Initial Exchange Offerings (IEOs) have been gaining quite a bit of steam lately. It appears that major cryptocurrency exchange backing certain projects is shaping up as a very successful fundraising model, allowing blockchain-centered efforts to receive the resources they need, while also providing investors with notable returns.
IEOs have lots of advantages, such as being managed by the exchange which is a trusted source. However, when looking at a new trend like this, it’s also important to consider some of the potential pressure points. Hence, we’ve brought up a list of potential issues that both exchanges and investors might have to keep in mind if this trend is going to continue.
Cryptocurrency exchanges have always been a sweet spot for hackers to target. We’ve seen this on multiple occasions.
During token sales such as IEOs, there are a lot of funds stored on the exchange, which are moved in a relatively short period. This makes the exchange an ultimate target for a variety of different hacking attempts, including phishing attacks.
Additionally, the majority of the cryptocurrency exchanges have implemented a minimum holding requirement. In other words, those who want to be eligible to participate in the IEO need to hold the exchange’s native token over a certain period. But the thing is that it needs to be stored on the exchange. Binance, for example, encourages their users to hold up to 500 BNBs (equivalent to $9,000 as of now) in order to enjoy their IEOs lotteries. Hackers know this, and it’s now more transparent than ever.
Impact on Token’s Value
Unlike traditional ICOs which flourished in 2017 and 2018, the value of the token subject of the IEO is massively impacted by the exchange’s native token, since it’s the only instrument used to participate in the sale. Therefore, fluctuations in the price of the native exchange token are also going to seriously impact the actual value of the token being sold during the IEO. For instance, KCS, which is Kucoin’s token, dumped hard following their first IEO of MultiVAC.
The token’s utility is also somewhat limited by the exchange that it is being sold on. A lot of the exchange-based tokens which are currently traded on the market provide primarily for certain fee discounts.
Tokens sold in IEOs depend massively on the cryptocurrency exchange itself, and they don’t provide any important usability besides in-exchange. As such, if something unexpected happens to the exchange, the value of the token is likely to crash as well, and it is not limited to exchange hacks only, but also to regulatory affairs.
Centralized Exchanges: Unknown Deals and Whales
Let’s face it: Almost all exchanges, especially those with the most volume, are centralized. This means that centralized organizations have conducted all IEOs. Yes, these companies or exchanges, have complete control over the projects’ token sales which are chosen for this fundraising model.
We are not saying for sure, but it’s entirely possible that there are hidden or unknown to the public deals which impact this selection process. Furthermore, being centralized, exchanges can also severely affect the value of the tokens sold in their IEOs. After all, that’s their interest to prove the success of the new fundraising model.
Regulators have severely increased their scrutiny towards ICOs and the overall matter of whether or not tokens issued through events of the kind classified as securities. Only recently, the SEC released a guidance shedding certain clarity on the problem.
However, the centralization of cryptocurrency exchanges once again comes into play: Regulators will certainly have easier times clamping down on IEOs, mainly because they can go after the exchanges, subjecting them to their regulations. This can have an impact not only on the tokens in question but on the overall exchange and everyone who’s using it.
Of course, none of the above goes to say that IEOs are a terrible practice. It just outlines some of the pressure points which may come in the future and are indeed worth thinking about.