IEO Vs STO Vs ICO; A Comparison of Tokenized fundraising. Which one is better?
Initially, it was just ICOs, then came STOs (the supposed ICO killers) and now there’s IEOs. It seems like there is no shortage of vaguely similar acronyms in the Blockchain and crypto space. But despite the similarity, each acronym represents a different fundraising model, unique with its own characteristics.
Essentially, all fundraising models allow entrepreneurs/organizations to raise capital directly from investors by leveraging the internet and Blockchain technology.
As much as $1.55 billion has been raised by entrepreneurs/organizations leveraging these fundraising models — akin to 59% of the total funds raised in the Blockchain and Crypto space during May 2019, according to InWara’s monthly report.
So Let’s briefly dive into what each model is all about.
Initial Coin Offering (ICO) — One of the first fundraising models to depart from traditional methods of Venture Capital or the Initial Public Offering. Organizers of an ICO issue cryptocurrency tokens (conventionally utility tokens) which is sold online to investors in return for funds. Investors can use these “utility tokens” to gain access to the product/service the ICO organizer has promised to develop. Usually, ICO organizers are Blockchain and crypto startups aiming to bring their product to this industry.
The ICO model was a huge success (in terms of fund-raising, the jury is still out on the effectiveness), ICO projects have raised a staggering $25 billion so far with over 95% of these funds being raised in the past two years alone (source). But alas, the incredible success of ICOs didn’t last long. Fueled by the numerous ICO exit scams and ICO organizers with malevolent intent, investors quickly lost interest in ICOs. On top of this, ICOs faced major regulatory setbacks in countries like the US, China and South Korea.
Security Token Offerings (STOs) — As the name suggests an STO offers security tokens to its investors, unlike utility token in ICOs. So before we jump into what security tokens are, what’s a security?
A security is a financial instrument that represents an ownership stake in its underlying asset. Hence, security tokens are backed by an underlying asset that holds some monetary value. This isn’t something revolutionary, securities have been around for a long time now and with the advent of the digital age — investments in securities like stocks started receiving a digital certificate.
So what’s a security token?
Imagine a traditional “security” but represented by a crypto token and stored on a blockchain, that’s a security token.
Initial Exchange Offerings (IEOs) — The latest innovation to the tokenized fundraising economy. IEOs are very similar to ICOs in the sense that, they encompass many of the same core principles like a low-barrier of entry for investors, the use of non-asset backed utility tokens etc.
But critically, IEOs are launched by a third party organization (usually, crypto exchanges) rather than the project launching it themselves. These crypto exchanges essentially become “launchpads” for IEO projects. Imagine “Kickstarter” but for Blockchain and crypto projects.
So that’s the jist of the major tokenized fundraising models. So how do each fare against each other? As you’ve already seen in picture 1, IEOs are a force to be reckoned with STOs strongly following suit. On the other hand, ICOs have seen much better days.
Interestingly, 57 ICO projects managed to raise just $103 million while this is no small feat, it pales in comparison to the $1.18 billion raised by IEOs and $255 million raised by STOs.
On average, STOs perform better than any other fundraising model. For STOs, the average funds raised per project is $85 million while that number is only $17 million for IEOs and $10 million for ICOs. Interestingly, all three models performed better than traditional Venture Capital.