An Introduction to Crowdfunding
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) are both forms of crowdfunding that use crypto assets. In more traditional fundraising such as venture capital, a small number of people would provide large amounts of money. In crowdfunding, small amounts of money are raised from a large number of people.
The most popular crowdfunding platforms such as Kickstarter, GoFundMe, and Indiegogo mainly showcase projects from the U.S. and Europe and only accept payments via credit cards and traditional fiat currency. These mainstream crowdfunding platforms are also focused on supporting products, projects, and causes, but do not offer the ability to purchase a share of an organization or network.
The ICO: An Evolution of Crowdfunding
The Initial Coin Offering (ICO) was a leap forward in terms of access. Anyone in the world who had an internet connection and some crypto asset was able to participate in an ICO.
Participants in an ICO were able to own a share of a crypto network, which was basically a startup in a completely new technological arena with very high potential returns if the token appreciated in value. These coins or tokens were also provably rare, could be owned and exchanged without restriction, and could be tied to how that network functioned.
In the past, investing in a startup was limited to only venture capitalists that had a strong network and enough capital to participate in venture capital funding rounds. Furthermore, being the first to own an exchangeable share of a business meant participating in Initial Public Offering (IPO), which is an initial sale for a company on the stock market. IPOs are limited to certified investors in certain jurisdictions.
The ICO was a completely new innovation in that anyone could participate in a sale that was like a combination of an IPO and a venture capitalist funding round.
ICOs were able to raise unprecedented amounts of money at their peak, which eclipsed both traditional venture capital funding and incumbent platforms such as Kickstarter. Of the highest funded crowdfunding projects in history, blockchain ICOs dominate; occupying 17 of the top 20 positions including the three highest funded projects.
In the summer of 2017, during the peak of the ICO craze, the amount of money raised by ICOs surpassed angel and seed VC funding for the first time.
It was clear that the value proposition of the ICO: the possibility of massive returns on investment, the completely unrestricted access, and the immense demand at the time was truly changing how fundraising worked. The excitement around this new innovation would be short-lived.
The ICO or crowdfunding in general was the first use case for live blockchain networks that truly tested the networks’ capacities. Because most ICOs launched their initial sales or conducted their sales on the Ethereum platform, the Etheruem network was pushed to its maximum limits. Even now, Ethereum remains the platform on which most crypto projects are built on top of.
During some of the largest and most popular ICOs, the Ethereum network ground nearly to a halt and at times very large asset holders were able to manipulate the network by pushing through huge transaction fees so they could buy their tokens before everyone else.
For example, during the Brave ICO, $35 million worth of Basic Attention Tokens (BAT) sold out in less than 30 seconds. In that sale, one buyer paid more than $6,000 in gas fees and five buyers were able to buy up half of the supply. The hotly anticipated Status ICO raised nearly $100 million in a day and the enormous demand led to congestion on the Ethereum network, which increased wait times and fees for all other non-ICO related transactions.
The high demand, limited supply, and rapidly closing sales times are being repeated on the Initial Exchange Offerings that we are seeing today, but without the network-wide slowdown effects.
Scams, fraud, and legal issues were the worst part of the ICO boom of 2017 and the beginning of 2018. One of the triggers that spelled the end of the ICO era and also the end of the crypto bull market was the regulatory or legal crackdown on ICOs by regulatory authorities such as the U.S. Securities and Exchange Commission (SEC).
There were many outright frauds and scams that simply stole people’s money and had no intention of building a real product, but there were also legitimate projects that faced legal action because they were unregistered.
— hubii network (@hubiinetwork) August 23, 2017
The SEC even started taking action against celebrities such as Floyd Mayweather and DJ Khaled who were profiting from the ICO craze.
China completely outlawed crypto ICOs and exchanges. Even many of the ICOs that legitimately tried to build real products were either not able to deliver or saw their asset prices plummet from their original ICO prices.
The IEO: An Evolution of the ICO
Though ICOs have been in decline, the Initial Exchange Offerings (IEOs) have been gaining a lot of attention recently because of the rise in popularity and the extremely quick sales cycles that are reminiscent of ICOs.
The objective of ICOs and IEOs are essentially the same, which is to offer tokens to a large group of investors. An IEO is basically an ICO except that it is launched and managed by an existing exchange instead of the organization that created the token. The exchange holds and sells the token on behalf of the project team. This small change has significant effects on the entire process.
In a typical ICO that takes place on the Ethereum network, the developers create a smart contract and investors send crypto assets to the smart contract in exchange for a set number of tokens at a fixed price. In a typical IEO, developers send their tokens to the exchange and the exchange sells them to its platform users at a fixed price.
The ICO format is completely permission-less for absolutely anyone to launch and participate in. There are no gatekeepers. The IEO reinserts the middle man and central authority in the form of an exchange. This reintroduction of centralization can be seen as counter to the basic ideology that created Bitcoin and open blockchains in the first place, which was to be a completely peer-to-peer network.
Many of the top exchanges who are hosting IEOs have different requirements that involve holding or using their own platform tokens in order to participate in the IEO. By creating this condition, exchanges create demand for their internal tokens, which increases its value.
