Irrespective of whether you are just a startup or a big business, you will still need more capital and financial leverage to grow your business. Finding investors and getting the funding for a new venture is no easy task.
In the cryptocurrency world, initial coin offerings (ICOs) became quite the trend by 2017. New crypto token developers were raising funds by selling a portion of their total token supply to the general public. Many of these tokens created phenomenal profits for their investors, once they listed and opened for trading on an exchange.
Did you know that Ethereum was launched using an ICO, way back in 2014? With 50 million tokens sold at 0.311 dollars per token, the ICO raised 15.5 million dollars. Ethereum reached as high as $4,362.35 per ETH token by May 2021.
But there are plenty of tragic stories as well. ICOs face a lot of challenges ranging from hackers, and whales to human error. Third parties were sometimes able to manipulate them. There were plenty of scams and rug pulls. All this led to the rise of other fundraising models such as security token offerings (STO) and initial exchange offerings (IEO).
But as of now, Initial DEX offerings (IDOs) have emerged as the best crowdfunding model. Let’s check what IDOs are, as well as, the pros and cons of IDO.
What is IDO?
Initial DEX offering (IDO) is a method of raising funds for cryptocurrency projects. It is a permissionless, crowdfunding platform for launching new crypto tokens in the DeFi space.
This can be compared to an IPO (Initial Public Offering) in share markets. You must be familiar with the traditional way of trading shares of various companies on stock exchanges. In such equity markets, IPOs are used for raising funds. The investors get company shares in return. In an IDO, instead of the company shares, you get their crypto tokens.
In an IDO, new crypto coins or tokens are launched using a decentralized liquidity exchange.
Now let me explain a bit more about that mechanism.
IDO and Liquidity Exchanges
Unlike liquidity exchanges, regular decentralized exchanges rely on order books to execute trades. They tend to have high slippage due to their lack of liquidity.
On the other hand, a liquidity exchange relies on liquidity pools for executing trades. Liquidity pools contain tokens locked in smart contracts. Traders swap crypto tokens in these liquidity pools.
Liquidity Pools work by creating a market for a specific pair of crypto tokens on a decentralized exchange. Examples: ETH and USDT, BNB and BANANA. Investors add liquidity to each pool by depositing both types of coins (in equal values).
Read more: Liquidity pools and liquidity providers
Evidently, there were smart people who quickly caught on to this property of liquidity pairs as a great way to launch new crypto tokens. Projects launching new tokens are looking for ways to create maximum liquidity as quickly as possible since this is a key factor in the token’s survival chances.
Liquidity exchanges offer immediate liquidity at every price level with minimum slippage. And that’s exactly why new crypto tokens are launched via IDO on liquidity exchanges.
Binance DEX, Polkastarter, and Uniswap are some of the DEXs offering IDO services.
Advantages of Initial DEX Offerings (IDOs)
Initial DEX offerings have many advantages over the other models of fund-raising.
1. No Pre-Mining
In ICOs, pre-mining was a method to reward the project’s founders, its developers, and its early investors. They were allowed to mine or take their share of the blockchain-based tokens before the ICO was launched to the public. IDOs do not allow pre-mining, thus even the project founders do not gain an advantage over the public investors.
2. Open and Transparent
In an IDO, the fundraising procedure is completely fair and transparent. For IDO, anyone can check and verify the token contracts. Since every action takes place on-chain, they can be traced.
3. Easy Access to Crowd-Sourced Funds
Whether it’s a small project or a massive collaboration, anybody can organize an IDO. You do not have to wait for any exchange to approve the project nor do you need any kind of authorization to launch a fundraising event.
4. Enhanced Liquidity
After receiving the crowd-sourced funds from the IDO, many projects lock in a substantial portion of it as liquidity on the DEX platform where their tokens are traded. To incentivize holding, staking programs are also offered almost immediately by many of these projects.
5. Instant Trading and Quick Profits
Both ICOs and IEOs have an initial waiting period before they get listed for trading. On the other hand, with IDO, you do not have to wait so long to cash in on your investment.
These tokens get listed on the decentralized exchange immediately after the IDO gets completed. There is instant access to liquidity and trading. You can reap your profits during the token listing by selling them at a higher price. It’s all a game of chance. Some tokens jump 500 to 700% during the listing.
6. Multi-Wallet Support
IDOs offer the convenience of a secure wallet and trading platform support, all built into one interface. IDO also improves the user experience with its ability to support several types of wallets.
7. Secure Transactions
IDO is executed via smart contracts and all the transactions are recorded on the blockchain. Considering that the DEX is not actually holding any of your funds, you don’t have to worry about hackers taking off with your investment.
8. No Commission, Low Fees
In an ICO or IEO, the exchanges charge a commission for launching and trading the new token. You have to pay the exchange fees first and then wait for the exchange to approve your project before it can be listed.
With IDO, there is no exchange fee as it is a decentralized offering. Your only cost is the gas fees for smart contracts deployed by the DEX, for controlling the project’s token and its liquidity pool. DEX exchanges such as UniSwap charge just 0.3% gas fees.
Disadvantages of IDOs
Although IDOs have all these advantages over ICOs and IEOs, they still have some disadvantages as well.
1. Breeding Ground for Scams
IEOs may have had many drawbacks, but they did have rigorous vetting procedures. IDOs, as mentioned earlier, can be kickstarted by anyone. While this can be viewed as an advantage of IDO, it also creates a favorable breeding ground for scams.
2. Costly to Participate
While it’s true that anyone can participate in an IDO, your chances of winning an allocation are pretty slim. The competition is really stiff. You need to have a large number of launchpad tokens to make a reasonable investment and this can get quite expensive.
3. Anonymity and Lack of KYC
While the anonymity provided by blockchain technology is a great thing, it brings with it so many disadvantages. Being decentralized, IDO also does not require any KYC/AML integration from its investors. This means we have no way of knowing their identity, authenticity, or credibility.
4. No Buying Limits
An IDO does not have any buying limits. Only a relatively small number of investors may have been able to get the token at its initial listing price. Some investors (known as whales) get hold of large amounts of tokens. This enables them to manipulate the token price. Rug pulls can occur where your entire investments can go down the drain.
Closing Thoughts
IDO is more like a combination of ICO and IEO. The major difference is the usage of decentralized exchange (DEX) instead of a centralized exchange (CEX)
Although any project within the crypto world can utilize IDOs, only DeFi projects have actually raised money through this decentralized crowdfunding platform. For a project to be successful on this platform, it requires you to generate enough excitement among DeFi users.
The crypto market is becoming more and more decentralized each day. But DeFi still remains a relatively new niche. DeFi users form only a fraction of the market. Centralized exchanges such as Coinbase and Binance still hold a monopoly over the market. Rather than the next upcoming IDO, the average crypto trader is still more interested in when these exchanges will list a specific token.
IDOs are not without drawbacks, but we can expect improvements to the existing model. Some control mechanism needs to be in place to reduce toke price variations until the fundraising is completed.
The future of IDO is indeed bright. As more awareness builds around decentralized exchanges, we will see more and better versions of IDOs being launched.