In recent years, the cryptocurrency industry has witnessed drastic changes that paved ways for the development of new methods of supporting new Blockchain projects. Some of these newly developed methods include ICO (Initial Coin Offering), IEO (Initial Exchange Offering), and STO (Security Token Offering). Blockchain projects ICO, STO, and IEO are gaining more traction in the cryptocurrency industry.
What is an ICO and how does it work?
An ICO (initial coin offering), very similar to initial public offering (IPO), is simply a type crowdfunding that uses crypto coins. It is usually set up to source for capital for startups. Anybody or company can become an investor or fund any ICO project.
An ICO is normally backed by an idea or project, which is explained on the ICO official website to attract investors. More so, there is also a document known as a “whitepaper” which contains all the essential information about how the ICO and its idea will work. A cryptocurrency or a token, usually powered by Ethereum (ERC-20), is also created for the project to offer investors a unique periodic share profit distribution.
Then, people are invited to invest in the ICO, usually with Bitcoin (BTC) or Ethereum (ETH). At the end of the ICO, the ICO token is listed on an exchange. If the project is legit and receives much hype, the token or coin will increase in value and investors will trade with it. The token would be sold to those who did not invest in the ICO when it was on.
However, if the hype around the project is not large enough or if the project is only made for short-term gains, then the token or coin will drastically drop in value and would be dumped on the market. Hence, people must be really careful about the ICO project they choose to invest in. Just as some investors have gotten rich overnight through ICOs, some others have lost all their money.
What is an STO?
Similar to the ICO, the STO also allows investors to be issued with a crypto coin or token, which represents his or her investment. However, STO differs in that it is a security token representing an investment contract into an underlying investment asset like funds, bonds, stocks, or real estate investment trusts (REIT). STO represents the ownership information of the underlying investment and is stored on the Blockchain. STO can also be considered as a hybrid approach between the traditional IPO and ICO.
Unlike with the ICOs, there are lower risks associated with the STOs. This is because they are governed by securities laws that enforce transparency and accountability. Also, STOs are backed by real-world assets and not white elephant projects like most ICOs.
What is an IEO?
The IEOs are similar to the ICOs as a means of raising money for a startup but they are conducted on cryptocurrency exchange platforms. IEO differs because it is usually issued by the cryptocurrency exchange on behalf of the start-up that wants to raise money fund with its newly-issued coin or token.
IEO is more advantageous because the IEO project would benefit from the existing customer base of the cryptocurrency exchange to get contributions and raise funds. It ensures that the newly-issued coin or token is listed on that particular exchange (irrespective of the hype around it). Also, it is more difficult to find scams among IEOs because the cryptocurrency exchanges will investigate the project carefully before accepting it. IEO benefits all parties involved: the cryptocurrency exchange (earns from listing fees, new customers, joint marketing), the investors and the project itself.
This article must have given you a better understanding of what the ICO, STO, and IEO are. However, it is very important to also understand that these Blockchain projects possess a high amount of risk. Therefore, it is advisable to always conduct personal research before taking any investment decision.