You’re probably already familiar (and tired) with the never-ending number of acronyms that become immediately viral in the blockchain world. As we’ve said in a previous article, we, the crypto-enthusiasts tend to make our lives harder trying to innovate (but not really) with overly complex business models. Today we want to clarify some issues, hoping to positively contribute to the discussion on ICOs, STOs, and IEOs.
Let’s start with ICOs. An Initial Coin Offering (ICO) is nothing more than a fundraising method usually used for the launch of a new product or service related to the crypto world.
Why invest in one? In exchange for their investments, the investor/s will receive a number of tokens (crypto coins) issued through the ICO. In theory, investors venture into projects that look and sound promising, since their profit will only exist if the value of the token will increase from the base price. Then the investors can use an exchange to trade their token and, eventually, make some profit.
Why start an ICO? Firstly, you should only start one if your token is needed within your business’ ecosystem. And if it is, it makes sense to use this as a form of fundraising, as the regulatory procedures involved by traditional forms of fundraising might kill your project. You can gather a lot of funds easily, using AirDrops, Bounty programs, private and public sales.
Cons: Scams. Yep. There are a lot of those. Satis Group LLC says that 81% of the ICOs analysed by them are scams. This is what makes investors scared and disappointed in the current system. Luckily for them and for you, we have a solution that helps you gather the funds and lets the investor be in control of what happens to their money. Read more about this here.
A Security Token Offering (STO) is also a fundraising method that, unlike an ICO, comes in the form of an investment contract into an investment asset such as bonds, stocks, funds or real estate trusts. Now, according to Investopedia:
A security is a fungible, negotiable financial instrument that holds some type of monetary value. It represents an ownership position in a publicly-traded corporation (via stock), a creditor relationship with a governmental body or a corporation (represented by owning that entity’s bond), or rights to ownership as represented by an option.
Security tokens are recorded on a blockchain, in a similar way with how an investment in traditional stocks is recorded in a digital certificate. STOs are, if you want, a mixed approach between traditional public offerings (IPOs) and ICOs.
Why does It make sense for the investor? Because STOs are based on real assets and they need to comply with regulatory bodies. However, this is why STOs are not really attractive for developers, as one of the main advantages of the crypto world is that it is less bureaucratised. As STOs fall under the securities law, it might be a bit more complicated to jump start one, especially because regulatory bodies will ask for KYC/AML accredited solutions which means large advisory and lawyer fees. However, there are ways to make this easier and our suggestion is to use Daicore as a launching platform.
This is a newer fundraising practice. Initial Exchange Offerings (IEOs) refer to those projects getting listed on an exchange directly, without going through an ICO. What happens here is that the developers mint the project’s token, send it to the exchange, which will then sell the tokens on their platforms to individual contributors for another coin (usually ETH). So, the contributor doesn’t directly engage in a Smart Contract with the ICO, but instead, he creates an account on the exchange and sends ETH to that account. Then, when the IEO starts the contributors can purchase the token directly from the exchange.
Now, some authors suggest that the advantages of running an IEO instead of an ICO include: a) the possibility to directly use the existing user base of the exchange, b) the vote of confidence given by the exchange which performs its own due diligence so it only accepts trustworthy projects (in their opinion, obviously) and it also makes it more difficult to scam contributors to engage in fraudulent activities.
These are all true to a certain extent. There is a set of problems that arise from this:
1. A very high percentage of tokens are held by a small number of people. This means that when the price goes up, a small number of people would make a lot of profit at the expense of the others and that a small number of people would be able to manipulate the price of the coin. This goes against the whole idea of having a decentralized system where prices are subject to the law of supply and demand.
2. To be able to get listed on one of the big exchanges, you need lots of money. As the exchanges have to perform their own due diligence and somehow act as a guarantee of your project’s worthiness, they will naturally ask for a lot of money. Projects also bear the marketing costs which can easily reach $100 thousand or more.
3. A lot of money is wasted on exchange fees. This is where it makes a lot of sense for exchanges to engage in listing IEOs. Having more users and coins means more transactions and obviously higher revenues. If you’re thinking about starting or investing in an IEO, think about the fact that a lot of your money goes to the exchange.
4. Inflation. IEOs have made it acceptable to create huge inflation from the very beginning. As soon as the project’s coin can be traded, investors will likely want to exchange them for profit. This makes the token act like nothing more than a fundraising method and destroys its long-term utility within the ecosystem. This leads to speculative behaviour that goes against the idea of creating a sound business model.
According to a 2-month-old article, Binance was against IEOs because of the many risks they posed. Changpeng Zhao concluded that:
I believe ICOs are still the best way to raise funds. In fact, it is so good that I cannot imagine why any decent project would still seek traditional VC money. All the smart VCs are now investing in ICOs, even the top names in the business.
However, realising they could make a lot of money, they have reconsidered this opinion very quickly, as they listed their first two IEOs, namely Fetch and BitTorrent. Don’t get too hyped about how much money they have raised. Instead, follow closely their development and see for yourself how sustainable they are.
Until then, we are telling you, don’t give up on ICOs and STOs just yet. They have proven to be successful in the past and they will continue to bring value to the crypto universe. We are giving you a solution to get rid of fraudulent practices that messed with the business model in the past. Be in full control over what happens to your money and venture into trustworthy projects with very limited risk. Try Daicore.
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