IDK ABOUT IDO – BUT NOW YOU DO
Hold up! We have a new acronym in crypto that we need to learn? I just understood ICO, DAO, NFT and P2P. Well, it’s safe to say the crypto space is booming with new concepts and this time it is a new means of fundraising. An initial DEX offering or an IDO, acts as a decentralized crowdfunding. It enables startups to raise funding for their native tokens in a much more transparent, secure and efficient manner. This may sound somewhat similar and it actually is. An IDO is a fundraising successor of ICO and IEO, initial coin offering and initial exchange offering respectively.
When we already had these two methods of fundraising, why is there a new one now? Well, both of the previous means of fundraising actually served their purpose really well, but they each had their drawbacks. ICOs had gained a lot of momentum and attracted many investors in 2017. This was an efficient way for developers to raise funding since they could remain anonymous and not provide any sort of validation. Thus in 2018, most of the ICOs turned out to be scams and the crypto community generated a new method, the IEO. This new means provided the security investors needed from an ICO by involving a middleman: a centralized exchange. These centralized exchanges acted like an underwriter in an IPO process, vetting the issuers and providing them services like KYC, anti-money-laundering and marketing the sales. But this would usually result in costing a lot of money to be paid to these exchanges, hence the community shifted to an IDO in 2019.
The IDO method removed the centralized exchange and replaced them with a decentralized exchange and gave access to immediate liquidity to its issuers. They would now have full control over their fundraising and be responsible for their own marketing and creation of smart contracts to sell the tokens. Additionally, due to constraints like restriction on trading on other exchanges, the community felt the need to shift to a decentralized exchange and be true to the origin of cryptocurrency.
Let us take a deeper look at how this works: The decentralized exchange uses liquidity pools to allow traders to trade tokens. For example, USDT/ETH is a liquidity pair and the liquidity pool is such pairs of common cryptocurrencies and stable coins. This allows traders to quickly trade between them based on market conditions. Now from the issuer’s side, the process is fairly simple as well: Once the issuers have chosen a particular exchange for listing, they will send their project to the launch platform for approval. This is done on most platforms, where external auditors or the exchange users vet the project. After the token is approved it goes to launchpad for sale to retail investors and other early-stage sponsors. This sale can either be done in different price batches or at fixed prices mimicking an auction. This leads to getting the token listed for trading on the exchange and the issuer creates a pool of liquidity using the funds and tokens from the IDO. Since the issuers have complete autonomy over their fundraising, they would need to create a website and/or publish a whitepaper and MVP in order to validate their project and attract their early adopters that will mark the beginning of their community.
So, if you are a developer or an investor who is still confused about an IDO, we have made a pros and cons list for you:
- Issuers aren’t required to pay high fees in order to get their token listed
- In the case of exchange users vetting the project, it is led by community members that are more likely to give a chance to small scale projects and it also reduces the wait time for issuers allowing them to list their tokens quickly
- An issuer is not restricted to one exchange like in an IEO, they can sell their tokens on multiple exchanges
- IDOs are a better alternative to get immediate access to liquidity and trading
- These are ideal for smaller companies as it is a cost effective and time saving method of raising funds
- Retail investors that may not be accredited investors can take advantage of such opportunities since there is almost no regulation
- There is always the possibility that the project is a scam
- Investors may feel cheated when they are unable to buy the tokens at the start of the IDO and end up acquiring them at higher prices
- Since the exchange does not provide a KYC service, one cannot validate investor information
- They can be victims to a pump and dump, where investors buy large sums of the token and dump them when the prices have risen high enough. It should be noted that this is not particular to an IDO, but happens even in the stock market, but since this space is not regulated, there are no repercussions.
Since this concept is relatively new, it has its kinks that need to be sorted out. For example, it is imperative to have KYC integration in order to validate information about investors. Another mechanism that could be included is to remove price variation until the fundraising has completed. Most of the projects being listed as well are Decentralized Finance (DEFi) projects which require a crypto savvy user base. Thus, there needs to be an increase in the investments related to education and awareness of the general public and their knowledge of crypto.
- The Raven Protocol: https://www.ravenprotocol.com/
- The Universal Market Access Protocol: https://umaproject.org/