, when Binance helped Gifto Official and BREAD raise over $3 million $6 million respectively on the exchange. In 2018, however, Binance stated that it is hesitant to list IEO coins, as when a token is issued directly to a listing, “it is quite easy to control or manipulate the price of the coin by the few large holders”. The concept was then put on hold.
Flash forward to two years later, Initial Exchange Offerings started to gain momentum in 2019, when the industry started to wake up from the so-called “crypto winter”, more mature and compliant.
Next IEOs on Binance took place in February and March 2019, with BitTorrent (recently acquired by Tron), Fetch.AI and Celer raising over $6 million each. All three have been quite a success: BTT token is traded with a 6.23x above its IEO price, FET token - 2.39x, while CELR made vertiginous 400%.
These success cases paved the way for other exchanges, and shortly afterward Bittrex, KuCoin, LBank, and Coin Bene invited projects to hold initial exchange offerings on their platforms.
Crypto projects shook off the dust and started to google “how to do an IEO”.
Despite mass interest from projects, exchanges are acting cautiously. IEO of RAID project on Bittrex was cancelled last minute, and BIttrex explained the motive behind this decision by a significant change in RAID business status, which could negatively affect the investors. After the ICO wave of 2017, exchanges are paying extra attention to the due diligence of the projects they onboard.
So far, only 35 IEO’s are complete and 10 are in progress, and there is little awareness about how it works, how it is different from ICO and what it takes to launch a successful initial exchange offering.
Let’s dive deeper into that.
IEO step by step
Step 0. Decision-making
The first thing to do is to evaluate existing fundraising methods. We are doing an overview of the decision-making factors in one of our next articles, but let’s briefly focus on IEOs here.
What kind of project would benefit most from holding an Initial Exchange Offering?
This fundraising method fits best for already functioning businesses. In this case utility tokens issued during the offering would represent tokenized contracts, for example, for supply of goods/services from the project. And this is what makes the use case completely different from ICOs and STOs.
The solid reputation of a functioning business would also make it easier for projects to negotiate with exchanges: the biggest exchanges are willing to share their client base only with proven reliable projects.
Moreover, IEO might not be the suitable case for the first fundraising of early-stage ventures: major exchanges usually require a substantial security deposit for a so-called buy wall, which makes it more feasible for a functioning business with a turnover, than for a startup. Tech and marketing budget should also be taken into consideration.
Step 1. Choosing the exchange
So, you decided to go for IEO. Choosing the right exchange is the next step.
There is plenty to choose from, and the number of options is growing every day: as of April 21st*, there were 16 exchanges with their own launchpads - the number of IEOs conducted on each is listed below. The more prominent the exchange - the higher the costs and the stricter the due diligence process is.
The thing to always keep in mind when choosing an exchange (not to scare you off!) is that some centralized exchanges are vulnerable from negative consequences of malfunctions and cyber attacks. Which means that projects and users trust their funds, driven by the level of confidence the platform and previous performance. Multiple advisers and consultancies emerge on the market now, offering “turnkey” IEO solutions, but you should always do due diligence yourself.
The same applies to the counterparty. Unlike ICOs, where the quality of the project wasn’t always the highest priority, now exchanges are looking to ensure that the IEO investors will get the best deal possible. Every questionable coin poses high reputation risks, so an exchange needs to be presented with a very attractive and sustainable business model and tokenomics.
These factors contribute to the higher quality of offered projects. At the same time, compliance and transparency are ensured by exchanges: unlike ICOs, where an investor could send the funds directly to the project and get a token in return, to participate in an IEO the investor needs to be registered on the exchange, pass KYC and be whitelisted for the token sale.
That’s why one of the main benefits IEOs offer to investors are high-quality projects and anti-scam protection, kind of a quality stamp by the exchange.
Step 2. Negotiations and preparation: tech, marketing, legal
The most frequently asked question is: how much does it cost?
We’re breaking it down below - the costs are approximate, average for the market, and may differ depending on exchange and project.
- While top exchanges like Binance are rumored to be able to provide special conditions for the selected few, most of the exchanges charge an average of $100-$200k for the offering, in addition to 10% from raised funds.
- Another item of expenditure is a buy wall and market making strategy. Some exchanges take $1-2 million security deposit to support the token price in the case of necessity. Market making for your token is rather “good manners” than a must, but to support the narrow spread and trading volume you will need to spend at least $30-50k. These costs fall on the project, not the exchange.
- Technical costs. Minting a pool of tokens according to the exchange’s requirements and handing them to out an exchange is also a project’s responsibility. With Daonomic’s self-service solution, it’s completely free.
- Marketing, PR, community building and related costs can vary drastically but start at $100k. In some cases, marketing expenses are shared among the issuer and the exchange.
- Legal costs.
Step 3. Minting tokens for IEO
As mentioned above, a project is obliged to provide its tokens to an exchange itself. Daonomic provides an easy-to-use and completely free basic tool for that.
To mint a token via Daonomic, the issuer can set all the parameters according to their agreement with an exchange: token sale time frame, amount of tokens, price; set up pools and lock up period, when necessary. In most cases, exchanges have standard requirements for tokens, but it is also possible to create a customized set of smart contracts according to the issuer’s needs.
It is important to understand that most of the project who are starting an IEO already have pre-IEO investors: this is vital for most to be able to afford all IEO related costs. To have them taken into account, Daonomic provides the pools set up feature: a smart contract that distributes a number of tokens with certain features among pre-IEO investors. To conduct obligatory KYC/AML for pre-IEO investors, the issuer can choose a provider from Daonomic marketplace.
A separate pool is created for an IEO itself, and is sent to a chosen exchange.
Step 4. After IEO
We have just brought down how IEO actually works. What happens afterwards?
There are two important steps to keep in mind:
I. Secondary trading and market making
After the IEO, the token is listed on the token exchange immediately and (let’s be honest) is expected to trade at 2x minimum. We already discussed the approximate costs to support your token price and trading volume; now is the moment when these tools come into action.
II. Intended use
IEOs are about utility tokens - and they have to be used according to their original, utilitarian purpose. Otherwise, it is called scam. Just raisings funds via an IEO is never an ultimate goal and final destination: the project must create the real infrastructure that enables to exchange these tokens for real goods or services.
Daonomic does not only issue tokens: we can become a full-scale tech partner and help integrate tokenomics of a project with your development and sales system, ensuring that token holders aren’t disappointed and can get the services they paid for. High-quality and on time.
Daonomic is designed to become a universal partner in token issuance and tokenomics, providing a solution for the particular needs of your ICO, IEO or STO campaign.
Visit https://daonomic.io to launch your token: easy, fast and absolutely for free.
For a consultation or custom logic implementation reach to us at [email protected]