Startups need funding in the early stages of business for growth and development, and for many entrepreneurs, joining a fundraising organization is the best option. Many crypto services get funded through blockchain-based fundraising models. These models include ICOs, IEOs, and IDOs.
What is IDO in crypto and how does it compare to ICOs and IEOs? IDO in crypto stands for initial DEX offering, while ICO and IEO mean initial coin offering and initial exchange offering, respectively. Over the years, IDOs have become the preferred model because they provide faster access to liquidity at controlled price levels. It also offers a fair chance for investors and community members to buy the tokens equally.
In other models, there's a process called the premine period, where a few people are given access to buy a crypto coin before it's made available to the public. This system is absent in the IDO model. So, what is an IDO mode of operation? We'll cover that in the later part of this article.
History of IDO
Before IDO crypto fundraising became popular, most of the popular ways for startups to raise funds were via angel investors, VCs, and initial public offerings.
When crypto gained the spotlight in 2017, many crypto startups embraced the initial public offering (IPO) model to create the initial coin offering (ICO) crowdfunding method. In an ICO, the coin founders offer a portion of the total coin supply for the public to buy at the earliest possible time. The funds are vested for a period of several weeks to several months. This prevents the investors from selling the coins and allows the business to use the funds for the growth and development of the project.
Due to the rise of scam projects, many investors were hesitant to participate in ICOs, leading to the creation of initial exchange offerings (IEOs). IEOs are launched on centralized crypto exchanges, providing a level of security to investors.
As crypto became more popular, interest in decentralized finance also gained momentum, forming IDOs. IDO full form is described as " Initial DEX Offering." IDOs were launched on decentralized exchanges, providing users more access, privacy, and control.
How IDOs work
Crypto token providers use IDOs to enable the public to buy their tokens. They collaborate with decentralized exchanges like Pancakeswap and Uniswap to get liquidity. Most DEXs promote liquidity pools and offer attractive rewards to enable crypto projects to secure funding.
IDOs function as automated market makers (AMMs), which means that the crypto company's method of depositing their tokens to the DEX and the system the buyer uses to purchase the coins are both automated. This is made possible through the operation of smart contracts on the blockchain.
What is IDO like for a crypto token founder?
- First, the project team has to submit their project to the desired exchange for a vetting process.
- The dex evaluates the project, and if it meets their requirements, they offer their tokens for sale.
- When investors purchase the tokens, their funds are locked for a period of time after which they receive a certain percentage of the proceeds.
Anyone can participate in an IDO meaning crypto is accessible to a wide category of people. Identity verification or registration is often not needed to buy newly listed tokens on dexes.
Advantages of IDOs
For investors, token offerings regarding fairness and security have largely improved over time. IDOs offer several noteworthy benefits, which include:
- Affordability
Fundraising through an IEO or ICO comes with high fees, which can be a major challenge for new businesses. However, an IDO in crypto does not require projects to pay high exchange fees.
- Decentralization
Aside from the fees centralized exchanges require from crypto startups, they must also approve the project before the token can be listed on the exchange. In contrast, an upcoming IDO does not require a DEX's approval before listing a token.
- Access to Liquidity
Projects have immediate access to the liquidity generated through their token sales. Usually, a good portion of the funds raised is locked up in a pool to make it easier to transact with the token.
- Reduced Slippage
The liquidity pool helps to reduce slippage, which is important to promote low price volatility. The larger the liquidity pool, the less the slippage in an IDO crypto meaning users will pay fewer transaction fees.
- Attractive Annual Returns
Most IDOs offer high returns to early investors and implement anti-monopoly measures to prevent token monopolies.
Risks associated with IDOs
An IDO has a number of benefits, but there are some drawbacks to this fundraising model as well:
- Security risks
Liquidity pools are at risk from blockchain hackers. In 2022, over $10 billion in Defi was lost due to such hacks and thefts, making security a major concern in crypto IDO.
- Higher risks of scams
Because anyone can launch an IDO platform on a DEX, there are more scam projects. Scam IDO projects are also on the rise, as there's wide accessibility, and they do not need to undergo any vetting process before they're made available to the public.
- High volatility
When an IDO lists a token, the price increases sporadically at the beginning and can spike at any time. The rapid price fluctuations can be a disadvantage for many investors who purchase the token at a high price before it drops. The most profitable investors are those that get access to buy the token in a presale before it gets listed on an exchange. Overall, a secure defi IDO is one with good security audits, strong partnerships, and a solid token use case. A less risky alternative to making money in crypto is through a bitcoin mining host, where you mine crypto passively and get rewards.
Conclusion
Among all the crypto fundraising models, IDOs are the newest and most widely adopted. Although we've not reached the IDO full form in crypto, as there are still needs for improvements, it remains the most beneficial crowding method for crypto projects.
One issue that needs to be addressed in initial DEX offerings is the lack of regulation. Regulations are important to protect investors and ensure financial crimes are minimal. A hybrid IDO model that embraces KYC registration or a form of control over coin listings will help provide the necessary security measures that IDOs need.
Another major issue is that although some of the best IDO platforms, like Pancakeswap and Uniswap are popular in the decentralized finance space, the majority of trading takes place on centralized exchanges like Binance and Coinbase. If you wish to invest early in cryptocurrencies, follow analytics pages that update new listings. As an investor in the defi space, one of the most important things to note to keep your funds safe is ensuring your wallet keys are stored securely.
