- In the world of cryptocurrency, protocol and project owners can crowdfund using an IDO, or initial DEX offering. You can use an IDO to find investors to help fund your project if you have a fantastic concept that will advance the decentralized crypto economy.
- A protocol can use a specialized mechanism, known as an initial DEX offering, to meet its financial targets. In order to accomplish this, a protocol issues a currency or token that consumers can purchase using fiat money or other cryptocurrencies.
- After that, this coin is introduced on a liquidity exchange platform so that trades can occur there.
One reason for the increasing popularity of IDOs in the cryptocurrency world is their efficiency. They enable funders to hold funds prior to a protocol launching its coin or token by employing a smart contract.
Due to the fact that investors will always receive their tokens upon launch, regardless of the amount of money they have locked up, this smart contract offers a sense of assurance.
By preventing investor fraud, this approach makes it possible for the protocol to raise money in a way that benefits all parties.
The one drawback of an initial coin offering (IDO) is that investors frequently need to sign up ahead of time for a coin launch, which can mean waiting on a waiting list.
To give investors a guarantee of tokens and facilitate their distribution in accordance with the protocol’s strategy, this security precaution is important.
How Do Crypto IDOs Operate?
The DEX receives tokens from a cryptocurrency project, and users deposit money through the platform. The token transfers and distribution on the blockchain are then automated by the DEX through the use of smart contracts.
The DEX then generates new smart contracts with a nominal gas cost when there is a large amount of liquidity available for trade.
Users gain from IDO since it permits funding for any project without requiring a stringent clearance procedure.
This is a major development for the ecosystem since it opens up access to individual investors for numerous initiatives. IDOs enable instantaneous token minting, which is quick in contrast to conventional fundraising techniques.
IDOs also assist projects in avoiding the significant expenses related to IEOs, or initial exchange offerings.
An IDO must follow certain guidelines and phases, and these depend largely on the platform the project owner is using to manage it. However, an IDO often employs the following four techniques:
- Before beginning work on a project on a decentralized exchange (DEX), the team must go through a screening process. They provide a predetermined quantity of tokens at a fixed cost after approval. After locking their money, users can obtain these tokens. After a token generation event (TGE), the tokens are distributed.
- There is typically a whitelist of investors. To be added to the list, you as a user have to finish marketing chores or enter your wallet address.
- The project’s token is used to form a liquidity pool with a portion of the funds raised. The remaining funds are given to the team. Investors can exchange the token for another coin following the TGE.
- Users receive the tokens at the TGE, and trading in the liquidity pool is permitted.
Advantages of an IDO
Quick Trading
As soon as a project’s token is released, investors can trade it. As a result, traders will aim to purchase the token as soon as it becomes accessible and resell it at a profit.
Just Fundraising
Increasingly, fundraisers are starting their firms or businesses using the IDO approach rather than regular private fundraising. Investors might get a discounted price on the cryptocurrency when the token sale opens to the public.
Later on, they can resell the tokens to a larger market and profit handsomely. The best thing about an IDO is that it’s open to everyone, not just private investors.
Safe Exchanges
Smart contracts are used on decentralized exchanges (DEX) to process trades and upload them to the blockchain, greatly enhancing transaction security. Furthermore, hackers and other malevolent users are less likely to target a DEX because it does not retain money.
No Registration Is Required
To take part in a sale, all you need is money and a wallet; your personal information is not required. It follows that anyone can participate. However, the lack of KYC or AML procedures may be a drawback for some consumers.
Not stumbling
You can purchase tokens at any price you choose when you purchase them through an IDO. This is so that you are guaranteed not to experience slippage, which is the change in price while your transaction is being processed. IDOs give instant liquidity for project tokens.
With more options for token distribution, this benefits both the enterprises themselves and those looking to invest in new ventures.
Reduced Prices
Self-executing smart contracts power decentralized exchanges (DEXs), eliminating the need for middlemen or other outside parties.
As a result, the sole expense associated with implementing a new smart contract to manage an asset’s liquidity pool and tokens is the “gas” fee levied by the Ethereum network.
Countermeasures Against Whales
Many IDOs have policies in place to stop investors from purchasing an excessive number of tokens. By doing this, it is made sure that tokens are distributed fairly and that no one has an excessive number of tokens or level of project control.
Consequences of an IDO
Possibility of Manipulating Prices
The IDO mechanism may have a flaw in that it is susceptible to price manipulation through the use of the pump-and-dump strategy.
This occurs when traders purchase a large number of tokens at face value using a trading bot, then promptly sell them once the exchange rate has sufficiently risen.
Fraud Risks
In DeFi, security is a constant worry, particularly considering that over $10 billion was taken in DeFi theft alone last year.
Accessibility and a lack of screening in an IDO can have positive effects, but they also raise the possibility of scam ideas being introduced and flooding the market.
Remember that this is comparable to what transpired with initial coin offerings (ICOs).
Absence of AML and KYC
You don’t need to provide personal information to participate in an IDO; all you need is money and a wallet. This implies that appropriate safeguards must be in place to stop illicit activity such as money laundering and user evasion of economic sanctions.
It might not even be legal to participate in some jurisdictions based on whether the token is considered a security or not.
Cost Increases at the Outset of IDO
A token’s price rises as soon as it is purchased by the first buyer. This implies that investors have a limited window of time to buy a token when it first starts to sell for its starting price before the price rises.
