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Unpacking the Acronyms: A Comparative Guide to ICOs, IEOs, STOs, ISPOs and IDOs
If you recently started your crypto journey, you might have come up with acronyms such as ICO, IEO, STO or more. ICO, IEO, STO and ISPO are different types of fundraising by modern companies.
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If you recently started your crypto journey, you might have come up with acronyms such as ICO, IEO, STO or more. ICO, IEO, STO and ISPO are different types of fundraising by modern companies. After the advent of cryptocurrency and blockchain technology, companies no more wait for a venture capitalist to invest in the company to raise capital.
But coming up with new ideas for fundraising. ICO, IEO and more are the result of such ideas.
How It Began
Token offerings can be traced back to 2013, when the project Mastercoin held the first Initial Coin Offering (ICO), raising $5 million through a crowdfunding campaign. This event witnessed the start of a new era of crowdfunding for blockchain-based projects and startups.
ICOs became a popular fundraising method for blockchain-based projects in the years that followed. The ICO market peaked in 2017, with $6.5 billion raised. However, due to a lack of regulations, many of these projects turned out to be scams or failed to deliver on their promises, causing investors to lose faith in the ICO market.
As a result, to safeguard investors, numerous nations started to enact laws on ICO. Because they are governed by federal securities laws, security token offerings, or STO, became a common method of generating money. Similar to initial public offerings (IPO), STOs enable businesses to raise funds by offering investors ownership stakes in the company.
IEO, which are similar to ICO but use a cryptocurrency exchange to function as the middleman between a project and investors, have also gained popularity and offer investors an additional degree of security.
ISPO was first started on the Cardano blockchain. An Initial Security Token Offering (ISPO) is a type of fundraising in which digital assets that are securities, such as shares, bonds or property investment trusts, are sold. These assets are stored on blockchain technology and are governed by federal securities laws. ISPOs are related to IPOs in that they enable companies to raise funds by selling controlling shares to investors.
IDO is the latest addition to the crowdfunding list in crypto. An Initial DEX Offering (IDO) is a type of fundraising in which tokens are sold on a decentralised exchange. IDOs are similar to ICOs and IEO in that they are utilized to raise money for projects, for greater ease of access and liquidity for investors.
The options range from Initial Coin Offerings (ICOs) to Initial Security Token Offerings (STOs), Initial Exchange Offerings (IEOs), Initial DEX Offerings (IDOs), and Initial Security Public Offerings (ISPOs).
Each of these fundraising methods has its own set of features, benefits, and drawbacks. In this article, we will delve into the world of token offerings and learn about ICOs, IEOs, STOs, IDOs, and ISPOs.
What are ICOs (Initial Coin Offerings)
An Initial Coin Offering (ICO) is a technique for startups and businesses to obtain funding for their projects by selling cryptocurrency tokens. These tokens are built with blockchain-based technology and can be purchased and sold on a crypto exchange.
Normally, ICO investors receive tokens that can be used on the company’s platform or that will increase in value if the project is successful. Popular examples of ICOs are Ethereum, Ark, Alias etc.
How ICOs Work
1. First, the company publishes a whitepaper outlining the project’s details, including the issue the company seeks to solve, the potential solution, and the techniques behind it.
2. The company then develops new cryptocurrency tokens or issues tokens on existing blockchains. These tokens can be used to gain access to the platform or to interact with the project’s services.
3. Some companies offer discounted token pre-sales to early investors. This could be a way for the business to raise funds and generate the project’s interest early on.
4. After the presale, the company holds a public token sale, during which investors can purchase tokens at a predetermined price. The sale can take place in a variety of ways, including through a website or on a cryptocurrency exchange.
5. The tokens are then distributed by the company to its investors, the tokens can increase in value if the company does well or is even used in a crypto exchange.
6. The funds obtained by selling the tokens are then used by the company to establish its premises and develop the project further.
Advantages And Disadvantages
- It enables investors to contribute to a new or emerging company regardless of their geographical location or their net worth.
- Tokens obtained from an ICO can be used in crypto exchange and provide investors with liquidity.
- It provides a gateway for new and innovative projects to take place, which may not have been possible with traditional fundraising techniques. It contributes greatly to the economy as a whole.
