One thing that is synonymous with cryptocurrencies, aside from the periodic rise and fall of digital assets, is the fast pace at which newer ideas are introduced and institutionalised as the ‘next big thing’ for the industry. Beyond what is looking like Crypto Winter 2.0 which the industry is currently facing, another solution picks up rapid steam: One such example is Initial DEX Offerings - IDOs. Call it ICO 3.0 or IEO 2.0, one thing is clear, IDOs are becoming the easiest route for crypto startups to crowdfund or bootstrap liquidity for their young projects. Even established projects are looking to raise further funds this way.!
But what are IDOs? What makes it different from its earlier predecessors like ICO and IEO? How long will IDOs last, and what is fuelling them? And what is the future for IDOs? These are some of the pertinent questions we shall be looking at in this article. So without much ado, let’s begin tearing into these questions.
What is an IDO?
Initial DEX Offerings are token crowdfunding sales taking place on decentralised exchange platforms. If you’re not familiar with what a DEX is, let me explain. A decentralised exchange (or DEX) is a peer-to-peer marketplace where transactions such as swapping of digital assets occur directly between crypto traders. There’s no need for sign-ups which means no KYC. Instead, DEX users connect their wallets directly to the exchange, meaning it is non-custodial.
Because of the way DEX is designed, there’s usually no counterparty risks that arise from intermediaries. Crypto projects found another use-case aside from just trading or farming yields, and they can now raise funding for their project by offering their token directly to users who decide to add liquidity to any of the token pairs. Take for instance; liquidity pools are pairs of crypto assets and stable coins. More specifically, USDT/ETH is a liquidity pair. Traders can swap them between different crypto assets and stable coins based on market conditions. As a result, decentralised liquidity exchanges enable companies to launch a token and access immediate liquidity. In an IDO, the IDO coin is issued via decentralised liquidity exchanges, such as Uniswap, Bancor, Sushiswap, SpacePort, Polkastarter etc.
How is IDO different from ICO and IEO?
Like the way they bear semblance in nomenclature, IDOs are similar to their predecessors: ICOs and IEOs. However, at the same time, they are fundamentally different from each other. In the case of ICO, a token issuer manages all the responsibilities like allocation and distribution. Meanwhile, for IEOs, a centralised exchange conducts the token offering and distribution in partnership with the crypto project. However, for an IDO which is a mix of ICO and IEO, the difference is that IDO replaces the centralised exchange (CEX) with a decentralised one (DEX).
Advantage of IDO over ICO and IEO
This singular replacement of a CEX with a DEX comes with tremendous advantages. First, IDOs are preferred because they provide projects with the opportunity of frictionless liquidity, immediate trading, significantly lower listing costs etc. In addition, there are no intermediaries, which means a more open, transparent, and fair way to launch a new crypto project than the pre-mined ICO models of the past that rewarded founders to the detriment of token buyers.
Factor fuelling IDOs
IDOs are facilitated on a DEX, meaning direct access for token buyers without any intermediary. DEXs are non-custodial and have blown up in activities since the DeFi Summer of 2020 that has continued even till now. Moreover, due to DeFi composability (the ability to build upon another DeFi project), dapp builders continue to explore more use-cases for DeFi. And this has fuelled the boom of DEXs like Uniswap, Curve, SushiSwap, PlasmaSwap etc. As more people keep using DEXs, projects see an opportunity to connect to the growing liquidity on these DEXs. Hence, one way to do that is by issuing their token to the DEX communities through an initial DEX offering.
Will IDO as a crowdfunding method last?
It’s been two years plus since Raven Protocol conducted the first-ever IDO and it’s not looking like this crowdfunding method is plateauing in interest. Currently, there is no concise data on how much has been raised through IDOs so far. While crypto startups raised $13 billion and $1.7 billion through ICOs and IEOs, respectively, popular IDO launchpads like Polkatstarter and DuckSTARTER are getting booked by the day. For those who conducted their IDO already, their funding rounds were oversubscribed. Participants have gone on to rake in an average of 2,036% gains within a few days of buying an IDO project’s token.
It took the ICO about three years for it to flatten out and IEO about two years. However, the IDO movement has now exceeded two years since the first one, with an even more substantial prospect of gaining widespread adoption. Moreover, if DeFi continues to gain steam and DEXs keep staging massive competition over their CEX counterparts, IDOs would far outlast its predecessor centralised funding methods.
Future of IDOs
The Initial DEX Offerings approach has been introduced to address the issues with its predecessor’s ICO, STO and IEO to some large extent. With its decentralised exchange model, where there is no need for permission to be granted in order to organise the fundraising event.
However, at the same time, it leaves loopholes that whales and scammers can exploit, affect the token issuers such as immediate price movement, rug pulls where shady crypto project owners suddenly pull away liquidity and crash the token price and more unfortunate unethical situations.
Of course, Initial Dex Offering (IDO) is the next step of crypto fundraising, but it needs a lot more work to be done. For instance, it might make sense to integrate control mechanisms into the existing IDO model. This can help in eliminating variations in token prices until the fundraising has finished - SpacePort currently does this. Vesting and lockup periods are pre-built into SpacePort’s launchpad smart contracts preventing private sale investors from going rogue and selling against agreed terms. Also, in a way, by using KYC regulations, issuers can gain more control over the buying of tokens making sure rogue entities don’t use IDO tokens for terrorism financing and money laundering.