Digital Currency/Stablecoin/Tokenization Series: A Quick Guide For Risk Mitigation in Token Sale/IEO

On the back of security tokens being the trending talk of blockchain-driven innovations to conventional financial services, a new method of fundraising or token sale to retail investors is termed as an ‘Initial Exchange Offering (IEO)’. Unlike an Initial Coin Offering (ICO) which is a peer-to-peer fundraising event typically organized on the project’s website or facilitated by a specialized token offering platform, an IEO token sale event is hosted by a third-party exchange. The Tokens that resembles the conventional financial instruments, like, shares, debentures or units in a collective investment scheme.

Of-late, the segment of tokenization lures the shrewd investors with the exponential returns. While the regulators keep raising cautionary statements that the token categories are not mutually exclusive, suppose that a token issued as the utility token, can also transform into an exchange token over the timespan. Quite a few tech-savvies perceive this property of tokenization mechanism as an apprehensive thing to consider.

In this write-up, we run you through a report released by the BNC in association with Techemy Capital that analyses for the retail investor, an IEO has several risk-mitigating advantages over ICOs: the exchange performs due diligence to ensure the quality, credibility, and potential of the project, there is an immediate secondary market upon issuance to ensure liquidity, and the exchange also has skin in the game due to reputational risk.

We have witnessed a common consensus that the glory days of ICOs during the course of 2018 bearish rout saw the most ICO projects declining by up to 97% from their all-time highs set in the froth of the 2017 bull run. 2018 saw both the highest number of ICOs, at 1,075, and the largest USD sum raised in one year, at US$21.48 billion. 

There are signs that IEOs are starting to generate similar excitement to the retail-driven ICO bubble of 2017. Whereas in 2018 the ICO model accounted for 98% of project funding, so far in 2019 ICOs account for 18% while IEOs account for 82%. 

An exchange-hosted IEO reduces several inherent risks that ICOs posed for retail investors. For one, an exchange is unlikely to risk damaging its reputation by hosting a fraudulent project, so the legitimacy of IEO applicants is thoroughly vetted. In addition, the exchanges conduct extensive due diligence to assess a project’s success potential. The exchange’s credibility is at risk if the market perceives it to be promoting ‘non-starter’ projects, choosing mature-stage projects rather than those with no product built. 

For instance, OKEx’s native token ‘OKB’ that provides a service fee discount, profit sharing, voting rights, and the ability to invest in projects incubated by the OK Blockchain Foundation. 

Where OKB varies from BNB which is an initial subscription period which is first come, first serve. OKEx announces the total supply of tokens being allocated at a date before the 10 minute subscription. The subscription window lasts for 30 minutes, or until the subscription limit is hit. 

Replicating to the Binance system, if a user succeeds in getting in on the IEO sale during the subscription round their allotment is based on the average size of their OKB holdings during a fixed snapshot window. 

Essentially OKEx will announce to users that a token snapshot for OKB holders interested in participating in an IEO is going to commence (officially this period appears to be a 30 days but this is likely changeable) and based on the average size of their OKB holdings, only during this time period, the amount of the IEO token an individual user receives is adjusted. The minimum amount of OKB required for an allotment is 500 OKB or US$1460. The snapshots occur once a day at a random time. 

Jumpstart also uses a half oversubscription model. If participation/demand in the initial allotment round is excessive then it can be extended automatically. The oversubscription is designed to widen the net of participants in IEOs. 

IEO users in OKB, there is a clear swing trade implication. Buying pressure for OKB should be triggered around the dates of these IEO snapshots, however, once the snapshot is over and allotments have been determined, there are fewer reasons to participate. A user interested in participating in multiple IEOs, for example, may adjust and time his treasury management to ensure that he maximizes allotment amounts around IEO dates. He may then sell excess amounts post snapshot if they are not interested in using OKB for other utilities like discounts on transaction fees. Courtesy: BNC