- Because ICOs are not regulated in the same way as traditional securities, they are more vulnerable to fraud and scams.
- A lack of accountability can result in projects failing to deliver on their promises or even being forced to abandon after funds have been raised.
- Investor losses could be substantial as a result of the extreme volatility of the price of tokens generated during an ICO.
What Are STOs (Security Token Offerings)
In a Security Token Offering (STO), which is a type of fundraising, digital assets that are regarded as securities, like shares, bonds, or real estate investment trusts, are sold. Federal securities laws apply to these assets, which are represented on a blockchain.
Initial Public Offerings (IPOs) and STOs are both methods for firms to raise funds by offering ownership holdings to investors. However, STOs, in contrast to IPOs, can be carried out through a decentralized platform, giving investors better accessibility and liquidity.
The STOs were launched in 2017 in response to a lack of regulations and scams in the ICO market. Because STOs are more regulated than ICOs, which have a history of fraud and scams, they are viewed as a more secure method of raising money. They have been employed to raise money for a range of initiatives, including real estate, venture capital funds and ownership stakes in private businesses.
Although the rules and procedures for STO compliance are still being defined, it is anticipated that they will eventually become more simplified and uniform.
How Does STOs Work
- For the STOs to work, they first have to be accredited by a regulatory authority. Also, only accredited investors can buy the tokens. Accredited investors are investors with a certain income or net worth that are allowed to own the tokens.
- The distribution process takes place through smart contracts, to automate the whole process. Hence, it is decentralized.
- The laws and regulations in STO vary depending on different jurisdictions in different locations.
Advantages And Disadvantages
- It provides greater security to investors than ICOs because of increased regulatory oversight.
- Because it deals with an ownership stake in the company, investors have the potential for higher returns.
- As it provides more security, more investors may decide to take part in the process and hence a greater pool of investors can be reached, the greater the pool, the more robust will be the project’s success chances.
- Only a limited number of accredited investors can buy the securities. Hence, only a limited number of investors can take part.
- Although they have greater regulations, they still are subject to market fluctuations and carry potential risks from those fluctuations.
- Compared to ICOs, issuing STOs can be more expensive for the company.
Some of the most popular examples of STOs are, IMPT, Battle Affinity (IBAT) and FANTOM (FTM).
IEOs (Initial Exchange Offerings)
An IEO uses a cryptocurrency exchange to facilitate the sale of tokens, rather than the issuer selling them directly to investors. The exchange serves as a middleman, managing the issuance and distribution of the tokens and guaranteeing compliance with all applicable laws.
IEOs were initially launched by Binance Launchpad in 2019 with BitTorrent token and afterward utilized by other exchanges.
Compared to ICOs, IEOs are thought to be a more regulated and secure method of raising money because the exchange works as a gatekeeper, only listing projects that adhere to specified criteria. Some of the most popular exchanges that list IEOs are Binance launchpad, Gate.io, Kucoin etc.
How IEOs Work
In this process, the cryptocurrency exchange acts as the intermediary between the company and the investors. By managing the company-issued tokens and grating and distributing them to their respective investors. Also, it acts as a regulatory body throughout the process.
- The company looking for crowdfunding applies to a suitable crypto exchange.
- The exchange conducts a thorough examination of the factors that predict the company’s probability of success such as business model, team capacity, the economic standpoint of the company etc.
- Once the company’s application is approved, the exchange lists the company’s token on its exchange, which the investors can buy using the exchange’s native currency.
- The exchange takes care of the whole process by managing its smart contract where the distribution of tokens to investors is carried out automatically.
Advantages And Disadvantages
- As an IEO takes place in a popular exchange, it has great reach and exposure. Because so many people are already using the exchange and are aware of its reliability. Hence, the project gets a great boost from the start.
- Listing on a reliable crypto exchange significantly increases the company’s security score because the exchange thoroughly examines the dynamics of the project before presenting it on its listings.
- It is regulated by the exchange itself, and chances of mishaps like mismanagement of tokens or corruption are significantly less.
- The exchange charges its fees for the examination, listing and management process which adds to the token price and makes it a bit expensive for the investors.
- Dependence on the exchange can act as a double edge sword, while providing security for the process it can also take a turn. The exchange can experience some technical issues or smart contract hacks.
