IDO (Initial Dex Offering) is a type of crypto crowdfunding that has gained a lot of traction in 2020 as interest in DeFi has increased. The operation of this paradigm and how it differs from both ICO and IEO will be discussed in this article. Let’s discuss the benefits and drawbacks of IDO and assess the potential of a new crowdsale technique.
What is Initial Dex Offering (IDO)?
IDO is a fundraising method that conducts a crowdsale using a decentralized exchange with liquidity pools. Traders may swiftly and easily buy new tokens on the DEX. The liquidity pool trades both conventional cryptocurrency pairings and stablecoins like USDT/ETH. Depending on the situation of the market, they allow traders to quickly switch between stablecoins and crypto assets. Stablecoins’ low volatility also reduces the likelihood that you may lose money on your investment due to the extreme volatility of the cryptocurrency market.
IDOs have minimum requirements for investors and developers, much like with ICOs (often, there are none at all). This has led to this way of fundraising becoming particularly well-liked among DeFi projects in 2020. IDO will likely develop into a new trend in the cryptocurrency industry if the authority does not step in once more.
From ICO to IDO
While an IPO (initial public offering) is the typical method for raising funds in the stock markets, the bitcoin market is becoming more nimble. Our industry is continually changing, switching from one (more mature) model to another: ICOs (Initial Coin Offerings) in 2017–2018, IEOs (Initial Exchange Offerings) in 2019, and IDOs (Initial Dex Offerings) in 2020. It represents the development of cryptocurrency crowdfunding.
ICO is the start. Initially, ICOs were used as a form of crowdfunding for the early fundraising of blockchain firms. Anyone could start selling their tokens to anyone under this paradigm. The tokensailer is also exempt from having to provide any personal information, show the finished product, attest to his qualifications, or otherwise demonstrate that he is a trustworthy developer and that his project will make money for investors. Just setting up a smart contract to exchange your tokens for bitcoins or ether was sufficient.
The ICO market garnered interest and capital because to the accessibility of investments. However, at the same time, a lack of regulations and controls has emerged as the primary factor in the rise in con artists. Thus, over 80% of all token sales on the ICO market in 2018 were frauds, according to a report by Satis Group LLC. Investors started to involve regulators and launch lawsuits against token dealers and even those who advertised them once they became aware of the issue.
STO stands for the entry of regulators. Because practically all tokens are digital securities, these moves led regulators to step in and demand that blockchain businesses adhere to regulations governing the issuance and distribution of securities (the SEC stood out among them) (security-tokens). This condition was accepted by numerous projects. At the same time, they started referring to their crowdfunding efforts as STOs to distance themselves from the tainted reputation of conventional ICOs (Security token offering).
STOs were a new trend for a while, but they did not last very long because it was difficult to register a project in compliance with all the regulations, and only accredited investors and/or investment funds were allowed to participate. As a result, the search for a new mechanism for early startup financing was launched.
IEO is a fresh approach. The IEO model, a type of crypto-crowdsale in which centralized cryptocurrency exchange is solely responsible for supplying the infrastructure for issuing, selling, and the majority of the marketing, is the outcome of these searches. This is quite practical; however, the business must pass the test before it can hold a token sale of this kind. Similar to listing any other coin, evaluating a new project involves the trading platform looking at the white paper, yellow paper (technical documentation), the experience of the development team, the demand for the project, and the investment appeal of the project.
In contrast to an ICO, where the project team is solely accountable for everything, an IEO places a significant amount of the burden on the exchange because it already has the launch-related infrastructure, an audience, and advertising channels. She accepts a listing fee in exchange for commissions or project currency. Additionally, the exchange frequently also gets the sole right to trade a new token.
How do Crypto IDOs Work?
Decentralized exchanges (DEXs) are used to enable the sale of tokens in initial decentralized offerings. Users deposit money using the platform; the cryptocurrency project first sends its tokens to the DEX, which then completes the final distribution and transfer. Through the use of blockchain smart contracts, these procedures are automated.
There are a few common requirements, but the IDO stages and restrictions vary on the decentralized exchange.
Here are the basic requirements:
- After completing the verification procedure, the project is granted permission to run IDO on the desired DEX. Users lock their money in exchange for a set number of tokens that are offered at a defined price. During the Token Generation Event, investors get these tokens at a later time (TGE).
