What is an IDO (Initial Decentralized Exchange Offering)?
IDO is a cryptocurrency token offering that runs on a decentralized exchange (DEX). Liquidity pools (LPs) play an important role in IDOs by creating liquidity after the sale. A typical IDO has users lock up funds in token generation events in exchange for new tokens. Part of the funds raised are added to the liquidity pool along with the new tokens, which are then returned to the project.
IDO provides a simple, easy and low-cost token issuance method for projects. IDO has been around for a long time, but it is still evolving and offers new models such as Initial Mining Offering (IFO). As the field becomes more regulated, identity verification (KYC) requirements may gradually increase.
If you want to participate in IDO, you must use a digital wallet such as MetaMask and some cryptocurrencies to complete the subscription and pay transaction fees. You must always do your own research and invest through a trusted DEX. Specific measures include paying close attention to the mechanics of IDO, the project team and its token economics. Token issuance is risky and should always be invested within what you can afford.
In the cryptocurrency ecosystem, token offerings often get investors cheering. Buying tokens at the issue price can bring huge benefits, but there are also hidden risks behind the benefits. Looking back at the ICO (initial coin offering) boom of ETH in 2017, opportunities and risks coexist. Scams and runaway scams abound, and it is not uncommon for investors to suffer huge losses.
Since then, the cryptocurrency community has successively launched other token issuance methods, including initial exchange offerings (IEOs), initial DEX offerings (IDOs), and security token offerings (STOs). Today, IDOs are a popular choice. How is it different from ICO, and can it guarantee the safety of investors?
What is a coin offering?
Token issuance is a fundraising method for projects or startups to promote the listing and sale of new cryptocurrencies. Crowdfunding methods may vary, such as through centralized digital currency exchange management (IEO), cooperating with local financial regulators (STO), or directly operating independently (ICO). Some investors buy tokens for use, while others are for speculation. For example, you can use tokens for mining, staking in governance mechanisms, or paying transaction fees.
How does IDO work?
IDO drives token sales through a decentralized exchange (DEX). Cryptocurrency projects provide tokens to DEX, users invest funds through the platform, and DEX completes the final distribution and transfer. These processes are automated through smart contracts in the blockchain.
The rules and stages of IDO depend on the operator DEX, but there is also a general approach:
After completing the review, the project can carry out IDO in DEX. The project party supplies tokens at a fixed price, and users lock up funds in exchange for tokens. Investors will receive tokens later in a Token Generation Event (TGE).
There is usually a whitelist of investors. Investors may need to complete a marketing task to join, or simply provide a wallet address.
Part of the funds raised will be used to create a liquidity pool for the project's tokens. The rest of the funds are reserved for the team. Investors can trade tokens after TGE. The liquidity provided is usually locked for a period of time.
In the TGE stage, tokens are transferred to users, and the liquidity pool is open for trading.
How will the IDO model develop in the future?
The above model is a typical IDO, but token offerings are always changing. For example, we also have the increasingly popular IFO (Initial Mining Offering) model. It is difficult to call this model a traditional IDO, but the core concepts it relies on have not changed, and are still liquidity pools and decentralized exchanges.
Investors must first stake in Decentralized Finance (DeFi) liquidity pools to earn liquidity pool tokens instead of directly locking tokens. For example, if a project wants to sell tokens in PancakeSwap’s IFO in exchange for Binance Coin (BNB), investors must hold BNB and CAKE in the BNB-CAKE liquidity pool.
Then the BNB-CAKE liquidity pool tokens will be locked in exchange for new tokens, the project will receive BNB, and at the same time CAKE will be destroyed. The number of tokens you receive depends on the number of people participating in the sale, and any excess staking funds will be returned. Some IDOs will even set up relevant mechanisms to help small-scale investors obtain IDO shares fairly and equitably. The [Basic Sales] and [Unlimited Sales] features introduced by PancakeSwap IFO are typical examples.
Another big change in IDO is the KYC (identity verification) and AML (anti-money laundering) process requirements. Financial regulators around the world are increasingly paying attention to DeFi and its regulatory status. At present, AML and KYC are standard operations of centralized exchanges, and they are expected to become necessary procedures for DEX in the future.
What are the advantages of IDO?
Over time, most token offerings have become more fair and reasonable, creating a safe environment for investors. IDO has obvious advantages in this regard:
There is no need to deal directly with the project, nor to trust smart contracts. A trusted IDO platform will successfully help multiple projects sell. If new projects follow the same smart contracts, the credibility will naturally increase a bit.
Provide liquidity immediately after sale. IDO will lock part of the funds raised in the liquidity pool to create a liquidity market for after-sales. This helps reduce slippage and volatility.
