Whenever a blockchain project, like Polkadot, for example, decides to raise funds, it has two ways to do it. The first way is the popular way; it is called an ICO or Initial Coin Offering. It is also known to most people. So what is the alternative approach? The answer is Initial Exchange Offering or an IEO!
An IEO involves issuing tokens through a digital exchange. In this method, the developer sends tokens to the exchange. The exchange then collects contributions from the buyers and in return, issues tokens to these buyers. Developer and contributors do not deal directly with each other.
At this point, one might wonder how the two methods are different from each other. The answer is simple. In an IEO, buyers need to create an account with the exchange. They then deposit their contributions in that account. Whereas, in case of an ICO, the contributions go to smart contracts. Smart contracts are digital protocols governing transactions between buyers and sellers. The smart contracts are self-executing in nature, and the ICO drafts them itself.
One might wonder what value an IEO has in general or over an ICO. Here are some reasons why a blockchain project or a token buyer goes for an IEO:
1. An IEO helps to raise funds for projects without following the tedious processes required by conventional banks or venture capitalists.
2. An IEO provides cost savings by helping developers save money in many ways. Developers don’t have to spend on finding sellers as exchanges have their base of users. They won’t have to spend on token distribution or any transaction processes either thus saving more money. Moreover, there are savings due to the lack of need for gathering buyer data, which the exchange collects itself.
3. An IEO provides projects with an enhanced perceived value. When a project gets listed on an exchange, its credibility increases. Buyers perceive that the exchange performed its due diligence on the project and knows that it is authentic.
4. An IEO prevents Gas Fee Wars between the contributors. Gas Fee is the fee that every contributor has to pay for the computational resources linked to each transaction. IEOs have limits set for this fee which prevents Gas Wars. No genuine buyer ever wants to be a part of Gas War.
There are 3 simple steps you need to follow to be a part of an IEO as a buyer.
1. Sign up on an exchange where the IEO you want is offering.
2. Pass the whitelisting process of the exchange. This process involves providing the exchange with information about yourself. Note that not all countries allow their citizens to participate in an IEO. A list of the banned countries is available on exchange websites.
3. Find out which cryptocurrency the IEO accepts. Deposit that in your exchange account and wait for the IEO to begin.
IEOS are indeed a better and safer method of trading for both buyers and sellers. If the exchanges show transparency and efficiency in both seller selection and buyer due diligence, IEOs can completely replace ICOs one day.