The evolution of ways of attracting funding for startups led the market to a new stage – IEO.
The first project, the financing of which was carried out through the ICO, was a startup MasterCoin. It was implemented in 2013.
Since then began to flare up boom ICO
According to the publication of Forbs in 2017, the volume of investments attracted by the ICO (Initial Coin Offerings) amounted to more than $2.3 billion on a project like Spectrecoin in late 2016 – early 2017, in a bull market, have brought their investors in the short term a fabulous profit.
The cost of the token XSPEC rose by 46000%. The Storj project had a yield of 7600%, and Qtum – 5400%.
After analyzing site data TokenData, we can say that 95% of all ICO projects implemented in 2018, was a Scam. Most tokens lost its value and traded below its initial value. Bearish trend and falling prices of Bitcoin and Ethereum made an investment in ICO is extremely risky, which offers hope to profit in either the short nor in the medium term.
The hype around the ICO was caused by the ability to quickly make “big money” and has lost the functions of civilized krautsalat for the development of blockchain technology. The hype has attracted the attention of regulatory authorities. This may be the only positive thing which managed to achieve the ICO projects in 2018.
A detailed analysis of White pipers, the public discussion of start-UPS on forums and the supervision of the Controller with the ICO process make financing of projects civilized, and the investments are protected from fraud.
However, it is impossible to wait until the market will be the Regulator and will only allow what can’t. The blockchain industry is self-regulating and does not fit well with the state administration.
Therefore, the process of supply of coins (ICO) has transformed into the Primary stock location of the (Initial Exchange Offering or IEO). The main feature of this method of investment is the issue of coin directly to the platform crypto-exchange. This allows to automatically include new tokens in the listing.
In this case, the obligations of an expert assessment (due diligence) of the startup project is on the exchange. It carries reputational risks. This automatically weeds out the blatant fraud of “legal” obtaining money from investors. The exchange is interested in liquidity of placed tokens, because further trade will be linked to the profits she will be receiving a Commission on each transaction.
One of the first such successful project was the startup GIFTO, which carried out the Primary stock location of the token GTO platform Binance.
The IEO process consists of several stages
1. Future investors seeking to Finance a promising project, open a special account at the exchange after pass authentication (according to KYC – Know Your Customer).
2. If the token is of interest to a large number of investors, then the Organizers can choose a more attractive investor from the standpoint of further promotion of the project. They are offered with a discount of more favorable terms of sale.
3. After that, the participants of token sale transferred Bitcoin, Ethereum, or other scriptactive provided by the project, in return for a token, and the equivalent number of tokens credited to an open account of the investor.
Exchanges beneficial to the conduct of IEO
Due to the innovative start-up projects they attract new investors and get new deposits. In the future, traders pay a Commission. In addition, the exchange receives the revenue for the inclusion of new tokens in the listing. Exchange Binance has the ability to promote their own crypto-currencies BNB, taking it in payment for new tokens. The income exchange is growing together with the price its a token that is in demand.
Experts say that the IEO is an evolutionary development of the market, which solves issues of unsystematic risk investors (hacker attacks, scamming) and reduces the costs of the organizers of start-UPS.
But in fact it is not
We all know that even the most reputable crypto-exchanges have the same opportunity to fail as any start-up project. The question is the extent. The consequences of such failure can be catastrophic, compared to the Scam little project.
A constant reminder of the extent of the bankruptcy of the Tokyo exchange MT.Gox, are periodic drops in market prices. They are associated with low stock miraculously surviving assets of former clients. Receivables before them is still not repaid in 2014.
In addition, the prospect of the ICO project, it was necessary to prove the crypto-community in discussing the ideas of creation and mission of a startup. A dummy could not pass this “natural selection” in the initial phase ICO. And the Primary exchange distribution , such a selection does not pass. Investors rely on the reputation of the exchange.
Direct interest of the exchange in profits from IEO questioned the reliability of the validation of reputational risks, and therefore the safety and profitability of investments of the investors is under threat of total loss.