Imagine that you invested $325 in Ethereum ICO before everyone else at $0.311 in 2014. If you waited patiently until November 2021 before selling back your 1045 ETH at $4890 per unit, you would have got $5.11 millions! And if you invested the same amount in Nxt ICO with the same amount of $325 at $0.0000168 in 2013, resold them in 2017 at $2.15 each, and therefore got away with a handsome jackpot of 41.5 million dollars ! So of course, these are extreme caricatures, and ICOs/IDOs are not paradises without pitfalls, otherwise it would be too easy and everyone would get into it. And although there are many incredible success stories related to ICOs and IDOs, there are also problems that investors are facing. Let’s analyze them one by one…
An IDO is a crypto token offering run on a Decentralized Exchange (DEX). Liquidity pools (LP) play an essential role in IDO’s by creating liquidity post-sale. A typical IDO lets users lock funds in exchange for new tokens during the token generation event. Some of the raised funds are then added with the new token to an LP before being returned later to the project.
IDOs provide a cheap and simple way for projects to distribute their tokens. IDOs have been around for a while, but they are still evolving and providing new models like the Initial Farm Offering (IFO). We may also see increasing KYC requirements as the area becomes more regulated.
If you want to enter an IDO, you’ll need a digital wallet like MetaMask and some crypto to subscribe and pay transaction fees. Always do your own research on the project and invest via a trusted DEX. This includes looking closely at the IDO’s mechanics and the project’s team and tokenomics. As always, only invest what you are comfortable losing as token offerings involve high risk.
A token offering is usually an exciting opportunity for investors in the crypto ecosystem. The chance to buy a token at its launch price can be extremely rewarding. But this is just one side of the story. Looking back at the ICO (Initial Coin Offering) craze of 2017 on Ethereum (ETH), it wasn’t all entirely positive. Scams and rug pulls were widespread, and investors often suffered big losses.
Since then, the crypto community has developed alternative token offering methods, including the Initial Exchange Offering (IEO), Initial DEX Offering (IDO), and Security Token Offering (STO), among others. IDOs have become a popular choice, but how does this differ from an ICO, and is it safer for investors to use?
What is a token offering?
A token offering is a fundraising method where a project or startup supplies a new cryptocurrency for sale. Crowdfunding methods can vary, such as using a centralized crypto exchange platform to manage the process (IEO), working with a local financial regulator (STO), or simply doing it alone (ICO). Some investors purchase the coins for their utility, while others do it for speculation. For example, you might use the coin for farming, staking in a governance mechanism, or paying for transaction fees.
How does an IDO work?
An IDO uses a decentralized exchange (DEX) to facilitate the token sale. A crypto project provides their tokens to the DEX, users commit their funds through the platform, and the DEX completes the final distribution and transfer. These processes are automated and occur via smart contracts on the blockchain.
The rules and stages of an IDO depend on the DEX running it, but there are some common methods:
1. After a vetting process, a project is accepted to run an IDO on a DEX. They offer a supply of tokens for a fixed price, and users lock their funds in return for these tokens. Investors will receive the tokens during the token generation event (TGE) later.
2. Usually, there is an investor whitelist. You might have to complete marketing tasks to join the list or simply provide your wallet address.
3. Some of the funds raised are used to create a liquidity pool with the project’s token. The rest of the funds are given to the team. Investors can then trade the token after the TGE. Typically, the provided liquidity is locked for a certain period.
4. At the TGE, the tokens are transferred to the user, and the LP opens for trading.
What’s the future of the IDO model?
While the model above is a typical IDO, token offerings are always changing. For example, we also have the IFO (Initial Farm Offering) model, which is increasingly popular. It’s hard to say whether it can be called a traditional IDO, but it depends on the same core concepts: liquidity pools and decentralized exchanges.
Rather than lock their tokens directly, investors must first stake in a Decentralized Finance (DeFi) LP to earn LP tokens. For example, a project wanting to sell its token for BNB in an IFO on PancakeSwap will require investors to stake BNB and CAKE in the BNB-CAKE LP.
BNB-CAKE LP tokens are then locked for the new tokens, and the project receives the BNB while the CAKE is burned. The number of tokens you get will depend on how many participants there are in the sale, and any excess funds staked will be returned to you. There may even be measures in place to make it fairer for small investors to get a share of the IDO, such as the [Basic Sale] and [Unlimited Sale] features on the PancakeSwap IFO below.
Another possible change to IDOs may be the requirement of KYC (Know Your Customer) and AML (Anti-Money Laundering) processes. Financial regulators worldwide are taking a bigger interest in DeFi and its regulatory status. AML and KYC are now standard for centralized exchanges, and DEXs may also be subject to the same rules in the future.
What are the advantages of an IDO?