- In IEO tokens are distributed to only accredited investors, considerably decreasing the investor liquidity pool.
What Are ISPOs (Initial Stake Pool Offerings)
An ISPO allows a company to raise capital by issuing security tokens that represent an ownership stake in the company; however, unlike IPOs and STOs, these securities are available to the general public rather than just accredited investors. Cardano blockchain was the first to introduce it.
It is a rather recent idea. It has been suggested that ISPOs be used to simplify the fundraising process and make it more approachable to a larger range of investors.
How Do ISPOs Work
- The necessary regulatory bodies receive an application from the company looking to raise funds through an ISPO.
- To make sure the project is credible and has a good chance of success, the company thoroughly analyzes the initiative’s personnel, business model and token prices.
- Once the project has been approved, the corporation produces tokens that represent a share in the business and makes them available to the general public.
- A smart contract is used to run the ISPO, automating the token issuance and tracking procedures.
- After being distributed, the tokens can be exchanged on secondary markets in the same way that conventional securities are.
Advantages And Disadvantages
- As an ISPO token is not just limited to accredited investors but is available to the public at large. It has great accessibility, meaning the normal public can buy the tokens.
- ISPO tokens are more affordable than their counterparts.
- As it operated on blockchain technology and not on any intermediary such as a bank, investors enjoy more transparency.
- As they are more public, they are riskier as well, the crypto market is a very volatile market and investors are always at risk of losing the value of their tokens, hacks, Rug pulls, scams etc.
- They run on Blockchain and not by a centralised authority. Hence, there is a lack of regulation on the company issuing the tokens.
What Are IDOs (Initial DEX Offering)
A project can raise money through an Initial DEX Offering (IDO), a method of fundraising that enables it to do so by issuing and selling tokens on a DEX (Decentralized exchange) rather than a centralised exchange.
It is a relatively new kind of fundraising that has grown in acceptance within the cryptocurrency market recently. The development of decentralised finance (DeFi) and the growing acceptance of decentralised exchanges are strongly related to the history of IDOs (DEXs).
IDOs were initially presented in late 2019, and since then, the crypto community has given them a lot of attention and interest. Some of the most popular IDOs launchpads are, GameFi, Seedify, TrustPad etc.
How Do IDOs Work
- Before the IDO, investors are usually required to go through a whitelisting process to ensure that they are eligible to participate in the token sale. Typically, this process entails providing personal information as well as passing a Know Your Customer (KYC) and Anti-Money Laundering (AML) check.
- On the day of the IDO, the project will typically open a smart contract on a DEX that allows investors to purchase the tokens using a cryptocurrency such as Ethereum. The smart contract will automatically execute the token sale, distributing the tokens to investors in exchange for the cryptocurrency they used to purchase them.
- The funds raised in the IDO are typically used to further develop and market the project. After the token sale, the tokens will be spread to investors’ wallets, where they can be held, traded, or used as the project intended. The funds raised in the IDO are typically used to further develop and market the project.
Advantages And Disadvantages
- Decentralized execution: IDOs are executed on decentralised exchanges (DEXs), which means they are not governed by a single entity. This can offer a level of safety and transparency that centralised exchanges do not.
- Investors have complete control over their funds and tokens, and they are not restricted by the same regulations that they would be if they were trading on a centralised exchange.
- Higher potential returns: IDOs can be highly speculative, and some projects have seen significant increases in the value of their tokens as a result of an IDO.
- IDOs are not tightly controlled and are not subject to the same securities laws as traditional fundraising methods such as IPOs. This means that investors face increased risk.
- IDOs are susceptible to scams and investors should be careful to thoroughly research a project before participating in an IDO.
- As IDOs become more popular, there is a lot of competition for investors’ attention and funds.
The cryptocurrency and blockchain industry’s token offerings face an uncertain future.
The market for token offerings has historically been highly speculative and volatile. Regulators around the world are taking notice and imposing stricter regulations on token offerings, which could lead to increased investor protection and a more stable market.
However, the market may remain highly speculative and volatile in the coming months. As the blockchain and cryptocurrency industries evolve, investors must stay informed and thoroughly research any token offering before participating.