ICO stands for Initial Coin Offering and IEO stands for Initial Exchange Offering. Both these terms are often used as buzzwords in the ecosystem of cryptocurrencies. Both of these are crowdfunding mechanisms and are widely used by crypto-oriented projects to fund themselves for the next round of development. However, there are some striking differences between ICOs and IEOs. In this blog post, we will have a detailed look at those differences. However, before delving into that, let us get a basic understanding of the basic concepts of an ICO and IEO.
What is an Initial Coin Offering (ICO)?
An Initial Coin Offering or ICO is a crowdfunding method using which startups in the crypto space raise funds from the general public as well as institutional investors. Unlike traditional fundraising, in ICOs, people do not always invest in finished products or an established brand. Instead, they invest money in disruptive ideas which would later be developed using the funded capital.
Investors in an ICO get native cryptocurrencies (tokens developed by the startup) in return. Once the investment is done, these investors only hope that the value of the tokens they received increase in the near future and they make a decent return on their investment. It is needless to mention that people only invest in ideas and tokens if they believe that the particular venture/idea/token has what it takes to be of greater value in the future.
Another unique aspect of an ICO is the fact that investors do not own any stake in the company against their investment. This is how ICOs are different from a traditional IPO where investors earn a stake in the company they are investing in. Furthermore, the process of investing in ICOs is highly automated via smart contracts, which makes the entire post-investment process seamless and less tedious.
What is an Initial Exchange Offering (IEO)?
An Initial Exchange Offering or IEO serves a similar purpose like that of an ICO i.e crowdfunding of ideas. However, unlike ICOs which require projects to execute the process of fundraising independently, fundraising via IEOs is overseen by a cryptocurrency exchange.
The process of investing in an IEO is simple for both the parties – investors and token issuers. The token issuer must list their token on a cryptocurrency exchange by paying a certain fee and the investors can buy these tokens by paying directly from their exchange wallet. In other words, the cryptocurrency exchange serves as an intermediary throughout the process.
Major Differences Between an ICO & IEO
In this section, let us list down the major differences between an ICO and an IEO. Though fundamentally, both these concepts serve the same purpose of fundraising, there are some basic differences between them.
- ICOs require token issuers or startups to execute and manage the fundraising process independently. IEOs, on the other hand, only require the token issuer to list the concerned token on an exchange from where investors can directly buy via their exchange wallet. This gives the token issuer access to a large pool of potential investors as exchanges usually have a larger database of active users. In the case of an ICO, the token issuer would need to spend marketing dollars to get the same exposure. The listing fee on crypto exchanges for IEOs are considerably less than the ICO marketing spend.
- ICOs are a completely decentralized process as there are no third parties involved. IEOs on the other hand involve a certain degree of centralization as the crypto exchange oversees and manages the entire crowdfunding process.
- Any investor from across the globe can invest in an ICO as it is an independent process executed by the token issuer. On the other hand, only the exchange users can invest in an IEO. People who do not have an account with the IEO executing exchange will need to set up their accounts themselves before being able to invest and buy the tokens.
These are the three key differences between an ICO and an IEO.
ICOs and IEOs are both potent methods of crowdfunding in the crypto space with minimum regulatory interference. However, from an investor’s perspective, investing via IEOs might be a safer option in some cases as the exchange will be liable for any potential mishap that might happen. However, this is not to suggest that ICOs are unsafe. For any financial investment, it is always suggested to do due diligence before proceeding.
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