What Is an IDO?
An Initial DEX Offering (IDO) is a modern crowdfunding approach that enables a promising cryptocurrency project to launch its native tokens or coins through decentralized exchanges (DEXs).
Unlike an Initial Coin Offering (ICO), where tokens are sold before they are listed on exchanges, IDOs involve tokens being listed on the DEX immediately upon launch. This model allows crypto projects to bypass the need to accumulate assets for liquidity pools themselves, as these pools are established on the DEX or through a third-party launchpad platform after the IDO.
IDOs have gained popularity due to their efficiency and transparency. They allow crypto projects to raise funding through liquidity pools without intermediaries and enable investors to trade tokens instantly, creating a mutually beneficial scenario.
About an ICO
What Happens to the Funds?
If the money raised in an ICO falls short of the minimum required by the project’s criteria, the investment may be returned to the investors, and the ICO would be considered unsuccessful. However, if the funding goals are met within the specified timeframe, the raised funds are then used to advance the project’s objectives.
Who Can Launch an ICO?
In theory, anyone can launch an ICO. However, regulators in the U.S. and other developed nations and governments closely monitor ICOs to ensure that the companies and projects comply with necessary regulation requirements. This means that while launching an ICO is relatively accessible, it also opens the door to potential scams. Fraudsters may go to great lengths to appear legitimate, including faking registration documents and approval letters.
Just because anyone can launch an ICO doesn’t mean everyone should. If you're considering starting one, it's crucial to assess whether your business genuinely benefits from it. Additionally, you may need to register your offering as securities with the SEC to comply with the valid regulation.
Buying Into an ICO
If you're interested in investing in a new ICO, thorough research is essential. Start by verifying that the individuals behind the ICO are real and accountable. Check the project leaders' backgrounds in crypto and blockchain. If the team lacks verifiable experience, consider it a red flag.
Identifying ICOs and Avoiding Scams
ICO activity significantly declined in 2019, partly due to the legal uncertainties surrounding them. While it's possible to find ICOs to invest in, staying updated on all the latest offerings is challenging.
Checking registered cryptocurrency exchanges for new coin listings can provide some safety, as these exchanges usually vet the coins before listing them.
Cryptocurrency aggregators can also be helpful in identifying potential scams or genuine opportunities. These platforms provide links to project GitHub pages, websites, and social media, and discuss the issues the projects aim to solve. However, if a project lacks clear descriptions and is filled with nonsensical phrases, it's a good idea to steer clear.
A Brief History of IDOs
Source: Freepik
IDOs evolved from earlier fundraising models.
Initial Public Offerings (IPOs): Historically, businesses raised capital through IPOs by selling a portion of their shares to the public. This traditional method paved the way for modern fundraising techniques.
Initial Coin Offerings (ICOs): Around 2017, ICOs became popular in the crypto space as crypto projects sold part of their token supply directly to the public. ICOs were highly successful but faced issues with ICO scams and fraudulent schemes, leading to a decline in their popularity. This also attracted the attention of the Securities and Exchange Commission, raised questions about compliance with the securities regulation, and led to a decline of ICOs' popularity.
Initial Exchange Offerings (IEOs): In response to ICO problems, IEOs emerged in 2018. IEOs are similar to ICOs but occur on centralized exchanges, which promise a higher level of scrutiny and listing assurance. This method fostered greater trust and led to the rise of well-known projects like Polygon and Elrond.
Initial DEX Offerings (IDOs): With the rise of DEXs in 2019, IDOs became an attractive option for projects seeking to leverage decentralized platforms for funding their development. The Raven protocol was the first project to conduct an IDO, and subsequent launchpads specializing in IDOs further boosted their popularity.
How Does an IDO Work?
Understanding the concept of an IDO (Initial Decentralized Offering) sheds light on a modern approach to crypto crowdfunding, similar to how the rise of Ethereum highlighted the potential of decentralized finance (DeFi).
An IDO is a contemporary method in the cryptocurrency world that allows projects to launch their native tokens or coins via a decentralized exchange (DEX). This approach is decentralized, transparent, and automates the token sale process, eliminating the need for intermediaries.
How It Works
Project Vetting
The decentralized exchange carefully evaluates and selects projects to ensure they are legitimate and align with the DEX's goals.
Token Sale
Tokens are offered at a fixed price, consistent with the current market value, to maintain fairness. The entire sale process is automated on the blockchain, ensuring transparency and efficiency.
Investor Whitelist
Investors might need to complete certain tasks, such as marketing activities or providing a wallet address, to be added to a whitelist, granting them priority access to purchase the tokens.
Liquidity Pool Creation
A portion of the funds raised during the IDO is used to create a liquidity stake pool with the project's token. This pool helps ensure the token's stability and availability for trading.
Token Generation Event (TGE)
During the TGE, tokens are distributed to users, and the liquidity pool is made available for trading. In some cases, the provided liquidity may be locked for a predetermined period to support the token's price stability.
Comparing Initial Coin Offerings and Initial DEX Offerings
Source: Freepik
Here's a breakdown of how Initial Coin Offerings (ICOs) and Initial DEX Offerings (IDOs) differ.
