Very few people in the Cryptocurrency market have heard about Initial Exchange Offerings (IEOs) in 2019. However, this concept of crowdfunding has become increasingly popular and one can only wonder whether the trend shows that Cryptos are maturing.
In an IEO arrangement, a Crypto exchange platform acts as a counterparty. This model is revolutionary as it can cut the risks and challenges associated with both Initial Coin Offerings (ICOs) as well as Security Token Offerings (STOs) to disrupt crowdsales.
Explaining A Counterparty Concept
A counterparty is in layman terms the other side of the transaction. For example, the counterparty of a seller is a buyer and vice versa. There are risks associated with counterparties such as failure of a seller to meet the terms of the contract that got the buyer onboard in the first place.
It is critical to note that in the absence of a traceable or liable counterparty, all the risks are assumed by the buyer which makes ICOs be extremely risky and a real-life gamble.
Conclusively, in the realm of Cryptocurrencies, a counterparty is an exchange platform on one hand versus an investor on the other. This trading model is a new concept in which a trader deals directly with an exchange as opposed to an ICO team.
Binance Is Setting The IEO Pace
In January, the Binance Launchpad’s BitTorrent (BTT) managed to sell 60 billion BTT coins in a record time of 14 minutes. This could have been done in seconds were it not for a bug that paralyzed transactions for minutes according to Binance CEO Changpeng Zhao.
In an IEO transaction, new Tokens are immediately available for trade. This solves one of the principal problems for an ICO where a crowdsales precedes listing. In the event that exchanges reject the new Crypto, investors can end up holding a devalued Digital Token.
The other benefit is that the exchange serves as a counterparty which is assuring to investors and hence encourages high trade volume and participation.
There Are Limitations To The IEO Model
There is one shortcoming to the IEO Crypto-based crowdsales model. This limitation is that the IEO is not different from the traditional IPOs in stock markets. In the conventional market, exchanges such as the NYSE, FTSE, Nasdaq, etc. have to approve an offering based on the quality of the stock, as well as its regulatory compliance.
In the same way, Crypto exchanges scrutinize the viability of Crypto projects before listing Tokens on IEOs. However, because of the vague regulatory environment in which Cryptocurrencies operates, compliance becomes an issue and an IEO, therefore, fails to adequately replace equity with a Cryptocurrency.
The second limitation is the reliability of some exchanges which is in doubt. It is not yet certain that all Crypto exchange platforms have the interest of investors at heart. For instance, the infamous Mt. Gox, BitGrail, and Coincheck hacking, and many other cases. This can make it hard for some investors to trust these marketplaces to act as counterparties in IEO investment deals.
Time Will Tell…
Nonetheless, some exchange platforms offer theoretical protection against fraud as they have advanced mechanisms of approving or rejecting some projects.
It is clear that there may be some opposition to IEOs. However, the model will solve key crowdfunding issues such as security and lead to market maturity.