Initial DEX Offering (IDO) Meaning
What is Initial DEX Offering (IDO) in Crypto?
Imagine you’re attending a startup fair, where founders showcase their ideas and projects. One of the projects presented is innovative and has prospects to make an impact, but it needs funding to bring it to life. Instead of approaching investors or acquiring bank loans, the founder(s) offer a token to anyone who contributes. The token holders can utilize it to access perks or services once the project is complete. This fundraising method is like an IDO in the crypto space.
An Initial DEX Offering (IDO) is a crowdfunding approach that raises investment capital from everyday investors. It takes place on a decentralized liquidity exchange (DEX) through the use of liquidity pools and smart contracts.
IDOs are an alternative to Initial Coin Offerings (ICOs) that allow new cryptocurrency projects to launch their tokens on a DEX platform. In ICOs and IDOs, anyone can participate in the crowdfunding process by providing liquidity to the pool and receiving tokens in return. IDOs are often characterized by decentralization, ease of use, accessibility, and liquidity provision.
How IDOs differ from IDO and IEO
Even though the outcome for ICOs, IEOs, and IDOs is the same, these fundraising approaches are quite different. For instance, ICOs don’t go through any vetting process since the project runs the fundraising itself. The tokens are usually created after the sale through the project’s website. The project also manages investors’ funds, creates and runs smart contracts. For these reasons, scams and rug pulls became widespread in ICOs, forcing the crypto community to develop alternative crowdfunding methods, like Initial Exchange Offering (IEO) and IDO.
In IEOs, a centralized exchange (CEX) vets the crypto project, manages investors’ funds, creates and runs smart contracts and lists the token. On the other hand, the vetting process in IDOs is carried out by a decentralized exchange. The DEX is also responsible for creating and running smart contracts and handling funds. During the IDO, the smart contract handles the allocation and distribution of tokens based on their contributions. It collects funds, usually in the form of a base currency such as Ethereum (ETH), and automatically calculates the corresponding token amounts based on the predetermined price or exchange rate.