You might have heard of an ICO, or initial coin offering. That’s where a nascent crypto project sells coins for its new blockchain or tokens to run on another one like Ethereum or BNB Chain. But those sales fell out of favor after the U.S. Securities and Exchange Commission chased after issuers for securities violations. Lots of ICOs were scams, too, with developers abandoning their projects after raising funds, never to be seen again.

See Also: ICOs Revisited

The market needed a more secure mechanism to raise funds for tokens and tokens that directly traded on exchanges. So, in the place of the ICO arose the "initial exchange offering," or IEO, and later, the initial decentralized exchange (DEX) offering, or IDO. These mechanisms are similar to an ICO – token sales of new crypto projects.

The main difference is that instead of taking place on a random website, sales of new tokens take place on a trusted site. In the case of an IEO, that’s a centralized crypto exchange, like Binance. For IDOs, that’s a decentralized exchange, such as Polkastarter.

IEOs take place on cryptocurrency exchanges. Having the initial listing on a trusted site lends a sense of validity to the new token, which may lead to people believing the exchange has vetted the project and ensured its legitimacy. But take this trust with a grain of salt. Binance Launchpad, for instance, publishes research reports on all new tokens listed for an IEO. Those reports, however, aren't critical of the projects they list; they simply explain how the projects work.

Binance, the world's largest crypto exchange by trading volume, claims that new coins on its launchpad go through “rigorous due diligence,” and CEO Changpeng Zhao said there is a “98% chance” that projects “won’t hear from us” after submitting applications. “In general, we like coins with a proven team, useful product and large user base,” he wrote in 2021.

IEOs are directly listed on the exchange, meaning that new projects have access to a large, highly liquid market. That allows the project selling the tokens to enjoy access to a rapt audience already interested in buying new tokens and enables the possibility for sales to be boosted by the marketing power of the exchange. In addition, some IEOs, like those on Binance Launchpad, let users buy new tokens with funds they already hold on the exchange, making it very easy for users to invest in new projects.

Yet IEOs aren't necessarily more secure than ICOs – at worst, they can be considered centralized gatekeepers about the types of projects that proliferate. Projects must also pay to get listed on a centralized exchange, meaning that only somewhat established projects can earn a spot. And they might have to sign exclusivity agreements that prevent them from listing tokens on rival exchanges.

The drawbacks of IEOs – gatekeeping, opaque vetting processes and listing fees – have attracted some projects to initial DEX offerings. In IDOs, projects list their tokens directly on a decentralized exchange.

The benefit of an IDO is similar to that of an IEO. The main difference is the way the tokens are approved for listing. Instead of an exchange like Binance rifling through submissions, IDOs are approved by a decentralized exchange’s community. In a truly decentralized exchange, anyone can become an approver. (It should be noted that IDOs are specifically a fundraising mechanism; most DEXes list all coins without approval.)

Another benefit is that while some countries cannot access centralized launchpads – most forbid the sale of new tokens to U.S. residents – decentralized exchanges don't necessarily have know-your-customer (KYC) restrictions.

Polkastarter, for instance, doesn't “have any direct control or mandate over a project’s KYC requirements or process.” Instead, this is at the discretion of the project, which “may choose to restrict participants from certain countries because of a region’s crypto laws or status as a region at high risk of fraud.”

Again, there are drawbacks. Decentralized exchanges tend to be a lot smaller than centralized exchanges, meaning that the traffic that a new project receives might be substantially smaller than the traffic on an IDO.

Are IEOs or IDOs safer than ICOs? Not necessarily. The platforms’ vetting procedures, at best, allow new projects that they believe are a good fit for the platform. That doesn’t mean they make for a good investment or a better one than an ICO. Before investing in a new token, you should make sure to do your own research.

See Also: 7 Key Ways to Evaluate a Cryptocurrency Before Buying It