All you need to know about IDO.

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ICO, IDO, STO, IEO,…there are so many abbreviations flying around in the crypto world that it’s hard not to feel like you’re playing a game of Jeopardy. And only those four are all different methods of raising funds for cryptocurrency projects. This begs a few questions this article will answer:

  • What kind of crypto funding methods are there?
  • What are the most relevant ones?
  • How do they differ?
  • What are the advantages and shortcomings?
  • Is there a solution that solves these shortcomings?

You’ll find answers to all of these questions below.

What kind of crypto funding methods are there?

Four main funding mechanisms exist in the crypto world:

ICO: Initial Coin Offering

IDO: Initial Dex Offering

IEO: Initial Exchange Offering

STO: Security Token Offering

That looks more confusing than it actually is in reality because they’re all relatively similar, and some are more popular than others. IDOs and IEOs are pretty similar (we’ll get to the how in a moment). ICOs used to be the first and most popular method, but are not used at all anymore. STOs are a bit more complex to use for crypto projects than the others, so they will be left out of this article.

Instead, we’ll focus on ICOs and IDOs and how they relate to each other. This makes sense because ICOs were the crucial fundraising mechanism during the last crypto bull run in 2017 and IDOs seem to have taken this role on now after improving on some of the predecessor’s shortcomings.

What is an ICO?

An ICO is a funding mechanism for crypto projects. It roughly works like a crowdfunding project, in that a project turns to its community and sets a goal for a minimum (and possibly maximum) amount of money it wants to raise.

Funds are raised in fiat or, more often, cryptocurrency, directly by the developer team. The money is sent to a smart contract, and the investor receives the project tokens on the blockchain the project launches on (often Ethereum).

Pros and Cons of ICOs

ICOs used to be the hype in 2017 when Bitcoin reached its cycle peak of almost $20K. Although they had existed since 2013, and coincidentally Ethereum had launched money for its foundation through an ICO, it was not until that cycle that ICOs really became a popular way to raise money. It’s pretty easy to understand why projects liked this mechanism:

Easy and to operate without much control or regulation. All upside, very little downside.

All you had to do was throw up a whitepaper, create a bit of hype through marketing, and you were ready to launch an ICO. The launch cost was almost nonexistent, and funds from the community were readily available. Since crypto tokens were not classified as securities, there was virtually no annoying government regulation. Projects could raise liquidity from all around the globe without intermediaries like exchanges or regulators, and those funds could be used instantly.

It’s pretty easy to see the flaws of this system. If control is absent, scams will be present, which was precisely why ICOs got a bad rap after Bitcoin had topped out. Scams were abundant since it was all too easy for projects to raise money and abscond with it. Many projects were not even past the idea stage and were far from having a working prototype. Add to that an injection of cash and no incentive to develop said prototype, and you have a recipe for disaster. Moreover, even legitimate projects find it hard to sustain their initial price level since they had the difficult task of listing on exchanges and had to grapple with investors’ expectations.

For investors, this was a high-risk, high-reward game. On the one hand, it was entirely possible to multiply your investment many times over very quickly. But it was equally possible to get exit scammed, which many did. Doing proper research and due diligence on projects was virtually impossible.

After the 2017 ICO hype had died down, a new funding mechanism emerged.

What is an IDO?

IDO stands for Initial Dex (Decentralized Exchange) Offering. This mechanism emerged from IEOs, Initial Exchange Offerings. At an IEO, a token gets listed on a centralized exchange. At an IDO, it gets listed on a decentralized exchange, i.e., all trading is non-custodial, and the exchanges do not control the listings since trading is permissionless.

IDOs emerged from IEOs, which work in the same way but with centralized exchanges. The downside for projects is that it retains control of the funds and doesn’t have to pay the exchange a fee for the listing. On the flip side, Dexes do not have the same trading volume that centralized exchanges have.

Pros and Cons of IDOs

IDOs offer fast trading, immediate liquidity, and an open and fair fundraising mechanism. Instead of launching on their own website, projects launch on a Dex, sometimes also called a launchpad. This carries the advantage of being able to leverage the platform’s own reach and marketing. Where ICOs had to pull all the weight themselves, in IDOs share the burden with the launchpad.

Moreover, the token is already listed on an exchange and, therefore, less likely to collapse in value drastically. Since the funds are not released all at once but follow a vesting schedule, the project has an incentive to behave rationally and try to maximize the project value to increase the value of its own share. This initial listing gives the project also leverage in trying to get listed on bigger exchanges.

Although they’re a more effective way to bootstrap a project, scams are still possible, albeit rarer. The bigger problem, though, is the high demand for IDOs. Interesting tokens get quickly bought up, making it hard for the average investor to buy in. Moreover, most tokens are still reserved for private investors and pre-sales, thereby limiting transparency and fairness. Some Dexes try to conduct a guaranteed allocation, but that comes at the expense of being able to reserve a bigger share of the pool. Lastly, IDOs can require KYC, putting potential investors, who value privacy and decentralization, off.

ICOIDO
Characteristics• Crowdfunding mechanism for crypto projects
• Projects market themselves
• No exchange listing
• Crowdfunding mechanism that works through exchange listing
• Decentralized exchange vets the project
• Shared marketing with Dex
Advantages• Easy to operate
• Quick, no-strings-attached liquidity
• No regulatory oversight
• Vesting schedule incentivizes correct behavior
• Shared marketing effort means better long-term prospects
• Token listing increases chance of future listings
Disadvantages• Often very immature or nonexistent product
• Incentivized exit scams
• Hard to maintain value even with best intentions
• Scams still possible
• Hard to independently research projects
• High demand leaves many investors empty-handed