No registration required. Prepare your wallet and funds to participate in the sale, no personal details required. So all kinds of users can use. But the lack of KYC or AML processes can also be considered a disadvantage (more on that below).
IDO is reasonably priced and easy to use for projects. . For smaller, lesser-known projects, issuing tokens through DEXs is often easier and cheaper than large centralized exchanges.
IDOs usually have anti-whale measures, that is, investors cannot buy tokens on a large scale.
What are the disadvantages of IDO?
Part of the advantages of IDO is a double-edged sword. These problems mainly stem from the decentralization and anonymity of IDO.
No KYC or AML. Investors and projects are protected after proper review is completed. These measures help avoid laundering of illicit funds and circumvent economic sanctions. For example, a few countries may not be able to legally participate in an IDO if the token is considered a security.
The project lacks due diligence. Notorious projects can issue tokens through an IDO, which is much easier than doing an IEO through a large compliant exchange.
What is the difference between IDO, IEO and ICO?
ICOs, IDOs, and IEOs use different methods, but the results are basically the same. The main differences are briefly described below:
Review process
Project is audited by DEX
The project is audited by the centralized exchange (CEX)
Project operates sales activities independently, so there is no review process
Fundraising
Investor funds are managed by DEX
Investor funds are managed by CEX
Investor funds are managed by the project
Smart Contract
Smart contracts are created and run by the DEX
Smart contracts are created and run by CEX
Smart contracts are created and run by projects
Listing
Liquidity pools open in DEXs
Listed by the exchange
The project must find an exchange where it can be listed
Where to get involved in IDO?
The first path to participating in IDO is the project itself. Participating in the project community and following its social media channels is a great way to get involved. You can also visit a DEX (like PancakeSwap or DODO) for upcoming IDOs. For all the upcoming IDOs, check out the list of token offerings provided by CoinMarketCap. Some tokens will not carry out IDO, but CoinMarketCap clearly marks the tokens that carry out IDO.
How to participate in IDO?
Prepare a cryptocurrency wallet that can be associated with the DApp, such as MetaMask or Binance Chain Wallet, to participate in IDO. You will also need some cryptocurrency to buy tokens and pay transaction fees. The required cryptocurrency depends on the sale, and even liquidity pool tokens need to be prepared if participating in an IFO.
Once the wallet is ready, click the connect button to link the IDO DApp, usually located in the upper right corner. The following examples are available for reference:
You'll see instructions on how to lock your funds in preparation for the token generation event. Be sure to deposit sufficient funds to cover transaction fees. Generally, after the subscription period ends, the tokens will be transferred to your wallet. However, some sales activities may lock or pledge new tokens for a period of time. All details must be fully investigated before participating in an IDO.
Tips for Safely Participating in IDO
As with any investment, here are some simple and practical tips to keep your trades safe:
Participate in IDO with the right link. The criminals used the public's enthusiasm for IDO to hype up and create fake subscription pages. Cryptocurrency transferred to scam pages can never be recovered.
Participate in the trusted DEX Launchpad. There are many trusted DEXs in the market (such as PancakeSwap and BakerySwap), and you can safely participate in the IDOs they launch. These are the best opportunities to harvest tokens during sales events.
In-depth study of investment projects. Is the project party a trusted and well-known team? Are funds raised audited? Is there a product available that can be used? Such questions can help identify potential run-off scams.
Review IDO's terms and conditions. There may be a delay in finally getting your tokens, and your tokens will even be added to the staking pool and locked for a period of time. According to the token economics of the project, anything can happen, and you should have a good understanding of the benefits and risks behind it.
Rational investment, do what you can. Token sales are notoriously volatile. Blind investing can easily get out of control and out of reach. Selling is always risky, and even after thorough research, there is still the potential for scams, frauds or run-off scams.
Popular IDO Launchpad Platforms
There are many DEXs in different blockchains that provide IDO services. An easier way to search is to visit CoinGecko for a list of Launchpad tokens sorted by market cap. All DEXs (almost all DEXs) that have launched exclusive tokens are listed. However, it should be noted that a high market cap does not mean that a DEX is trustworthy. This information should be combined with other basic knowledge to conduct a comprehensive analysis before deciding to carry out IDO's DEX.
In conclusion
Simple, affordable, and widely accessible, IDOs are gradually becoming the standard fundraising model for many new projects in the cryptocurrency market. In fact, token issuance has gradually developed into an industry. All in all, it is generally safer to participate in a sale through a decentralized liquidity exchange than through the project itself. Nonetheless, choosing the right project is critical if IDO is to be a big success. Therefore, doing traditional in-depth research is more important than anything else in the cryptocurrency space.
Last updated