What is an IDO?

An IDO, which stands for “Initial DEX Offering,” is a way for protocol and project owners to crowdfund in the crypto world. If you have a great idea that benefits the decentralized crypto economy, you can seek investors to help fund the project through an IDO.

The concept of an initial DEX offering is a specific mechanism that a protocol can use to achieve its funding goals. To do this, a protocol releases a coin or token that people can buy with their fiat or other cryptocurrencies.

This token is then launched on a liquidity exchange platform, where the exchange can take place.

The popularity of IDOs is growing in the crypto community, and one reason is their efficiency. They allow funders to store money using a smart contract before a protocol launches its coin or token.

This smart contract provides a sense of security, as investors are guaranteed to receive their token once it’s launched, based on the amount of money they have locked up. This system ensures that investors aren’t cheated, allowing the protocol to raise capital in a win-win situation.

The only downside to an IDO is that investors often have to register in advance for a coin launch, which may require being on a waiting list. Sites like CoinMarketCap have an ICO Calendar that allows people to do this.

However, this security measure is necessary to provide investors with a guarantee of tokens and make it easier to distribute them according to the protocol’s plan.

How Does a Crypto IDO Work?

A crypto project provides its tokens to the DEX, and users put their funds through the platform. The DEX then uses smart contracts to automate the blockchain’s distribution and transfer of the tokens.

When there is a lot of liquidity available for trading, the DEX then creates new smart contracts with a small gas fee. What benefits users when it comes to IDO is that they allow any project to raise funds without a rigorous approval process.

This means many projects now have access to retail investors, a game-changer for the ecosystem. Unlike traditional fundraising models, IDOs allow for instant token minting, which is fast.

Also, IDOs help projects avoid the high costs associated with Initial Exchange Offerings (IEOs).

There are some rules and stages to which an IDO must adhere, and this is usually a factor of what platform a project owner is using to run it, but here are four common methods an IDO uses:

1. The team must undergo a screening process to launch a project on a decentralized exchange (DEX). Once approved, they offer a set number of tokens for a fixed price. Users who want to get these tokens then lock their funds. The tokens are distributed later in a token generation event (TGE).
2. Usually, there’s an investor whitelist. As a user, you must complete marketing tasks or provide your wallet address to join the list.
3. Some of the money collected creates a liquidity pool using the project’s token. The rest of the funds go to the team. After the TGE, investors can trade the token for another coin.
4. At the TGE, users receive the tokens, and the liquidity pool is opened for trading.

Also read: What is DeFi?

Benefits of an IDO

Fast Trading

Investors can trade a project’s token immediately upon its release. This means that traders will try to buy the token as soon as it’s available and then sell it later for a higher price.

Fair Fundraising

Many fundraisers now use the IDO model to launch their firms or businesses instead of relying on traditional private funding. When the token sale becomes public, investors can purchase the cryptocurrency at a reduced cost.

They can sell the tokens later to a broader population and make a substantial profit. The best part is that anyone can participate in an IDO because it is for more than just private investors.

Secure Transactions

Trades on a decentralized exchange (DEX) are processed and added to the blockchain through smart contracts, which makes transactions very secure. Moreover, since a DEX does not hold onto funds, hackers or malicious users are less likely to target them.

No Sign-ups Needed

You only need a wallet and funds to participate in a sale – you don’t have to provide your details. This means anyone can join in. However, some users might see this as a downside because no KYC or AML processes exist.

No Slippage

When you buy tokens through an IDO, you can get them at the price you want. This is because IDOs provide immediate liquidity for project tokens, guaranteeing that you won’t experience slippage (i.e., the price changing while your transaction is being processed).

This is good for people who want to invest in new projects but also for the projects themselves because they have more ways to distribute their tokens.

Lower Costs

Decentralized exchanges (DEXs) operate using self-executing smart contracts, which means there is no need for intermediaries or third parties.

This makes the cost of deploying a new smart contract that manages an asset’s liquidity pool and tokens very low because the only price is the “gas” fee charged by the Ethereum network.

Anti-Whale Measures

Many IDOs have measures to prevent investors from buying too many tokens. This ensures that the distribution of tokens is fair and that no one has too many tokens or too much control over the project.

Also read: What is blockchain?

Drawbacks of an IDO

Opportunity for Price Manipulation

One potential drawback of the IDO mechanism is that it can be vulnerable to price manipulation using a tactic called “pump and dump.”

This happens when traders use a trading bot to buy a lot of tokens at their base value, then sell them quickly when the exchange rate has increased enough.

Fraud Risks

Security is always a concern in the world of DeFi, especially since over $10 billion was stolen in DeFi theft just last year.

While the accessibility and lack of vetting in an IDO can be good, it also increases the likelihood that scam projects will be launched and flood the market.

This is similar to what happened with ICOs, which is something to remember.

No KYC or AML

In an IDO, you only need a wallet and funds to participate; personal details aren’t required. This also means there needs to be proper checks to prevent illegal activities like money laundering or user evasion of economic sanctions.

Participating in certain countries may not even be legal, depending on the token’s classification as a security.

Price Spikes at the Start of IDO

As soon as the first person buys a token, its price increases. This means there’s only a small window for investors to purchase a token when it begins to sell at its initial price before the price increases.

So, investors need to act fast if they want to get in on the ground floor of a promising project.

IDO vs. ICO vs. IEO

If you have been reading to understand or utilize an initial DEX offering for your protocol, you must have encountered an ICO and an IEO. They are almost the same thing but have different working plans.

Let’s use the next few heading to understand what an ICO and IEO have in common with an IDO and its differences.

What is an ICO?

In 2017, when cryptocurrency was gaining more attention, some projects began selling a portion of their cryptocurrency token supply to the public through ICOs.