- The procedure typically makes use of a whitelist of investors. You might just have to give your wallet address to get access, or you might have to do marketing duties.
- The project token is utilized to form a liquidity pool using a portion of the cash raised, with the remaining monies going to the team. After TGE, investors can exchange tokens; however, the supplied liquidity is typically locked up for a specific amount of time.
- During TGE, tokens are transferred to users, and the liquidity pool is opened for trading.
Over time, most token offerings have become more profitable and safer for investors. IDO has several clear advantages to prove it:
- You are not required to personally connect with the project or have faith in its smart contracts. There will be a number of profitable sales on a solid IDO platform. The offer is reliable if the smart contracts are the same.
- Following the sale, immediate liquidity. To ensure a liquid market following the sale, IDOs will withhold a portion of the money raised in liquidity pools. Slippage and volatility are decreased as a result.
- You don’t need to register. Only a wallet and money are needed to take part in the transaction; no personal information is needed. Although this makes the service accessible to all customers, the absence of KYC and AML can also be seen as a drawback (more on this below).
- IDOs are accessible for projects and reasonably priced. Small, obscure companies frequently find launching their tokens through a DEX more convenient and affordable than a big, centralized exchange.
- IDOs frequently take action against huge traders (whales); hence, an investor cannot purchase a significant amount of tokens with a single hand.
Some of the advantages of the initial decentralized offering are also its disadvantages: as a rule, IDO problems are associated with decentralization and anonymity.
- Lack of KYC and AML By assisting in preventing money laundering and evading economic sanctions, due diligence protects investors and projects. For instance, if the token is considered a security, some nations cannot participate in an IDO lawfully.
- Not enough verification A project with a poor reputation can distribute its token through an IDO considerably more quickly than through an IEO with a significant, regulated exchange.
How does IDO Achieve Success?
The quality of the project and marketing are the primary determinants of a token sale’s success in IDO, just as they are in ICO, STO, and IEO cases, although the likelihood of success is significantly higher under the new paradigm. Furthermore, since advertising can make all of these things appear to be true, marketing is sometimes more crucial than a startup’s prospects, preparedness, and usefulness. These, however, are exceptions. The success of your IDO depends on if your completed product (MVP, demo) actually resolves certain user issues.
What is a Launchpad in Simple Terms
These are platforms that allow users to invest in new cryptocurrency projects before their tokens become available to the general public.
To fully understand how such launch pads work, you need to imagine how startups raise money to develop their product.
Here are the main steps:
- A startup develops a project and a roadmap for its development.
- Developers create a token that is an integral part of their platform.
- To attract attention, as well as funds for the development of the idea, a certain number of coins are allocated for sale to early investors. As a rule, they include large asset holders, participants who attracted the largest number of referrals, as well as a few lucky ones on the WhiteList (the so-called lottery). At this stage, the price of the token is very low, as the project is still at an early stage of its development. Therefore, the potential return on investment is very high.
- The digital asset is then released to the public market by listing on exchanges. Often, many investors immediately sell it, as the price rises several tens of times. This is the main trophy.
You can take part in the IDO if you get on the Whitelist – the so-called “white list” of participants.
It can be accessed in two ways:
- Apply on the project website or fill out the form. Usually, such a form is published on social networks and contains several tasks that need to be completed. Then a drawing is held among all the participants, and the winners are determined.
- Buy a certain number of launchpad tokens on which IDO will be held.
The chances of getting into the Whitelist through the form are too small since there are a lot of people who want to participate in the sale.
Therefore, the launch pads provide users with another opportunity – to buy their own tokens and block in staking for several days. At the same time, the chance of getting into the Whitelist depends on the number of coins purchased: the more there are, the higher the probability of participation.
There is also a guaranteed allocation – when an investor-participant is guaranteed to be on the white list to buy a certain share of tokens. However, to do this, he needs to stake a larger amount of his assets.
Each IDO platform has its own rules:
- the minimum required amount to participate;
- asset blocking period;
- distribution schedule;
Launchpads are platforms for launching new projects, tokens, and also a source of liquidity. They offer investors early investment opportunities. Previously, only venture investors and large investors had these opportunities.
If you are interested in launching your own IDO Launchpad, Exio.Tech is here for you. Contact our experts, learn details and bring your ideas to life.