In the first quarter of 2019, there were 20 Initial Exchange Offerings (IEOs) which raised over US$1.17 billion combined. By comparison, there were 76 Initial Coin Offerings (ICOs) which raised a total of US$748.9 million. Given the increasing use of IEOs, coupled with the simultaneous fall in ICOs, it may appear that ICOs will eventually be replaced by IEOs.

Back in July 2013, the launch of MasterCoin as the world’s first ICO epitomized the free market theory in the fundraising domain, as the decentralized nature of blockchain renders it difficult, if not impossible, for regulators to intervene. Although the fanfare surrounding ICOs eventually turned to scorn due to frauds and scams riddling the market, this in no way detracts from the core tenet of ICO as a democratizing fundraising tool.

In contrast, IEOs, with its need for an intermediary in the form of exchanges, opens the door for regulatory intervention and therefore represents a divergence from the decentralized nature of blockchain. That, in turn, creates a disconnect between IEOs and the ideological connotations of ICOs.

From a commercial perspective, the listing fees of an IEO may be a hindrance as a mode of offering by token issuers, particularly when listing fees are disproportionately high compared to the financial value of the underlying project. Although token issuers have the option of engaging lesser known exchanges whose listing fees may be more affordable, this cost-saving recourse would dilute the benefits of using an IEO, as potential investors may doubt the screening process of such exchanges.

In short, token issuers have to choose between incurring listing fees which may be prohibitively high for the financial value of their projects or resort to engaging lesser known exchanges, with a screening process less trusted by investors. In contrast, the use of ICOs give token issuers the autonomy to adjust the expenditure allocations based on the value of the underlying project.

Additionally, the fact that IEOs are only open to users of the host exchange have a limiting effect on the distribution pattern of the tokens. In the case of utility tokens, the limited distribution outreach under an IEO issuance framework may weaken the network effect of such tokens, as the trading price of utility tokens are highly dependent on the user experience of its holders.

In other words, the limited distribution outreach under an IEO issuance framework may result in the price fluctuations of utility tokens failing to properly accommodate the network effects arising from the user experience of the holders of such tokens. In contrast, the global scale of the ICO issuance framework would properly accommodate the network effects of utility tokens, thereby ensuring that they are traded at a price which represents their fair market value.

The advent of IEOs was primarily rooted in the need for an alternative crypto fundraising method to ICOs, which was increasingly being abused by fraudsters and scammers resulting in a highly volatile ICO market. Regardless of the current use trends, as the crypto market grows in maturity moving forward and the ICO market regains its stability, the pendulum is likely to swing in the reverse direction in favor of ICOs. In any event, IEOs can never and will never truly replace ICOs, given the ideological as well as practical differences between them.

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