An IDO is a crowdfunding approach by crypto projects to introduce their native token via a decentralised exchange (DEX). The IDO model is the successor to ICOs, allowing projects to raise funds for expansion independently. This article delves into IDOs, the steps to participate in an IDO, and much more!
IDO, short for Initial Decentralised Exchange (DEX) Offering, is a mechanism where a project introduces its token through a decentralised liquidity exchange. The birth of IDOs was ushered by the need to address the limitations of the conventional ICO crypto crowdfunding model.
In a typical IDO, investors can lock their funds into a smart contract just before the project launches its native token. As the token is generated, investors receive the new tokens in exchange for transferring the locked funds to the project.
In contrast to ICOs, IDOs offer projects a quick and cost-effective means of distributing their tokens and raising funds while providing investors with enhanced security. To participate in most IDOs, individuals must sign up in advance by joining the whitelist through a website or social media platform.
IDOs serve as a means to secure funding for advancing a project, offering fewer restrictions than traditional fundraising methods. After the token generation event (TGE), the tokens are listed on the DEX, enabling immediate trading on the exchange.
The funds raised during the IDO are bifurcated, with one portion transferred to the project team to support further development. At the same time, the other part is used to create a liquidity pool, ensuring sufficient transaction volume on the exchange.
IDOs can be initiated by anyone, not solely limited to well-established companies. However, for a project to be listed on a decentralised exchange, it must adhere to the guidelines set forth by the initial DEX offering platforms (launchpads) and the DEX itself. This may include requirements such as whitelisting and smart contract audits.
On a governmental level, there are currently no official requirements for IDOs, as the legal adoption of such mechanisms is rather limited. However, in the US, the FATF is planning to consider decentralised exchanges as Virtual Asset Service Providers (VASP), imposing obligations to implement Anti-Money Laundering (AML) and Know Your Customer (KYC) rules.
|Definition||A portion of the total token supply is sold to the public on its own||A portion of the total token supply is sold to the general public via CEX||A portion of the total token supply is made available to the public via the DEX launchpad|
|The fundraising entity||The project launching the ICO||The CEX||The DEX or launchpad for IDOs|
|Token listing after crowd sale||The project seeks token listing on several exchanges||The CEX automatically lists the token||The DEX automatically lists the token|
|Vetting process||The projects haven’t been vetted; anyone can launch an ICO||Before a project is listed, it has to undergo rigorous vetting process||Projects are vetted and have to follow the launchpad’s standards|
|Token availability||Tokens aren’t available immediately, so investors must wait for a listing on an exchange||Tokens won’t be available for trading immediately||Tokens are made available immediately or have a vesting period|
|Smart contract management||Managed by the project issuing the ICO||The exchange is responsible for this||Launchpad and the project issuing the IDO|
|Marketing||The project launching the ICO must spend a large amount of money on promoting it||The crypto exchange promotes and markets the IEO||The launchpad and the project market themselves|
Fair Fundraising: IDOs offer a more equitable fundraising approach, as they do not rely on conventional private funding. Anyone can organise or participate in an IDO, not just limited to private investors. Investors could purchase the crypto at a reduced cost during the public token sale, making a profit by reselling tokens to a broader audience.
Fast Trading: Tokens become available for trading on the DEX when the first investor purchases them during an IDO. Thus, users can promptly engage in the network's utility, using the token for purposes such as staking, governance, and other utility functions. It enhances token liquidity by enabling more people to access it in stable and liquid markets.
Lower Costs: DEXs operate based on self-executing smart contracts, significantly reducing costs. When a project uses a DEX without intermediaries, deploying a new smart contract to manage the asset's liquidity pool and tokens only incurs minimal "gas" fees.
Secure Transactions: IDOs processed by DEXs use smart contracts to execute trades and record them on the blockchain, ensuring secure transactions. Besides, as DEXs do not hold funds, they are less susceptible to targeting by bad actors.
IDOs provide fair fundraising, allowing individuals and businesses to participate without relying on private funding. They aim to enable fast trading of tokens, enhancing liquidity and allowing more people to access tokens in stable markets. DEXs operate on self-executing smart contracts, reducing costs and ensuring secure transactions. Overall, IDOs offer a more equitable approach to fundraising.