A Quick Overview of the ICO, IEO, IDO, and STO: Various Fundraising Mechanisms in the Cryptocurrency Space
In traditional finance, companies need to follow strict rules and regulations to raise capital. Standard methods are offering shares to private VCs or banks and taking financial loans. However, they do not provide equal opportunity to founders.
Today, blockchain and crypto startups have found creative ways of raising funds for their projects. Some have developed their cryptocurrencies and tokens, which they issue to retail investors to raise funds. It is often in exchange for other cryptocurrencies (e.g., BTC, ETH, ADA) or government-issued currencies (e.g., USD, AUD, GBP).
Here are common ways how crypto projects can raise funds:
Initial Coin Offering (ICO)
An Initial Coin Offering is a crowdfunding type through which companies offer their blockchain-based token or cryptocurrency. Interested investors can purchase these tokens in exchange for Bitcoin, Ethereum, or stable coins.
ICOs are an alternative to the stock market’s Initial Public Offering (IPO). Unlike IPOs, which let investors purchase stocks in a firm, ICOs provide buyers with tokens that they may exchange or trade on DEXs or CEXs.
The first ICO was held by Mastercoin in 2013. The digital currency and communications protocol raised close to $600,000 from this method.
ICOs allow companies to raise millions of dollars without any statutes. However, some bad players take advantage of the ecosystem’s lack of regulations. Some projects promise unrealistic profits to lure small investors. This greed has resulted in speculation and ordinances from the SEC and other regulatory bodies worldwide.
ICOs simplified the funding process for crypto projects. It has opened the doors for other crowdfunding methods such as STO, IEO, and IDO.
Security Token Offering (STO)
The Security Token Offering allows investors to swap other cryptocurrencies for the project’s coins or tokens. However, STOs offer tokens that are classified as securities.
In traditional finance, securities are financial assets backed by assets or commodities such as stocks, bonds, or other funds.
Companies that offer STOs must follow all existing laws around securities. They must also remain compliant with the rules and regulations of the jurisdiction where they are offered.
Blockchain Capital (BCAP) hosted the first security offering in 2017. The company raised $10,000,000 in a single day through this method.
With very few regulations, the ICO is in shambles. Many individuals have been duped by organizations that offered worthless tokens or did not deliver. STOs aims to reduce the risks of investing in ICOs by requiring these tokens to respect rules and regulations.
Security Tokens have the following categories:
Equity Tokens
Just like traditional stocks, equity tokens offer ownership stakes in a company. The ownership proof is recorded on a blockchain instead of a database. Equity token holders are entitled to the business’s profits and losses. These holders also have the power to vote on the company’s decisions.
Debt Tokens
Debt tokens represent a short-term loan with an interest rate provided by the company’s investors. Debt tokens can be real estate mortgages, company bonds, or other sorts of structured debt. These tokens are secured by smart contracts that have the repayment terms mentioned in them.
Asset-backed Tokens
These are blockchain-based tokens that reflect ownership of real-world assets such as real estate, fungible entities, art, or commodities. These are maintained using blockchain and smart contracts to reduce fraud and improve settlement times.
Security tokens are traded on specialized exchanges that comply with regulations. Some projects that assist businesses with launching their STO are Polymath, Securitize, Harbor, and Swarm.
Initial Exchange Offering (IEO)
An Initial Exchange Offering is a type of crowdfunding that involves a third-party crypto exchange. The exchange acts as an intermediary to facilitate trading tokens. In IEO, the exchange manages the token sale. The companies, in return, have to pay listing fees to the exchange.
In ICOs, the company issuing the tokens is responsible for raising funds for itself. In IEO, the exchange lists the token on its platform and invites its users to invest. Because IEOs are held through a centralized exchange, the exchange is responsible for conducting a thorough vetting process. This process minimizes the risk of fraud before publishing the token and launching the sale.
Several platforms offer IEOs to the crypto market, among which is the Binance Launchpad. It is the most popular platform and has helped more than a dozen blockchain projects raise capital.
Initial DEX Offering (IDO)
Initial DEX Offering enables blockchain-based projects to raise funds by selling their tokens or cryptocurrency on decentralized exchanges. It is the most recent and popular crowdfunding model for DeFi projects and DApps. RAVEN held the first IDO on Binance DEX in 2019.
IDO projects offer their coins on decentralized exchanges to raise funds from investors. Two of the well-known DEX are Uniswap and PancakeSwap. Project developers build a liquidity pool with popular cryptocurrencies such as Bitcoin, Ethereum, or USDT. Anyone with an exchange-supported web3 wallet can invest in the token with no KYC or identification required.
IDOs differ significantly from IEOs and ICOs. Unlike an ICO, an IDO forbids the project from owning the tokens during the fundraising process. Unlike IEOs, there are no strict rules and regulations that the projects must follow.
IDOs are gradually replacing traditional methods of distributing funds and raising capital in the blockchain realm.
Friendly reminder
With the introduction of ICOs in 2013, the crypto world climbed to new heights. However, it lost its support when STOs (Security Token Offerings) were introduced. STOs, on the other hand, suffered the same fate when IEOs entered the market. The introduction of IDOs this year will once again create a significant disruption in the crypto industry.
The blockchain ecosystem is once again thriving, with new projects popping up daily. Anyone can invest in these projects depending on one’s risk appetite.
Always do your own research before investing (DYOR) and only invest what you can afford to lose.
— -
Whether you have a question about our products, features, or anything else, our team is ready to answer all your questions. Please feel free to get in touch with us on our Telegram Community Chat.
TeraBlock official links:
