A Complete Guide to Initial Dex Offerings (IDOs)
From about a billion dollars in the first half of 2020 to over a whopping 50 billion dollars by mid-2021, the TVL (Total value Locked) in the DeFi markets is definitely heading for the moon.
As more and more projects are being launched into this space, businesses are on the lookout for funds and investors are clamoring for a piece of the action.
From ICOs, STOs and IEOs, there have been various fund-raising models in the cryptocurrency niche. But each of these has its own drawbacks. There is an evident need for a safe, transparent, and fair system for raising funds in this novel financial ecosystem.
The cryptocurrency community is well known for its divergent thinking. Here, we’ll discuss an innovative way to raise funds in the DeFi world - the IDO.
Initial DEX Offering (IDO) is a unique fundraising method in which issuance of the IDO coin is done via decentralized liquidity exchange.
Initial DEX Offering is still in a budding stage. But it is still the most favored way in DeFi for raising capital.
What is IDO?
Initial Dex Offering or IDO is the present-day and novel fundraising model that offers better liquidity of crypto assets. It ensures rapid, swift, open, and fair trading.
You might already be familiar with IPOs. Initial Public Offerings or IPOs are the standard procedure for raising funds in the equity market. This is the traditional way of trading shares of companies (Tesla, Apple, etc) on stock exchanges such as NYSE and Nasdaq. But the entire procedure of raising capital in the crypto market is very divergent and fluid.
Before explaining in detail what exactly is an IDO, you need to understand what were the drawbacks of the previous fundraising models - ICO (Initial Coin Offering), STO (Security Token Offering), and IEO (Initial Exchange Offering) and why IDO has become the talk of the town.
What is ICO?
ICO stands for ‘initial coin offering’ or ‘initial currency offering’. Startups, in the cryptocurrency and blockchain space, used an ICO to raise capital.
It helps raise funds to finance blockchain-based projects in their initial phase. This means - you have an idea, you raise the capital for the same, but the project or product is developed later in the future.
Futuristic projects always have a certain sense of ambiguity and uncertainty. Some projects don’t work out despite the funds. Some projects are just fraudulent and the funds invested vanish.
Public ICOs are a form of crowdfunding in which anyone can become an investor. In private ICOs, the company may set a minimum investment amount and allows only selected investors (high net-worth individuals and financial institutions) to participate in the process.
NEO and Ethereum: An ICO Success Story
The second most successful ICO in history is the renowned Ethereum platform. So who’s the first?
You may have heard in crypto lingo, the term China’s Ethereum. Yes, you heard it right! I am talking about the NEO platform, a first smart class contract platform that supports its own cryptocurrency. It is very similar to Ethereum. NEO was earlier known as AntShares. The NEO platform is considered the most successful ICO.
The Ethereum ICO was launched in 2014. At just 0.311 dollars per token, 50 million tokens were to raise 15.5 million dollars. The Ethereum token, ETH, hit a high of $4,362.35 in May 2021. A public platform with an open-source distributed ledger platform Ethereum enables its users to run decentralized applications, whilst implementing and using smart contracts.
No model or project can be perfect, the next example is a textbook scam and one of the worst ICOs. In the year 2017, OneCoin ICO was launched. No one ever knew how the token was ever created, a Ponzi scheme having no prototype.
Many other scandals like ENIGMA, DROPLEX, COINDASH followed. Some were just scams, some failed despite the best intentions, while others fell prey to hackers.
As per Ernst and Young’s report, the SEC (the U.S. Securities and Exchange Commission) had also launched a Cyber Unit for investigating digital financial frauds with regards to ICO, since 10 percent of the initial proceeds of ICO were stolen by hackers, amounting to almost 1.5 million dollars every month.
What is IEO?
Initial Exchange Offering (IEO) was launched to overcome the drawbacks of ICO. It provided an exchange platform, with more security, bringing in more trust to crowd-funding.
The IEO sphere is the intermediary between the borrowers (start-ups seeking crowd-funding) and the lenders in the crypto universe. It is basically the medium for crypto-token sales. It helps startups that are promising to gather funds to establish themselves in this highly competitive market.
What is STO?
Evolutions are happening at a very rapid pace in the crypto universe. STO (Security Token Offering) was created by combining ICO with legal obligations. All transactions on STO are compliant with securities legislation.
IDO and Decentralized Liquidity Exchanges
The descendant of all the above-discussed cryptocurrency fundraising models from ICO, IEO, and STO - is the IDO ( Initial DEX Offering). It is the latest fundraising model providing open and fair trading coupled with greater liquidity of the crypto assets traded.
An IDO is a very unique fundraising method in which issuance of the IDO coin is done via decentralized liquidity exchange.
The entire process depends on a process called swapping, swapping between tokens. These tokens are swapped by traders and investors in a liquidity pool. You need to strike the correct balance, which is achieved via the liquidity pool - since it’s a pair of stable coins and crypto-assets. For example something like DAI/ETH or USD/ETH
Depending on the market conditions, the traders can swap among the stable coins and crypto-assets. It is very similar to how we handle our assets. While we place some amount in liquid funds as safekeeping, with limited returns, we invest the rest in stock markets that are volatile trying to maintain a balance.
Similarly, the volatility is negligible for stable coins and it thus offers a relatively safe option for traders. The traders also manage other high volatile crypto tokens and assets by sequentially swapping them with each other. This results in companies launching a token and having access to immediate liquidity via these decentralized liquidity exchanges.
IDOs can be designed for almost anything - from cryptocurrencies to gaming apps, to a music album, to a battleship powered by aether. The moment any business has the capital, they definitely invest in developing, enhancing, and building contributing to their growth by making smart choices.
The first IDO was the Raven Protocol which was launched via the IDO just two years back, in 2019, and many others followed like Compound, Curve, UMA and the list is endless.
The Need for IDOs
Numerous Projects were gambling out in an endeavor to resolve their problems via the use of blockchain since ICOs became the new lease of life in 2017. An approximate value of 4.9 billion dollars was raised by the year-end. Plenty of projects did succeed, but many of them failed, due to the vulnerability of the ICO’s being centralized, discrimination by third- parties, and lack of privacy.
On the other hand, IDOs are decentralized in nature, the new ICO as we could term it. It was gutsy to try and solve the underlying issues of ICOs while also trying to reckon possibilities to the crypto market.
By using the concept of crowdfunding with IDOs, businesses can now deliver a blockchain product, which is past malicious influencers, eliminates human errors and issues related to hackers. And the best part, the coins of the token buyers and holders are immediately secured and transferred on their digital wallets. What more could you ask for?
Will IDO replace ICO & IEO?
With an IDO, we are just at the introduction stage, gradually moving to the growth stage. So it is a long way ahead before we know how good or bad IDO is.
But at present, it definitely seems to be the best way to go. This concept will eventually replace IEO and ICO in the coming few years or should we say months depending on its growth rate and acceptance.
If you take the story of Uniswap, the moment the BZRX tokens were listed, they rose to 1000 times within minutes. It clearly indicates that a certain equilibrium between fairness and maximizing capital is far from existence.
Popular IDO Platforms
Many new platforms have come up in recent times, where most of the IDO’s are being launched. We have listed a couple of the launchpads for you to know where should you all track for the new IDO’s coming up
If you need prompt access to the DeFi token, TrustSwap is the launchpad you should be using. It is a multi-feature and smart cross-chain platform. Glitch Finance with a return on investment above 200 percent was launched on TrustSwap
2. Paid Network
The smart agreement platform using the paid Net is what businesses and companies are wanting to swear by. The most popular IDO launched via the Paid Network were ShawDows Network, Blindboxes, Aioz, and many more giving investors a spectacular return
3. DAO Maker
This launchpad goes by its reputation for creating growth technologies. The project was launched last year in 2020 and has more than 300k retail users who were already inclined towards the crypto projects. Many popular projects like Elrond Network, Orion Protocol, and Ecomi have been hosted on DAO.
Distinct Features of an IDO
Let us look at some very distinctive features of an IDO
1. Multichain IDO - The New Approach
Earlier, when an IDO was introduced, it was only launched on a particular platform using only one type of token. But the current trend is of launching the IDO on multiple platforms.
It’s similar to online shopping. When you launch a new product, you can list it on Amazon, eBay, and any other online shopping portal of your choice. These work as multiple launchpads for your product. The buyer (in our case an investor) can pick and choose from where he wants to buy the product. Similarly, an IDO can be launched on many launchpads.
Let’s deep dive into some elements of multichain.
The key elements are Interoperability. Any business launches an IDO over multiple launchpads. This of course works in the best interests of both the business community and the investor. As an investor, we get the option to choose the platform we want. The businesses are able to increase their customer base while launching on multiple launchpads. This helps in eradicating the opportunity cost.
Adding on, every platform wants to give its investor the best experience, a unified approach that helps in minimizing the rebuilding cost as well
Also, it provides a great earning perspective since the investor can jump ship if another platform provides better options that align with the investor’s goals. Finally, the investor is the King, and hence every platform tries its best to provide a better user experience.
2. IDO Marketing and White Listing
When any new project is being launched, the project is vetted extensively and so are the investors. This is done via a process known as whitelisting. Only the investors who are on the whitelist are eligible to participate in the IDO.
So, what exactly do you have to do, to be on this whitelist? Well, if you wish to take part in an IDO, you need to perform some marketing tasks to display your genuine interest in the project.
These tasks are quite simple - like being a part of their Twitter handle, retweeting, etc. For further information, you need to ensure that you receive updates from the platform by entering and subscribing to their emails/newsletters.
Generally, when you visit any new website, they prompt you to subscribe to the site, or video (if it’s youtube) and most of us generally ignore it or block the alerts. Here you need to do the exact opposite - you need to subscribe, follow them on other social media platforms, join their telegram chats, - all the stuff we tend to do when we are a big fan of some celebrity. Just as many famous personalities get millions of followers without lifting a finger, so does an IDO project.
3. Participation Advantage for Native Tokens Holders
I am sure most of us have attended an elite concert or a live show. You must have noticed that the tickets are not prized evenly. A person who can shell out more, enjoys the front row, with the best view.
Confused? As to how it relates to an IDO,? Let me get to that.
An IDO, when launched on multiple launchpads, does give us the option to choose the platform we prefer to deal with. But there is a flip side to this. If an investor has native tokens of the platform they are investing from, it increases their chances for the allocation of tokens.
Many platforms allow investing from two pools. One pool is open for everyone. But in the other pool, only investors holding native tokens can participate. Now I am sure you can easily guess who gets the advantage here. The pool of native token holders would obviously be smaller, increasing their chance of participating in the IDO.
The Pros and Cons of the IDO Model
Now that we have understood the technicalities and nuances of an Initial DEX Offering, let’s head straight to some of the major advantages of an IDO
The Advantages of IDO:
1. Open and Ethical Raising of Funds: “Insider trading” have you all come across this term? Before going public, a lot of people buy a company’s share at lower prices. When it does go public and gets listed for trading at higher prices, these ‘insiders’ reap the benefits.
In the case of fundraising in the crypto world, private investors could also do the same - accumulate tokens to a large extent at a lower cost before they go public and some people even sell them off to the general public at an exuberant cost after the token begins trading.
This form of insider trading has been eliminated in the fundraising model IDO. Even the project's own developers can get the tokens only after the IDO opens.
2. Trading at Full Throttle: Time is money, and it is in this arena of IDO where an IDO coin can be traded immediately. Once an IDO is launched, you can accumulate the tokens, and the moment it is listed, you can reap the benefits.
After the lock-in period, the profits are immediately transferred to your wallet. What more can you ask for?
3. Money Buys Access: You have a viable business idea, you are at the right place to raise funds. In an IDO, practically anyone - even you and me, can launch an IDO. No permissions are required. But as I said we should have a viable business idea and then you are ready to roll.
4. Contemporary and Untouched: Reiterating the same fact, that IDO is the newbie. It is like the new shiny toy that has just come on the market and everybody wants to buy it. Only in the due course will we realize its drawbacks and flaws.
ICO was followed by IEO and now the new 3.0 IDO, as I would like to term it. Let’s wait and watch what’s in-store.
Disadvantages of IDOs
No one is perfect. Even these fundraising models have some disadvantages.
1. Scams Galore: An advantage can easily be turned into a disadvantage since anyone can launch an IDO. Scam artists can make any project look so viable that you will never realize the difference. And trust me, the demand for an IDO is so high, that you will easily be fooled. This leaves the HODLers (the ones holding on to the tokens) high and dry as the scam artists vanish with their investments.
2. Soaring Engagement Cost: IDO’s can be launched over multiple launchpads, resulting in exponential users. The demand is high and the supply is very minuscule. So to get a guaranteed allocation, your corresponding investment definitely has to be higher than the rest.
3. Unskewed Premises of Allocation: There are no limitations on buying IDOs. so the ‘Whales’ (Investors with sizable amounts of tokens) can easily turn the tables in their favor. A sense of ambiguity prevails till the time the IDO goes public. resulting in a bonding curve due to excessive supply and low demand.
4. Absence of KYC: Every platform has different criteria for launching and participating in IDOs. Certain platforms don’t insist on KYC (Know Your Customer) formalities and I am sure you know where that is gonna lead. No validation, you can imagine!
5. Ungovernable: The title says it all. Being decentralized, there are no control mechanisms in place. Though it’s an advantage for some, it’s a major drawback for many. It is so aptly said, “ When the rich wage war, it’s the poor that die”.
6. Avoid getting dumped: Trust me, I am still talking about investments. Messari, a research organization, has stated and warned investors to watch for the schedules, - you should know which IDO opens, when, and for which pool. And definitely watch out for the temperament of the crypto community.
The Future of Initial Dex Offering
A new approach, a new opportunity has been presented by the new fundraising model Initial DEX Offering ( IDO). Undoubtedly, drawbacks of the previous fundraising models have been eliminated to a great extent. But it’s a very new and nascent technology, and right now just in the introduction stage and firing up.
We have highlighted the advantages and disadvantages. The fact is that there is a very thin line on which we are walking. It is very crucial to integrate control mechanisms in the IDO model. This, in a very large way, will help to eliminate the variations in the prices of the tokens till the time they go public.
Before You Go...
IDOs are young and definitely far from perfect. But in the present scenario, they are the best possible option available for fundraising.
With time, IDO’s are only going to evolve and develop further giving substantial returns. But as they have rightly said, do not put all eggs in one basket, weigh your options wisely.