Definition
ICO (Initial Coin Offering): In an ICO, a portion of a crypto project's total token supply is sold directly to the public without any intermediary. This method allows the project developers to raise funds independently.
IDO (Initial DEX Offering): With an IDO, tokens are sold through a decentralized exchange (DEX) launchpad. This model benefits from the decentralized nature of DEXs for fundraising.
By Whom Fundraising Is Conducted
ICO: The project creator and development team (token issuers) themselves conduct the fundraising, managing the token sale and distribution of tokens independently on any jurisdictions.
IDO: The fundraising process is managed by either the decentralized exchange or an IDO launchpad platform, ensuring decentralized management of the native project's coin sale.
Token Listing After Crowd Sale
ICO: After the ICO, the project developers must reach out to various exchanges to list its tokens or coins. This process can be time-consuming and uncertain.
IDO: Tokens are immediately listed on the DEX through which the IDO was conducted, or on a supported launchpad, allowing for instant trading.
Vetting Process
ICO: There was no vetting process for ICOs and no legal procedures for identifying ICOs as legal or illegal; anyone could issue an ICO, which led to increased risk and potential scams. Now though, each new ICO has to be conducted according to requirements set by the Securities and Exchange Commission which has impacted the ICO situation.
IDO: Projects are vetted by the DEX or IDO launchpad according to their standards, ensuring a level of due diligence and compliance with the internal platform requirements.
Token Availability
ICO: Tokens are generally not available immediately and may require investors to wait until the token is listed on exchanges.
IDO: Tokens are either made available immediately for trading to earn money or come with a vesting period, depending on the launchpad's and investment policies.
Smart Contract Management
ICO: The smart contracts for ICOs are managed solely by the project, which can affect the security and management of the sale.
IDO: Smart contracts are managed collectively by the launchpad and the project, facilitating a more collaborative approach.
Marketing
ICO: The project must handle and fund its own marketing efforts before, during, and after an ICO, which can require significant resources.
IDO: Both the launchpad and the project share marketing responsibilities, benefiting from the combined efforts of both parties.
In summary, while ICO and IDO each provide unique advantages and challenges, the choice of fundraising method can significantly impact the project's success and investor experience.
Advantages of IDOs
Source: Freepik
One major advantage of IDOs is the absence of a premine. This absence significantly enhances investor confidence, particularly for those who use analytics to evaluate projects. Premine allocations, especially when reserved for a select few, often raise red flags for investors.
IDOs also offer superior token access. Unlike ICOs, where investors may face lockup periods before they can trade their coins, IDO crypto currencies are almost immediately available for trading. This instant liquidity eliminates the waiting period associated with many ICOs.
Additionally, IDOs prevent early investors from gaining an undue advantage. ICOs can sometimes favor early participants, creating imbalances within the project in the future. With IDOs, well-designed smart contracts prevent this issue, ensuring fairness for all participants.
Drawbacks of an IDO
Despite their advantages, IDOs have their own set of challenges. One significant issue is the potential for price manipulation by bots. Some users exploit this by manipulating token prices during the launch, which can result in significant gains for a few at the expense of other investors.
Moreover, security vulnerabilities in smart contracts can pose risks. Hackers may exploit these vulnerabilities to steal investor tokens and disappear before the issue is detected.
Finally, IDOs generally raise less funding compared to ICOs. While IDOs provide substantial benefits, if raising large sums is the primary goal, other methods such as ICOs might be more suitable.
Advantages of an Initial Coin Offering
Source: Freepik
ICOs offer several notable advantages for raising funds:
Accessibility
ICOs have fewer barriers to entry compared to IPOs (Initial Public Offerings). Anyone from around the world can participate in an ICO, whereas IPOs often require connections or financial status to participate, typically limiting access to institutional investors or high-net-worth individuals.
Inclusive Participation
Unlike IPOs, which often require investors to have significant wealth and a substantial income history, ICOs allow participation from individuals regardless of their financial status. This inclusivity opens up investment opportunities to a broader audience.
Immediate Liquidity
All ICO participants usually experience liquidity almost immediately. Once you acquire your tokens, you can sell them on the market, provided there is a buyer. In contrast, investments in public offerings or private companies often involve long holding periods before options can be sold.
Drawbacks of ICOs
Source: Freepik
Despite their advantages, ICOs come with several challenges:
Centralization Risks: ICOs are often centralized, making them susceptible to "rug-pulls," where the project team may abscond with the funds raised. This lack of protection can pose significant risks for investors.
Minting Costs: Tokens in an initial coin offering are typically minted after the sale concludes, which involves additional costs. These costs include fees associated with listing on exchanges and distributing tokens, potentially increasing the financial burden on the issuer.
Conclusion
While IDOs come with their own set of challenges, their benefits and the growth of DeFi and DEXs suggest a promising future. IDOs offer a more decentralized, transparent, and immediate alternative to traditional fundraising methods like ICOs and IEOs, positioning them as a strong choice for crypto projects looking to enter the market.