Over time, token offerings have mostly become fairer and more secure for investors. IDOs have some distinct advantages that support this:
1. You don’t need to deal directly with a project and trust their smart contracts. A reliable IDO platform will have several successful sales completed. If the smart contracts are the same, you can have some trust in the offering.
2. Immediate liquidity provided post-sale. IDOs will lock up some of the funds raised in liquidity pools to create a liquid market post-sale. This helps reduce slippage and volatility.
3. No sign-ups are required. You only need a wallet and funds to participate in the sale, and personal details aren’t required. This makes it open to all kinds of users. However, the lack of KYC or AML processes can also be seen as a disadvantage (more on this below).
4. IDOs are affordable and accessible for projects. It’s often easier and cheaper for a small, less-known project to launch their token through a DEX than a large, centralized exchange.
5. IDOs often have anti-whale measures, meaning no single investor can buy a large number of tokens.
What are the disadvantages of an IDO?
Some of the strengths of the IDO also bring about some of its weaknesses. These problems stem mainly from the decentralized and anonymous aspects of an IDO.
1. No KYC or AML. Investors and projects are protected when proper checks are completed. These measures help avoid the laundering of illegal funds and the evasion of economic sanctions. For example, certain countries may not legally participate in an IDO if the token counts as a security.
2. Less due diligence of projects. It’s much easier for an unreputable project to distribute their token through an IDO than it is through an IEO with a large, regulated exchange.
What’s the difference between an IDO, IEO, and ICO?
The methods used in an ICO, IDO, and IEO are quite different, even though the results are mainly the same. Here’s a quick overview of the key differences:
Where can I find IDOs?
The first place to find an IDO is from the project itself. Getting involved with the project’s community and following their social media channels is a good way to start. You can also check DEXs to see their list of upcoming IDOs, such as PancakeSwap or DODO. If you want an overview of all upcoming IDOs, CoinMarketCap has a list of token offerings available to view. Not all of these will be IDOs, but CoinMarketCap clearly labels which sales are.
How to enter an IDO?
To enter an IDO, you will need a crypto wallet that can connect to DApps like MetaMask or Binance Chain Wallet. You will also need some crypto to buy the tokens and to pay for transaction fees. The exact crypto you’ll need will depend on the sale, and could even be LP tokens if you’re taking part in an IFO.
After you’ve prepared your wallet, you’ll need to connect to the IDO DApp using the connect button, usually found in the top right corner. Here’s an example of what one looks like:
You’ll now be given specific instructions on how to lock your funds in preparation for the token generation event. Make sure you also have enough funds to pay your transaction fees. In most cases, once the subscription period is over, the tokens will be transferred to your wallet. Some sales might, however, lock or stake your new tokens for a certain period. Make sure to read the details before participating in an IDO.
Tips to stay safe in an IDO
Just like any investment, there are easy, practical tips to help keep yourself as safe as possible:
1. Use the correct link to subscribe to the IDO. Scammers will take advantage of the excitement and hype of an IDO and create fake subscription pages. Any crypto you transfer to a scam page will be permanently lost.
2. Use a trusted DEX Launchpad. There are already many trustworthy DEXs where you can participate in IDOs, including PancakeSwap and BakerySwap. Using these gives you the best chance of receiving your tokens successfully in the sale.
3. Research the project you’re investing in. Is it from an already known and trusted team? Will the funds raised be vested? Is there already a product to use? Questions like these can help you determine the likelihood of a possible rug pull.
4. Check the IDO terms and conditions. There may be a delay in when you get your tokens, or they could even be staked and locked for some time. Almost anything is possible depending on the project’s tokenomics, and you should thoroughly understand them.
5. Invest only what you can afford to lose. Token sales have a reputation for being hugely volatile. It can be easy to get carried away and invest more than you should. But don’t forget, sales are still risky, and even with sound research, you could still be the victim of a scam, fraud, or rug pull.
Popular IDO launchpad platforms
There’s a large number of DEXs across different blockchains who offer IDO services. A simple way to search through them is through CoinGecko’s list of Top Launchpad Coins by Market Capitalization. Any DEX that has its own coin, which is almost all of them, is present on the list. However, don’t forget that a large market capitalization doesn’t necessarily mean the DEX is reliable or trustworthy. You should use this information together with other fundamentals before choosing a DEX to use for an IDO.
With their mix of ease-of-use, affordability, and accessibility, IDOs have become a standard fundraising model for many new projects in the crypto market. In fact, token offerings have become an industry in itself. To summarize, you’re usually safer taking part in a sale through a Decentralized Liquidity Exchange than a project. Nevertheless, a huge part of success in an IDO is picking the right project. For this, nothing beats good, old-fashioned research in the crypto space.