This quickly became a popular strategy, with investors jumping at the chance to raise around $49 billion by the end of that year. Unfortunately, some dishonest projects took advantage of this popularity and scammed investors with Ponzi schemes, causing ICOs to lose appeal.

However, companies like LCX now provide complete legal protection for ICOs, making them a more popular and valuable option.

LCX offers everything from token sale management to high-grade compliance and post-token sale listing, all in one convenient place.

What is an IEO?

IEO is an acronym for “Initial Exchange Offering,” similar to an ICO but with a few key differences.

IEOs are launched on centralized exchanges, which means that investors can trust that the token will be listed on an exchange and that they won’t be taken advantage of by the project owners.

To participate in an IEO, crypto projects undergo a rigorous screening process, which creates trust between investors and the project developers. Many popular blockchain projects today, like Polygon and Eiron, were born from IEOs.

Differences Between IDO, ICO, and IEO:

How to Invest in an IDO

If you are interested in participating in an IDO, there are a few steps you will need to follow. The exact requirements may vary depending on the project, but here is a general overview of what you can expect from most IDOs.

• First, be aware that most IDOs require investors to comply with KYC/AML procedures to ensure everything is legitimate and avoid potential legal issues. Unfortunately, this means that US residents are often not allowed to participate.
• Once you’ve cleared that hurdle, you must enter the whitelisting stage. This involves completing a few tasks like following certain pages on Twitter, retweeting posts, and joining Telegram groups.
• Finally, you’ll need to prepare your wallet. Interacting with the launchpad platform requires you to invest and receive tokens, so you’ll want to choose a crypto wallet that meets your needs and provides the level of security you want. Be sure to do your research and choose a wallet that you trust.

Also read: What are NFTs?

Examples of Successful IDOs

Raven Protocol IDO

Even though Raven Protocol was one of the first projects of its kind, and even admitted in their blog that they were not familiar with the concept of an IDO at the time, it has proven to be a successful venture.

The protocol operates on a decentralized and distributed system for training deep neural networks, specifically for deep learning.

Raven Protocol is dedicated to offering fast and cost-effective solutions that utilize blockchain technology to revolutionize the industries of AI and machine learning, which big corporations currently dominate.

Users who share their computer resources can earn rewards through the native RAVEN token, while the utility token is used for Al training.

Universal Market Access Protocol IDO

The Universal Market Access (UMA) protocol is another successful IDO project, despite facing some initial issues during its launch. The IDO for UMA Protocol allowed DeFi developers to build assets on the Ethereum blockchain that users can get into by using their tokens as collateral.

Last April, UMA began its token sale via the decentralized exchange UniSwap at a starting price of $0.26 per token. UMA deposited $535,000 worth of Ethereum into a new liquidity pool to achieve this price.

However, as token pricing on UniSwap works with a bonding curve instead of order books, UMA’s token price quickly skyrocketed as investors flocked to buy the token, leading to higher gas costs for traders who attempted to outdo others.

Despite the initial setback, UMA now boasts a market capitalization worth over $1.5 billion, with one token valued at over $25.

While some buyers expressed disappointment that they purchased the token at a higher price than pre-sale investors, this issue primarily highlights the problem with UniSwap rather than UMA.

SushiSwap IDO

SushiSwap is another example of a decentralized cryptocurrency exchange built on Ethereum. It aims to overtake UniSwap as the most popular decentralized exchange on the Ethereum network.

Last September, SushiSwap users moved over $1.14 billion of UniSwap’s locked crypto assets to the SushiSwap platform. What’s interesting about SushiSwap is that instead of launching an ICO, the platform rewarded liquidity providers (LP) on UniSwap by staking their LP tokens on SushiSwap.

In return, users received SUSHI tokens as a reward. 2 weeks after its launch, about 1,000 SUSHI were issued by the protocol to users for every Ethereum block its users validated.

Where are IDOs Headed in the Future?

Token offerings constantly evolve, and the IFO (Initial Farm Offering) model is becoming increasingly popular. Although it’s still being determined whether it can be classified as a traditional DO, it still centers around the same core concepts of liquidity pools and decentralized exchanges.

Investors wanting to participate in an FO must first stake in a Decentralized Finance (DeFi) LP to earn LP tokens rather than directly locking them.

Here’s how it works: Let’s say a project wants to sell its token for BB in an IF on PancakeSwap.

Investors would need to stake BB and CAKE in the BNB-CAKE LP, and the BNB-CAKE LP tokens would be locked for the new tokens, with the project receiving the BNB while the CAKE is burned.

The number of token investors received is given based on the number of people who took part in the sales.

Tips to Stay Safe in an IDO

Investing in anything carries risk, including token sales. But there are some simple and practical steps you can take to minimize your risk and stay safe. Here are a few tips to consider when participating in a token sale:

• Be careful with subscription links. Scammers will try to take advantage of the hype of an IDO, creating fake subscription pages to steal your crypto. Always double-check the link before transferring any funds.
• Use a trusted DEX Launchpad. Some DEXs are more reliable than others when it comes to IDOs. Popular platforms like PancakeSwap and BakerySwap are safer bets for successful token purchases.
• Research before you invest. Take the time to learn about the project and the team behind it. Look for answers to questions like whether the funds raised will be vested or if there is a working product available. This research will help you avoid falling victim to scams or rug pulls.
• Check the terms and conditions. Each IDO has unique tokenomics, so read and understand them. Be aware of potential delays or locks on your tokens, which could impact your ability to trade them.
• Invest wisely. Token sales can be volatile, and getting carried away is easy. Invest only what you can afford to lose, and remember that even with careful research, there is still a risk involved. Stay safe, and don’t invest more than you’re comfortable losing.

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