Evaluating the Three Funding Mechanisms: Initial Coin Offering vs. Initial Exchange Offering vs. Security Token Offering

As the cryptocurrency industry rapidly evolves since it has first been launched, this brings the emergence of new methods that back the creation of innovative blockchain projects.

Several projects under these three fundraising initiatives such as Initial Coin Offering (ICO), Security Token Offering (STO), and Initial Exchange Offering (IEO) are gaining momentum in the marketplace.

This article seeks to provide an overview of how these three fundraising approaches differ from each other, stressing their pros and cons.

Initial Coin Offering (ICO)

An initial coin or currency offering (ICO) is a type of crowdfunding initiative that uses cryptocurrencies. An ICO is widely used as a capital source for startup enterprises. An individual or company can easily fund any project or become an investor.

An ICO operates by issuing digital or crypto coins against investments. These tokens are sold directly to the investors at a discounted rate during the angel round. Like stock markets, investors can gain profits when the tokens increase in value during the initial launching of ICO.

Pros of ICO

• Easy to launch. What you initially need is a white paper, product website, and a team of experts to manage the project technicalities. of the project.
• Reduce release costs. An ICO is most suitable for startups and new investors.
• Simplified the fundraising process. An ICO is less cumbersome to carry out as compared to STO and IEO.
• Minimized government intervention. An ICO is most preferred for use among small and medium enterprises (SMEs).
• More liquidity in ICO achieved within a short period.
• Full fund control among member investors.
• Employ multiple fundraising tasks like airdrops and private and public sales.

Cons of ICO

• Prone to scams and fraud.
• Not highly recommended for long-term investments.

Initial Exchange Offering (IEO)

An initial exchange offering (IEO) is held on the platform of a crypto exchange. It is recognized as a mutated ICO version. As compared to an ICO, the IEO is being managed by the cryptocurrency exchange through the startups that seek to raise funds with its newly created tokens.

Anyone can take part in public ICO. However, in an IEO, the tokens are sold exclusively to exchange members. In some instances, it is easier to invest in an IEO compared to an ICO. The exchange can standardize the process for all offerings, enabling it to be less tedious for the users to invest in the various tokens available.

Pros of IEO

• All member exchanges are KYC/AML verified to ensure improved security among investors.
• Investors can work directly with the exchange.
• Extra-low entry barrier. To participate easily, you need a verified account and cryptocurrency on the IEO platform.
• Members can transfer their funds directly without any hassle to their accounts and not necessarily through a smart contract.
• The token is listed instantly on the exchange and made available for transactions.

Cons of IEO

• High-cost means of fundraising and setting up the system is more difficult.
• Low liquidity level as compared to ICO and STO.
• Most investors have little control over the exchange activities.
• No guarantee that the token price will increase after the IEO.
• Tokens remain the token utilities and have no assets or net worth backing them.

IEOs are believed to benefit all involved parties such as the exchanges, investors, and projects. Exchanges earn from the listing fees, the influx of new users and their deposits, and joint marketing with the teams from IEO.

Investors earn from funding legit projects that provide an extra layer of trust and reduced risks. Meanwhile, the team behind the IEO will receive the funds they need to successfully implement their projects.

Security Token Offering

Similar to an ICO, a security token offering (STO) is where an investor is issued with a cryptocurrency or token that highlights his investment. STO is a more complex fundraising initiative, which is also more difficult to implement than ICOs.

In the STO, a security token is known as an investment contract into an underlying investment asset like stocks, bonds, funds, and real estate investment trusts (REIT). Therefore, a security token shows the ownership information of the investment product, as cited on the blockchain. Also, STOs are considered as a hybrid approach between ICOs and the conventional initial public offering (IPO).

Pros of STO

• Strictly complies with the state rules as it deals with real assets, enabling it as a trusted investment tool.
• More secure and effective for long-term investment.

Cons of STO

• Expensive fundraising cost and relatively complex to execute.
• Cross-border investment is difficult brought by strict regulations.
• Low liquidity caused by strict government regulations.

Common Setbacks of Funding Mechanisms

• Waiting to be listed on an exchange to enable trading.
• Nothing assures that token price will spike after the company successfully raises its capital.
• No chance for external firms not part of the industry (without blockchain divisions) to get involved.

How AladiEx’s Aladin Token Offering (ATO) Can Respond to the Existing Challenges

1. Multiple rounds. Aladin tokens can be introduced in many phases after the company’s establishment.

2. In every development phase, the company has suitable key performance indicators (KPIs) for each round. The company must meet the KPI from the previous round to be qualified and raise funds in the succeeding phase.

3. The number of tokens owned by buyers will be frozen until the next round and be partially released to prevent price manipulation and keep a stable growth opportunity for the token value.

4. Many buyers in the previous round will be rewarded with a number of bonus tokens based on their holding proportion when the company increases its funds in the next round.

5. AladiEx is committed to rewarding up to 70% of the profits of the entire group’s ecosystem monthly using a smart contract, based on the held purchaser’s tokens.

IEOs have significantly mitigated the legal risks related to ICOs though the liquidity is reduced. STOs, meanwhile, provide a more secure platform for serious investors who don’t want to leave their investment in the exchanges.

It is vital to consider that this industry has a high level of risk and it should always carry out your own research and be more cautious before taking the decision of putting in your hard-earned money on any project.

To learn more about this promising and once-in-a-lifetime opportunity, visit us at https://aladiex.io/

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