With an ICO, there were generally no fees for either the investor or the token creating teams since projects were sold directly on a blockchain network with no intermediaries. The only fees were the standard transaction fees to the network. With the IEO, the exchange performs many functions including serving as the intermediary, facilitator, manager, marketer, and all these services are paid for by the organization that is launching the IEO.
Streamlined Listing Process
The goal of most tokens or coins after they launch a coin offering is to get listed on at least one major exchange. Getting listed on an exchange brings credibility to a project as well as liquidity and may potentially increase the token’s value.
— Erik Voorhees (@ErikVoorhees) April 15, 2019
Though not all projects are interested in being traded, many are and by doing an IEO, getting listed on a major exchange is an automatic process that happens after the IEO is completed.
Exchanges have an existing community and promotional resources, which the IEO teams can take advantage of.
The exchange’s existing audience and resources for marketing make it easier for a new project to get discovered by a larger audience and thus launch its token offering successfully. Ideally, with exchanges assisting with fundraising and marketing, project teams can focus more on building a great product.
The exchanges benefit in that they receive new interest from those people who want to invest in the IEO, but were not already on their platform. Essentially, both the exchange platform and the IEO project are promoting each other in a way that wouldn’t have happened during a normal ICO.
It is likely that being on an exchange from the start will bring more types of investors who would not have normally participated if it involved a direct smart contract interaction. The user experience of an exchange is far more familiar to most people than participating in a pure ICO.
This may or may not be an advantage for the IEO teams because they may receive a more diverse token holder base, but they may also receive token holders who are purely speculating with no long term interest in the token or project.
Projects that choose to launch an IEO are curated and vouched by the exchanges. Though every exchange has a different reviewing standard, this process is a major difference from ICOs, which commonly had no external review processes at all leading to greater risks for investors.
In general, if you believe that an exchange is trustworthy, there is a reason to believe that it will select projects that have some degree of trustworthiness or credibility.
Exchanges are one of the only services or products in the crypto industry that have consistently generated revenue and do not rely solely on the appreciation of crypto assets. The teams behind exchanges may offer unique insight from running a legitimate revenue-generating blockchain business as well as being exposed to such a wide variety of different crypto projects that would greatly benefit the IEO teams.
In traditional venture capital funding, the venture capitalists provide funding as well as advice and guidance. In IEOs, the exchanges offer a platform for raising capital and potentially valuable advice and guidance for the IEO team. Because of their experiences with a variety of different projects, exchanges may have a better idea of how much an IEO should raise or what their token limit and prices should be.
Exchanges will commonly have a well-organized legal structure that protects them from regulatory consequences. For a young startup seeking initial funding, this is a protection that they normally would not have access to or resources for. Well-developed exchanges can offer legal advice and clarity as well as access to a full legal team to help nascent startups traverse through the minefield that is the blockchain industry.
The exchange will also commonly have some kind of Know-Your-Customer (KYC) verification required in order to use its services. With ICOs, all you needed was an Ethereum address.
Though IEOs are more restricted than ICOs, it does not mean that they are safe from regulators completely. If anything, they may be more vulnerable, but exchanges and projects have also learned their lessons. For example, Binance is based in Malta where it has guarantees of protection and restricts users from certain countries such as the United States, Venezuela, and North Korea from participating.
The speed of centralized exchanges and technology far eclipse those of the completely decentralized platforms such as Ethereum where ICOs were commonly launched from. This evolution in user experience seems to be a natural maturation of the technology. As we shall see, exchanges have been closing token sales in minutes and sometimes in only a matter of seconds thanks to their streamlined and centralized systems.
Major Exchange Platforms:
|Exchange||IEO Platform||Platform Token|
|Binance||Binance Launchpad||Binance Coin (BNB)|
|KuCoin||KuCoin Spotlight||KuCoin Shares (KCS)|
|Huobi||Huobi Prime||Huobi Token (HT)|
Binance is well-known for being one of the best cryptocurrency exchanges and it has also been an innovator in the area of IEOs. Binance has recently popularized the concept with the success of its Binance Launchpad platform. Binance’s founder, Changpeng Zhao (also known as CZ), believes that fundraising is ‘a killer app for the blockchain’ and its potential will be ‘many times bigger than the VC industry in the future.’
Binance Launchpad is essentially a streamlined platform and process for new projects to launch their initial token offerings and then get subsequently listed on the Binance exchange. Binance Launchpad offers full advisory services for startups using its platform for an IEO.
In order to participate in an IEO on Launchpad, users must complete verification so that they conform to a user’s jurisdiction as well as use specific coins such as BNB in order to participate.
The BitTorrent technology is already widely known and used by over 100 million people across the world and the BTT token will reportedly be integrated into the popular uTorrent client to reward users for seeding or sharing files.
A total of 50 billion tokens were sold out in less than 15 minutes for a total value of over $7.1 million. There were two sessions in which users could participate; one for purchases using BNB tokens and the other using TRON tokens.
