By Edward W. Mandel
Remember when ICOs was a thing? Good times… but lessons learned. Is IEO an next ICO?
It looked a little like this, courtesy of Blockgeeks:
In 2017, out of nowhere, blockchain companies changed their entire fundraising strategy. The momentum continued into 2018, but it takes another chart to show just how limited that momentum was, despite the amount of money that was raised in a matter of just a few weeks:
We at BQT, as regular readers of this space know, are students of history. And we are unlikely to ever forget what went wrong with the ICO market.
Today, the reason it’s important to learn from that crash is that there’s a new model superseding ICOs: initial exchange offerings, or IEOs.
As the name suggests, they’re offered through exchanges. Like ours. So before we dive into the whole IEO world, we want to make sure we know how to best curate these for our traders.
What happened to ICOs?
A big part of the problem was that a lot of the ICOs were just new flavors of cryptocurrencies. As someone in the business of trading these, I really can’t complain too much about that. The more of these there are, the more pairs BQT can offer. And such opportunities as Tezos or Neo or even Ethereum are not to be trifled with.
But imagine if, for over a year, the only new companies issuing IPOs were banks that underwrote IPOs. It was almost that ridiculous.
But as absurd as the proportion of cryptocurrencies to utility tokens were, the actual non-crypto projects being funded through ICOs were just as absurd. TombCare was a blockchain for people who want to hire someone to visit their loved ones’ graves and occasionally lay a wreath. Bananacoin was designed to facilitate the purchase of organic bananas.
(I did find one that is on others’ list of “silly” or “gimmicky” or “weird” ICOs that’s actually a good idea: DentaCoin. It’s intended to help dentists exchange medical records and patient data. When you consider patients’ right to privacy and the pseudonymous nature of distributed ledger technology, it sounds like a perfect fit. Medical doctors and other healthcare professionals should be looking into this too. Unlike TombCare or Bananacoin, by the way, DentaCoin is still live.)
Many — maybe the majority — were out-and-out hoaxes: SaveDroid, Prodeum, Karbon are all among the names that, if you hadn’t heard by now, aren’t worth googling. And I’m not even including Bitconnect, perhaps the most flagrant ICO scam, because it was pretending to be a cryptocurrency rather than to support a value-adding project.
Put it all together, and you can see why, after a year or so of FOMO-fueled sucker bets, the smart investors walked away. The issuers, meanwhile, ran away — with the dumb investors’ money. And that’s when the regulators finally showed up.
Why IEOs are different
An IEO is essentially an ICO run by an exchange rather than by the project team itself. The thinking is, this provides a curator who’ll filter away the scams. A legit exchange would be unwilling to issue a sketchy coin on its own account.
The migration to IEOs also means that the transaction will be processed by someone who processes transactions for a living, rather than some rand-o with an iPad. That suggests a lower risk of money disappearing off the chain. (If history has taught us anything, though, it’s that this risk will never go to zero.)
The growing IEO market has attracted interest not only from crypto investors but from the exchanges themselves.Binance, Bitfinex, OKEx and other major centralized players now have IEO-specific platforms. Coinbase’s is still in development.
IEOs have so far met with success.
In January 2019, Binance underwrote an IEO to support BitTorrent, a streaming fileshare tool that’s been stable since 2013. Hitherto unrelated to blockchain, BitTorrent raised $7.2 million in just 15 minutes on Binance, funding a new, token-based version of its application.
That wasn’t the first IEO, just the first one on a major, centralized exchange. According to CryptoPotato’s Benjamin Vitaris, “China’s late 2017 ICO ban left crypto startups in the country trying to find alternative solutions to raise funds for their projects. Projects started to discover the new trend of [IEOs]. This innovation allowed them to perform their fundraising with no fear of the law or the authorities.”
Andrey Sergeenkov wrote a great HackerNoon article about the rise of IEOs, with a particularly instructive ICO/IEO comparison chart toward the end. In another fascinating piece, Reuters’ Gertrude Chavez-Dreyfuss estimates that, in the first half of 2019, IEOs raised $1.5 billion — roughly twice the amount raised through traditional (if that’s the word) ICOs. If that’s true, then we might be heading for another 2017.
Do things ever change?
The problem with another 2017 is that it could end with another 2018.
So are IEOs for real? Or are they just a means of getting around regulators, fleecing a new crop of rubes with more money than brains by offering them a new flavor-of-the-month?
I hope not, but I’m also not sure that’s the most important question. As someone who runs a trading platform, I have to ask you: Is this what you want my team and I to be doing?
In legacy finance, there are reasons why banks do the underwriting and exchanges do the trading. There might just be reasons for that. But maybe there aren’t and it’s just an accident of history. If that’s the case, then why not? Apparently SIX, Switzerland’s largest bourse, is getting into IEOs through its digital platform.
There’s no real reason — technological or process-oriented or common-sense — that a decentralized exchange can’t do an IEO. BCW Group’s Angus Cepka recently blogged about two projects called Raven and Cubiex which he describes as the first “initial decentralized offerings,” or IDOs.
That sounds enticing. In fact, there are a few projects on my personal radar which I might want to offer to BQT traders first.
Let me think about that.
Edward is an Ernst and Young Entrepreneur of the Year Finalist, Blockchain Enthusiast and visionary behind many successful organizations. An avid entrepreneur, Edward has a knack for designing distinctive business models complemented with superior technology to deliver unparalleled service and profitability. Edward also has been advising and consulting for various successful Blockchain technology and recently launched BQTX.COM exchange, BQTUniversity.io Blockchain Education Platform, BQTexchange.com beta-P2P exchange helping traders connect with each other to leverage their crypto assets.
The information can be found online at BQT.io, on Telegram @BQTCommunity.