Thus, if investors wish to get involved early in a potential initiative, they must move quickly.
IDO versus ICO versus IEO
You have probably come across an ICO and an IEO if you have been reading this to comprehend or make use of an initial DEX offering for your protocol. Although their working plans are different, they are nearly identical.
An ICO: What Is It?
ICOs are used by certain projects to sell a portion of their cryptocurrency token supply to the public in 2017, as interest in cryptocurrencies grew.
Investors jumped at the potential to raise around $49 billion by the end of that year, and this quickly became a popular approach.
Unfortunately, some unscrupulous projects used this popularity by utilizing Ponzi schemes to defraud investors, which made ICOs less appealing.
Nonetheless, businesses now offer ICOs total legal protection, which increases their appeal and value.
An IEO: What is it?
The term “IEO” stands for “Initial Exchange Offering,” which is comparable to an ICO but differs significantly.
Since initial exchange offerings (IEOs) are introduced on controlled exchanges, investors may be sure that the tokens will be listed on an exchange and that the project owners won’t exploit them.
Crypto projects must pass a stringent screening process to be eligible for an IEO, which builds confidence between investors and the project developers.
IEOs are the source of several well-known blockchain initiatives nowadays, such as Polygon.
Investing in an IDO: A Guide
There are some procedures you must take if you want to take part in an IDO. Depending on the project, the precise requirements may change, however here is a rough summary of what most IDOs can offer.
- Firstly, note that to make sure everything is legal and prevent any legal problems, the majority of IDOs need investors to adhere to KYC/AML standards. Regretfully, this implies that participation is frequently prohibited for some people such as US citizens.
- After overcoming that obstacle, you have to proceed to the whitelisting phase. This entails doing a few things, such as joining Telegram groups, retweeting content, and following specific Twitter pages.
- Last but not least, get your wallet ready. You must invest and receive tokens to use the launchpad platform, so pick a cryptocurrency wallet that satisfies your requirements and offers the amount of security you desire. Make sure you do your homework and select a wallet you can rely on.
Instances of Effective IDOs
IDO for the Raven Protocol
Raven Protocol has shown to be a successful endeavor, despite being one of the earliest initiatives of its kind and even acknowledging on their blog that they were ignorant of the idea of an IDO at the time.
The protocol is designed to train deep neural networks—that is, deep learning—on a distributed, decentralized environment.
The goal of Raven Protocol is to transform the AI and machine learning industries, which are now dominated by large enterprises, by providing quick and affordable blockchain-based solutions.
While the utility token is used for Al training, users who share their computer resources can earn incentives through the native RAVEN currency.
IDO SushiSwap
Another example of a decentralized Ethereum-based cryptocurrency trading is SushiSwap. It wants to become the most well-known decentralized exchange on the Ethereum network by surpassing UniSwap.
Over $1.14 billion in locked cryptocurrency assets from UniSwap were transferred to the SushiSwap platform by users in September of last year. SushiSwap is intriguing because, rather than doing an initial coin offering (ICO), the platform compensated UniSwap’s liquidity providers (LP) by allowing them to stake their LP tokens on SushiSwap.
Users were rewarded with SUSHI tokens in exchange. About 1,000 SUSHI were given out by the protocol to users for each Ethereum block that its users validated two weeks after it launched.
What Direction Will IDOs Go in the Future?
The token offering landscape is always changing, and the initial farm offering, or IFO, model is gaining traction.
It still revolves around the same fundamental ideas of liquidity pools and decentralized exchanges, even though it’s still unclear if it qualifies as a typical DO.
Instead of immediately locking LP tokens, investors wishing to take part in a FO must first stake in a Decentralized Finance (DeFi) LP in order to obtain LP tokens.
The process is as follows: Suppose a project wishes to sell its token on PancakeSwap for BB in an IF.
The BNB-CAKE LP tokens would be locked for the new tokens, and investors would need to stake both BB and CAKE. The project would receive the BNB while the CAKE would be burned.
The quantity of tokens that investors obtained is determined by the total number of participants in the sales.
Some Safety Advice for an IDO
Token sales are not exempt from risk when investing in anything. However, there are a few easy and useful actions you can do to reduce your risk and remain secure. When taking part in a token sale, keep the following points in mind:
- Use caution when clicking subscription links. By fabricating phony subscription sites, scammers want to capitalize on the excitement surrounding an IDO and steal your cryptocurrency. Check the link one more time before sending any money.
- Choose a reliable DEX Launchpad. Regarding IDOs, some DEXs are more trustworthy than others. For successful token purchases, well-known websites like BakerySwap and PancakeSwap are safer choices.
- Do your homework before making a purchase. Spend some time getting to know the team and the project. Find out the answers to things like if a working product is available or if the funds generated will be vested. This information will assist you in avoiding being a victim of fraud.
- Verify the terms and conditions. Read and comprehend the tokenomics of each IDO as they are distinct. Be mindful of any delays or locks that may affect your tokens’ ability to be traded.
- Make prudent investments. Sales of tokens can be erratic, and it’s simple to overspend. Remember that there is always a risk associated with investing, even with thorough research. Only invest money that you can afford to lose. Don’t invest more than you can afford to lose, and be careful.
Disclaimer : This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.