Less than a month later, Binance Launchpad concluded its sale of the Fetch.AI (FET) tokens. Participants were only able to use BNB tokens for the FET sale, which generated $6 million dollars for 69 million tokens within 22 seconds.
24000 people pre-signed the User Agreement, 19860 people successfully submitted a buy order, 2758 people got a piece. The first 22 seconds (not 10). https://t.co/eVQy741bhO
— CZ Binance (@cz_binance) February 25, 2019
The crypto exchange KuCoin launched its own IEO platform called KuCoin Spotlight. In order to participate, KuCoin users must complete KYC identity verification before the offering. Like Binance, certain jurisdictions or countries are not allowed to participate in its IEOs.
KuCoin Spotlight’s first offering was MultiVac, which is a blockchain scalability solution that emphasizes sharding technology. The MultiVac IEO sold out on the KuCoin Spotlight platform in only 7 seconds.
Congratulations to 1661 users who successfully purchased the token! pic.twitter.com/vJGuGSPSgP
— KuCoin Updates (@KuCoinUpdates) April 3, 2019
The platform recently launched by the OKEx exchange is called OK Jumpstart.
OKEX only accepts its internal OKB tokens for payment in an IEO. OK Jumpstart uses a subscription and allotment model that is determined before the actual sale that limits the number of sales that can be conducted. Participants are allowed to purchase more of the IEO’s tokens if they have more OKB tokens held in their accounts.
Huobi Global is one of the longest-running crypto asset exchanges in the world having started in 2013. Huobi Tokens(HT) are essential to using the Huobi Prime token sale platform. The limits of what participants are allowed to purchase during the IEO are also directly tied to how many HT they are holding for a certain period of time.
Initial offerings are conducted in rounds that consist of five-minute intervals. The IEO tokens will be freely available for trade on the main Huobi exchange after the supply of tokens from the IEO get sold out or three rounds of IEO trading are completed.
Huobi Prime’s first token launch was on 26 March 2019 for the TOP Network. The rounds for the TOP tokens were met with phenomenal demand with each one ‘with the first round selling out of available tokens in 7 seconds, the second round in 5 seconds, and the third in 7 seconds.’
Only 3% of the total 130,000 participants wound up being able to buy the TOP tokens. Like many of the other IEO platforms, there has been concern about bots that prevent many investors from being able to participate.
Bittrex is also a well-known and established crypto asset exchange. The exchange platform was founded in 2014 and is based in the United States. However, its IEO platform is Bittrex International, which is based in Malta because Malta offers crypto exchanges the regulatory certainty that the U.S. does not.
Bittrex users need to be fully verified in order to participate in these initial offerings.
The first Bittrex offering was with VeriBlock (VBK) and since Bittrex does not have its own native token, Bitcoin was the only accepted crypto asset in which you could buy VBK tokens. Another thing that makes this IEO unique is its settlement and vesting schedule where 50% of VBK tokens are held in escrow by Bittrex for a certain time period.
To showcase the due diligence and review process of the IEO system, Bittrex actively removed one of its IEO projects right before it was scheduled to take place. The RAID team had a major partnership that was canceled before the IEO event so Bittrex decided to cancel the offering.
If this was an ICO, an external source could not stop or prevent an initial offering since all the decision making would be in the hands of the founding team. The IEO process has checks and balances that did not exist with ICOs.
Wishful thinking suggests that the blockchain industry has learned a lot from the first ICO craze and this new system of IEOs is an improvement on the past iteration of mass blockchain-based fundraising. Tested and grizzled veterans in crypto exchange businesses have seen what works and what doesn’t work and are able to use their accumulated industry knowledge to weed out the worst and most fraudulent projects.
These exchanges have also learned how to effectively protect themselves from regulators and market their products to a large group of users, both necessary components on the path to widespread adoption.
The IEO projects themselves have also learned to not have such extreme or uncapped funding rounds. Each IEO is limited to some specific and limited supply, which increases the demand. The more restrained funding model drip feeds these young projects the resources that they need without burning out all the investors or underlying asset value, which should also be a sign of a maturing industry.
The Next Big Thing?
Is this type of more restrained, orderly, curated, and serviced crowdfunding the next standard in the blockchain industry? Perhaps the idealism of the very early crypto adopters was too extreme and the resistance to centralization is softening in order to accommodate more mainstream users, adopters, and builders.
Perhaps the ICO craze, bull market, and subsequent crash was simply a necessary step in order to get to our current IEO stage, which will drive new investment and fuel promising projects in the industry.
The danger is that this is another hot crypto fad with no real substance. Considering that most ICOs failed after launch or saw their tokens drop significantly in value, this is not an overly pessimistic outlook. The breakneck speed of investing where initial offerings are selling millions of dollars of tokens in minutes or even seconds is something we have seen before.
However, it could also be taken that this is the ecosystem maturing and offering much-needed improvements in standards and user experience. It could also be argued that the regulators and extreme market conditions had stopped the initial ICO craze too early when in reality there was still underlying demand that was simply being suppressed.
The energy and speed in which new IEOs are being launched and closed could signify that this is just an outlet for the demand that had been simmering beneath the surface this entire time.