Crypto has evolved a lot over the years, and with that, there has been innovation in ways of raising funds for crypto projects. What began with Initial Coin Offerings (ICO) has now transformed into Initial DEX Offerings (IDO).
Started in 2019, IDO is a reformed version of ICOs. It is a way to raise funds for crypto projects through decentralized crypto exchanges.
What Is an IDO (Initial DEX Offering)?
Initial DEX Offering, the distant cousin of ICO, is a method of raising funds for a crypto project via a decentralized exchange. It is faster and inexpensive to use a decentralized platform for issuing and distributing tokens because of its lower compliance requirement.
In an IDO, tokens are first listed on the platform and then made available for sale. Whereas in ICOs, the listing is done after selling the tokens. Hence, IDOs serve investors and crypto projects with immediate liquidity. Investors can sell their tokens as soon as they get possession of them. The crypto project can use the funds from the sale of the tokens to improve the project.
IDOs benefit issuing companies and investors with a transparent fundraising process, higher liquidity, and a faster turnaround.
P.S.: Raven Protocol was the first ever crypto project to do an IDO. It was launched on the Binance DEX in June 2019.
How Does an IDO Function?
An IDO utilizes a decentralized exchange, as it says in the name. It helps companies raise funds for their crypto projects by selling their tokens. IDO makes the process of crowd fundraising quicker and smoother. Here is how IDOs work exactly:
- A team/person comes up with a crypto project idea, and they create a whitepaper detailing its working. The whitepaper is then submitted to the DEX to assess compliance and scope.
- Once accepted, the project offers a fixed number of tokens for a price, and the investors commit their funds to buy those tokens. During the Token Generation Event (TGE), the investors receive their tokens.
- Usually, investors have to be a part of the investor waitlist, for which they have to undertake marketing activities. They also need to provide their wallet address (Public address, not private address).
- A part of the funds from IDO is used to create a liquidity pool, and the remaining funds are distributed to the project team.
- Investors can trade the token after the TGE. Usually, this liquidity is locked for a fixed period.
Advantages and Disadvantages of IDO
IDOs have both benefits and downsides, just like any other crypto concept. Let’s find out what they are.
Advantages of IDO
1. Transparency in raising funds
With IDO, crypto projects are free from the obligation to acquire any permission to start their project. Project owners have the liberty to create projects and have direct control over the same. IDOs are less expensive and work well even for small and lesser-known companies.
2. Ease of investment
IDO removes the need for centralized exchanges and permission to launch any fundraising event. This allows the investors to buy tokens immediately when they go for sale. Also, IDOs have measures to prevent crypto whales (large investors) from eating major of the tokens. So, retail investors can participate with ease. Once the tokens are allotted and the liquidity pool opens, investors can trade the tokens bought.
3. Higher liquidity
Liquidity refers to the ease with which cryptocurrencies can be bought and sold. IDO projects typically lock a part of the funds raised to form a liquidity pool, which later provides investors with instant liquidity if they decide to sell the tokens. The lock-in also ensures reduced volatility and lesser chances of slippage.
Disadvantages of IDO
1. There is no KYC requirement
Since IDOs happen on a decentralized platform, there is no sign-up required. Investing in IDOs can be risky for investors if not researched well. Anyone can start a project or become a member without their identity being revealed.
2. IDO credentials can be fake
An IDO is very easy to launch. Anyone with basic technical skills can create a token and launch their IDO. Hence, it’s challenging to understand the legitimacy of a project. A good telltale sign is a project that looks too good to be true. If that is the case, you might want to steer clear. Always conduct your research before making your investment decisions.
3. Prone to fraudulent activities
IDO makes it easy for people to sell their tokens and create projects. Since there is a low obligation to start an IDO, it attracts scammers. They can create crypto products to solicit funds from people, and the product can turn out to be a fluke. Caution is needed whenever you invest in an IDO.
Where Will IDOs Go in the Long Run?
The crypto space is dynamic. New changes are constantly coming in and transforming the outlook of the whole market. With the onset of the new digital shift, we can see IDOs become a popular crowdfunding method in the market.
IDOs are still new and need improvements. While IDOs resolve the drawback of ICOs in terms of liquidity and access to tokens for small investors, there’s a lack of control over the process that needs to be solved for. In the case of fundraising, there need to be KYC policies.
Moreover, IDOs need to focus on adoption. Most DeFi projects have taken the IDO route, and there is scope for other projects to opt for IDO too. Also, because IDOs are still a new concept, many investors find it difficult to trust the process. Thus, education about IDOs is imperative.
IDOs provide accessibility and more opportunities for crypto projects to cater to their need for funds. However, to make IDOs more robust and effective, crypto projects can integrate control mechanisms that filter fraudsters and enable legit investors to buy tokens. If you are new to this space, it is advisable for you to learn more about how IDOs work and do your research before investing in them.
1. Is IDO better than ICO?
IDOs are an evolved version of ICOs. They offer immediate liquidity, a faster turnaround time to investors, and transparency to crypto project owners. IDO has overcome some of the drawbacks of ICOs, making it a better choice.
2. How is IDO different from IEO?
The main difference is that IDOs are conducted on a decentralized crypto exchange. In the case of IEO, which is known as the Initial Exchange Offering, there’s a centralized crypto exchange. While IEOs are more on the restrictive side, IDOs are comparatively lenient.
3. What happens after an IDO?
IDO is a crowdfunding method to raise funds for crypto projects via a decentralized exchange. Once an IDO starts, funds are pulled in to create a liquidity pool, and tokens are allocated to investors. The team of crypto projects gets a part of the liquidity pool, and the remaining funds are used to offer liquidity to investors to trade.