What is an IDO?
|— An Initial Dex Offering is the next step in cryptocurrency fundraising. The process provides financial freedom for both the investor and the project developers.|
— IDOs put the responsibility of due diligence in the hands of investors, which increases risk but also the potential reward.
— If you’re looking for new crypto projects, IDOs represent the future of fundraising.
Want to learn about crypto fundraising? let’s explore what is an IDO.
Are you getting tired of all the confusing cryptocurrency terms? First there’s an ICO, which is a fundraising method quite similar to an IPO. Then there’s STO, IEO, and now IDO. If you’re trying to keep up with project-centric crypto developments, these complex terms can get ahead of you. So let us try to help you make sense of it all.
Fundraising in Crypto
Fundraising is a vital part of early project development – teams need to pay their workers and afford partnerships or new technologies. In the real world, this is done through public stock offerings that invite investors to buy shares of a company. That money goes toward employees who develop the business and increase share values.
This fundraising method has carried over into crypto as well, with tokens taking the place of stocks. Each project offers a set amount of tokens, broken up into different avenues like team payments, public use, and more. However, the process isn’t as simple as “sell coins, earn money.” There are various ways for crypto projects to raise funds, which we’ll get into right now.
ICO vs. IEO vs. IDO
An Initial Dex Offering (IDO) is an evolution of the Initial Coin Offering (ICO) and the Initial Exchange Offering (IEO). To understand the first, you must know the latter two and their pros and cons.
ICO’s are the crypto-fied version of an Initial Public Offering (IPO) or when a private company offers public stock to raise funds. Say you’re a landlord with a three-story building. You live in two stories, but rent is expensive, so you offer a third story, or “part” of your ownership, to make ends meet. An IPO is like that but on a significantly larger scale.
An ICO is simpler than IPOs, however, as they avoid regulatory pains associated with the traditional business world. Instead of selling company shares, crypto projects fundraise by selling coins. Depending on the project, coins may mean you have voting power or can stake in the network as it grows. For visionaries, this non-discriminatory approach is great! Anyone can hold an ICO without licenses and fund their wildest developments.
However, the unregulated space brings some risk. Most ICOs have private, early funding rounds which attract rich investors. They get in at a price, and once the offering goes public, they will sell and potentially crash the token price. Also, ICO can lack some transparency when it comes to token distribution. Therefore after the 2017 ICO craze many countries have put in place restrictive measures to limit such practice.
After ICOs faded, the Initial Exchange Offering became popular due to its lack of risk on the user’s part. Instead of simply holding a fundraiser, an IEO sees projects launching their asset on an existing exchange. Since exchanges have a reputation to uphold, they’re likely to audit a project and ensure its legitimacy. If deemed legitimate, an exchange will hold a token pre-sale. Investors can buy and hold the token for a set period of time but cannot trade it until the event ends.
Imagine having a product to sell, but you’re having a hard time convincing potential customers of its worth. So you hire a popular distributor, like Amazon, to examine your offering and validate its existence while auditing its pros and cons. If Amazon likes it, they’ll list your product to its massive audience of users, allowing some to pre-order it ahead of time. Of course, Amazon will take a cut of each sale, but you’re provided an audience that trusts the platform.
Unfortunately for developers, exchanges have fees and limit user investments, which isn’t ideal for big investors! Also, the centralized nature of IEOs means some projects simply won’t cut it, gate-keeping the industry and its developers. Moreover, an exchange can still hold poor due diligence.
However, IEOs streamline the investment process, as users can simply buy on the exchange they already use. Plus, this provides a guaranteed liquidity from the project’s standpoint, assuming it’s successful.
An Initial Dex Offering is like an IEO but with more freedom.. Instead of fundraising on a typical crypto exchange, IDOs launch on a decentralized one. Decentralization provides immediate and fair trading for investors and automatic liquidity for the project. Developers aren’t waiting for a pre-sale’s end to access funds like with an IEO.
Back to the Amazon example – remember how Amazon must audit your product before it lists? Think of an automated and transparent platform that anyone can list on, requiring customers to do due diligence and avoid scams. This is great for you, as you can list any product without restrictions. Plus, any funds are available to you instantly, meaning you can constantly improve your product as it sells.
Instant Access to Funds
Instant access to funds is ideal for projects, meaning they can develop the product as soon as possible. However, this could mean more price volatility as major holders might day trade to maximize their profits. Otherwise, the project doesn’t pay a listing fee, and, similar to an ICO, really anyone can start a listing on a decentralized exchange.
Accessibility is Key
While IDOs are the newest form of fundraising for crypto projects, they very well might become the most popular. The promise of instant liquidity and lack of listing fees are quite attractive. But we won’t see mass adoption until user experience and security have been enhanced.
The barrier of entry for a Dex is significantly higher, as most don’t support fiat investments, meaning only the most crypto-literate can participate.
Lack of Regulation and Greater Scam Risk
IDOs are innovative, therefore, there is not much clearance when it comes to regulatory frameworks. However, their decentralized and transparent nature could provide them with an easier regulatory path than ICOs.
Unfortunately, the lack of centralization greatly increases the risk of a rug pull scam. IDOs mean the community vets listings, which is inherently riskier for investors as their analysis could be flawed.
IDOs and You
IDOs promise to change the current fundraising process, making it easier and fairer for developers and investors. While the tech is still nascent and has some shortcomings, it points towards an alternative fundraising process that could potentially disrupt the current top-down paradigm. The future is exciting!
Keep learning! So you’re into crypto, and you like the nuts and bolts? We have just the thing for you! Check out our School of Block episode on blockchain use cases.