Through fundraising, new companies, and aspiring developers in the Blockchain and crypto industry are given with the chance to transform their innovative ideas into action. ICOs (Initial Coin Offerings) was introduced in 2013, and the crypto space witnessed how this method soared so high only to lose its appeal when STOs (Security Token Offerings) was introduced. The same fate, however, happened to STOs when another method called IEOs (Initial Exchange Offering) graced the industry. This year, a tectonic shift is once again looming upon the introduction of IDOs (Initial Dex Offerings).
Fundraising trends have already gained global traction in different sectors, specifically in the decentralized market of cryptocurrencies. However, with four significant options, how would a startup choose the best fundraising method for a particular project? This comparative study of ICO, STO, IEO, and IDO aims to enlighten companies and individuals when it comes to making decisions.
Initial Coin Offerings (ICO)
Initial Coin Offering or more popularly known as ICO was once the most popular fundraising method in the industry. A startup firm looking for funding only needs to present a white paper that outlines how the proposed system would work. There would be a token sale in which the coins serve as future functional units of currency. Investors who believe in the potential of the project can purchase the “worthless” digital currency using fiat or cryptocurrencies. It’s a stake as they hope that the value of the tokens would increase when the project finally hit the market.
Despite being launched in 2013, ICOs only experienced its momentum in 2017. According to industry reports, ICOs managed to raise a staggering $5.6 billion. A quick Google search would reveal that this method reached its peak at around the same time Bitcoin hit a historical all-time high.
But while it took a few years for ICOs to gain popularity, this method quickly lost its appeal from the public. In 2018, the figures were still mind-boggling, with 1253 ICOs acquiring a total of $8 billion from investors. However, there had been a significant decline in the latter part of the year. In 2019, many ICOs struggled to attract investors, and reports revealed that only 84 projects managed to raise around $350 million, a far cry from the previous funding figures.
What went wrong?
Being able to raise millions in just a matter of seconds, it was not surprising why ICOs’ popularity immediately went global. Unfortunately, some bad players took advantage of the ecosystem. White papers had been plagiarized, and unrealistic returns were promised to lure investors. The industry was swept by speculation and greed, to an alarming extent. In 2018, one particular report claimed that 50% of Initial Coin Offerings were scams. Although several regulations had been put in place to avoid this kind of misconduct, Initial Coin Offerings hadn’t been able to regain its appeal to investors. The arrival of STOs even worsened the situation.
Security Token Offerings (STO)
Security Token Offerings is a form of cryptocurrency token which gives the owner the right to own a stake within the proposed business or to share profits in exchange for their investment. To avoid investors from falling victim to the industry’s bad players, STOs are offered with tangible assets as collateral. This fundraising method was designed in such a way that it can eliminate the fraud associated with ICOs. However, in the long run, investors and companies alike realized that it is not the most viable fundraising option in the industry.
Since STOs are classified as securities, startups and investors must first comply with the rules of accredited bodies such as the US Securities and Exchange Commission before being able to take part in the fundraising activity. Such requirements proved to be unrealistic, and the high barrier of participation made the investors turned away from this method.
Initial Exchange Offerings (IEO)
Initial Coin Offering is a project conducted by a cryptocurrency exchange on behalf of a company that seeks additional funding. The platform holds a token sale and firms seeking investment are required to pay the listing fees as well as the percentage of the sold tokens in the initial exchange offering. After the IEOs, the coins sold would be listed, and the crypto exchange would incentivize to help the firm in their marketing promotions and efforts. The same popularity acquired by ICOs in 2017 is happening today on IEOs. Major crypto exchange Binance started the trend on behalf of BitTorrent. The successful token sale had inspired other exchanges to conduct the same fundraising method.
IEOs proves to be advantageous for startups since interested investors can be easily encouraged by the credibility of the crypto exchange. Furthermore, once a token is listed, it immediately gains trading support from the platform. the dawn of IEOs represents a natural progression, citing that it provides a fair environment for startups and investors alike. The good side and the bad side of the method are laid crystal clear from the start. There is no doubt that the CEO of the biggest Indian cryptocurrency exchange is a big fan of IEOs when he declared that it’s a win-win situation for all participants.
Despite its booming popularity, US clients cannot enjoy the benefits of initial exchange offerings as of the moment. The government considered the tokens as securities and has prohibited the citizens from purchasing them, particularly from unregulated exchanges. However, worldwide investors have proven that IEOs are the new “in.” Despite the absence of investors from the United States, IEOs still managed to raise $1.5 billion in the first half of this year.
Initial DEX Offerings (IDO)
While IEOs presents itself as a viable option in terms of fundraising, it seems that crypto players and advocates would always be open to changes and curious about exploration. On June 2019, the new fundraising method dubbed as the Raven Protocol was introduced on Binance.
An Initial DEX offering shares the same concept as Initial Exchange Offering. However, while IEOs are conducted on centralized exchanges, IDOs happen on decentralized exchanges, hence the name. The initial IDO experiment ran for 24 hours on Binance platform where 3% of the total token supply was allocated for the IDO. During the sale, a single unit of raven token is priced at 0.00005 BNB.
As of now, there is a scarcity in details; however, initial reports revealed that IDOs would allow users from different countries to participate on a token sale trade hosted by Raven protocol or other specified vendors. However, it’s worth mentioning that the concept entails the same risk associated with purchasing crypto assets.
With Binance DEX’s credibility in the crypto industry, the introduction of IDO concept naturally gained the interest of advocates and critics alike. The former group wants to see how the idea would mature over time while the latter group attacked the utility and safety of a decentralized exchange. Furthermore, the critics are bothered by the fact that the first IDO was conducted on a platform that witnesses less than $2 million a day in terms of trading volume. According to Jennifer S.K. Chan of ProBit exchange, if the number of order books and users would be used as basis, decentralized exchanges are still no doubt far from maturity. At this point, DEX have little tractions and they need to boost good engagement and acquire a healthy number of users before the IDO concept can be considered as revolutionary.