The crypto industry has experienced a few changes in the past year that enabled the emergence of new methods to support new blockchain projects. Thus, projects undergoing ICO (Initial Coin Offering), STO (Security Token Offering) and IEO (Initial Exchange Offering) are gaining more exposure in the industry.
What is an ICO and how does it work?
An initial coin offering (ICO) or initial currency offering is a type of crowdfunding using cryptocurrencies. An ICO can be a source of capital for startup companies. Any individual or a company can fund any project or become an investor.
A project usually makes a pretty wordpress based website explaining why you should invest in their idea and releases a document which is usually called a White Paper that contains all the essential details about how the system will work. Then, people are asked to invest in this project, usually with Bitcoin or Ethereum, but this might vary from one project to another and in return, the investor receives the coin of the project which can be either a cryptocurrency or a token. After the end of the ICO, the coin will usually be listed on an exchange and if the hype around that project is big enough, investors will try to sell it to those who did not manage to invest in the ICO and then the trading begins.
If the project is legit and will have a real working ecosystem behind it, their coin will increase in value over time. However, if the project is made only for short-term gains, such as the majority of ICOs these days are, then we will observe a dump on the market of their coins and their value will drastically drop. This is why you need to be really cautious about the projects you choose to invest your money into. Just as some people got rich overnight, others lost all their money. The risk is real.
What is an STO?
Moving on, similar to an ICO, we have the STOs. Here, an investor is issued with a cryptocurrency or token representing his investment. However, in the case of STO, a security token represents an investment contract into an underlying investment asset, such as stocks, bonds, funds and real estate investment trusts (REIT). Therefore, a security token represents the ownership information of the investment product, recorded on the blockchain. STOs are also seen as a hybrid approach between ICOs and the traditional Initial Public Offering (IPO).
Many countries have banned STOs, however, they are seen to bring a lower risk because the securities laws that security tokens have to comply often enforces transparency and accountability. Another advantage is that the security token is backed by a real-world asset, which makes it a lot easier to assess whether or not the token is priced fairly in relation to the underlying asset.
What is an IEO?
And last, but not least, we have IEOs. An Initial Exchange Offering or IEO is conducted on the platform of a cryptocurrency exchange. Contrary to an ICO, the IEO is administered by the cryptocurrency exchange on behalf of the startup that seeks to raise funds with its newly issued tokens.
What are the advantages of an IEO and why it benefits all parties involved?
The advantages of an IEO are many. Through this method, the project will benefit from the existing user base of the exchange to obtain contributions. Also, it prevents the “gas War” between sale participants, assuming the exchange is not decentralized. Aside from ensuring their listing on that particular exchange, there is an extra layer of trust as it is more difficult to find scams among IEOs, because the exchange will conduct its own research before accepting a project.
IEOs are thought to benefit all parties involved: the exchanges, investors and projects. Exchanges earn from listing fees, influx of new users and their deposits and joint marketing with the teams from IEO. Investors earn from funding legit projects that provide an extra layer of trust and reduced risks and the team behind the IEO will receive the funds they need to successfully implement their projects.
I hope this helped you better understand what ICO, STO and IEO are. It is important to take into account that this industry possesses a high amount of risk and you should always perform your own research before taking the decision to invest.