After initial coin offerings (ICOs) fell out of fashion in 2018, new types of token sales emerged. The initial DEX offering (IDO) is one of them. Read on to learn about initial DEX offerings, how they work, and their pros and cons.
What Is an Initial DEX Offering?
An initial DEX offering (IDO) is a fundraising mechanism used by crypto projects to raise funds in a decentralized manner using crowdfunding on decentralized exchanges (DEXs).
This crowdfunding method is a brainchild product of decentralized finance (DeFi), aiming to eliminate issues with centralized fundraising methods. Launching on a DEX creates the difference between IDOs and earlier crowdfunding types, ensuring the process is permissionless.
IDOs are quickly gaining popularity despite being relatively new as they give developers and investors more control over the project and their assets. Additionally, there is a low barrier to IDO entry, providing opportunities for startups and retail investors.
How Does an IDO Work?
While each IDO differs slightly from one another, here’s an overview of the standard IDO process.
- A startup’s team approaches an IDO Launchpad with a viable project. The launchpad will vet the legitimacy of the presented idea, determining whether it can launch on its ecosystem.
- If accepted, the project will receive publicity as the launchpad announces the upcoming token sale. These startups can take advantage of the existing user base of the platform it’s launching on.
- Interested investors undergo a vetting process for whitelisting. Likewise, they may have to fill out an entry form providing the required details, including their wallet addresses, to receive the project’s tokens. Investors then get an opportunity for early entry into the fundraising if they own the launchpad’s native token.
- Once the token sale goes live, investors participate by depositing funds into the project’s liquidity pool. In turn, they will receive tokens once the generation event kicks off. A token generation event (TGE) is when the project’s team publicly releases their tokens to the market.
- Once the token sale event rounds up, the project, through smart contracts, locks the funds in the liquidity pool. The raised funds contribute to the project’s health by generating liquidity.
- The TGE ensures all investors receive equal tokens to the liquidity they provide. Afterward, the liquidity pool is ready for trading activity. An important aspect is that the trading fees provide rewards for users locking their funds in the LP.
Pros and Cons of IDOs
Here are some notable advantages and disadvantages of IDOs and why you should consider them:
Pros
Instant Liquidity
Funds raised during the token sale provide immediate liquidity to the project. The projects offer incentives for users to encourage holding tokens in the liquidity pool. In turn, all trading fees accumulated from trading LP tokens avail rewards for liquidity providers.
Transparency
The smart contracts ensure all parties meet the conditions required during an IDO. The vetting process for investors and projects on the launchpad further provides a more secure environment for retail investor involvement.
Low Entry Barrier
Initial DEX offerings don’t involve extreme KYC and AML verification processes. As such, they allow more projects to conduct crowdfunding, giving more opportunities for developers with no starting funds. Furthermore, any whitelisted investor can participate in the token sale. Also, IDOs are also cheaper and more straightforward to host than initial coin offerings (ICOs) and initial exchange offerings (IEOs).
Eliminating Whales
IDOs prevent one investor from purchasing massive amounts of the token, ensuring balance within the liquidity pool. That is, limiting how many tokens one investor can buy during the token sale.
Cons
Less Strict Vetting Process
Scams are a problem in the IDO space as it’s generally easier to launch an IDO than an initial exchange offering (IEO), for example. ave become frequent when conducting IDOs. This downside demands investors to take precautions before participating in an IDO.
Favoritism
While there is a degree of fairness in the process, IDOs can favor the project’s developers and private seed round investors. Therefore, interested investors should keep an eye out for these events to get a spot in the private rounds.
A New Concept
DeFi and DEXs are still fairly new concepts and more complex than custodial platforms. It might be hard for beginners to participate in IDOs as a result.
IDO vs. IEO vs. ICO: What’s the Difference?
| ICO (Initial Coin Offering) | IEO (Initial Exchange Offering) | IDO (Initial DEX Offering) | |
| Type of Token | Utility | Utility | Utility |
| Issuing | Centralized | Centralized | Decentralized |
| Platform | Project’s platform | Centralized exchange | Decentralized exchanges |
| Smart Contract Management | Token sale company | Token sale exchange | Token sale company |
| Counterparty | Developers | Exchange | Developers |
| Screening | None | Screening by the exchange | Screening by the launchpad |
| KYC/AML | None | Yes | Depends on the project |
| Token Listing | The project reaches out to exchanges for listings | The project reaches out to exchanges for listings | Listing happens soon after the end of the token sale |
| Token Sale Marketing | Done by the project | Handled by the centralized exchange | A joint effort between the DEX and the project |
| Participation | Open to all investors | Only open to exchange users | Open to all vetted investors |
| Risks | High | Low since the exchange controls everything | Medium |
| Security | Depends on the project | Higher, but depending on the exchange’s security features | Higher, but depending on the DEX |
| Regulations | Limited regulation depending on the jurisdiction | Limited regulation depending on the jurisdiction | Limited compliance due to the permissionless nature of DEXs |
The Bottom Line
IDOs have opened up a new funding avenue for crypto projects and the opportunity for crypto investors to invest early in new tokens and projects on Decentralized Exchange platforms.
However, they are highly risky, and you can easily fall victim to a rug pull if you invest in a fraudulent token sale. If you want to participate in an IDO, do your due diligence and conduct thorough research before deploying any capital.
