What is IDO?
An Initial DEX Offering, or simply IDO, is one of the crowdfunding methods for blockchain projects in the world of Decentralised Finance (DeFi). There are three main participants in IDO: a crypto project, a decentralised crypto exchange (DEX), and investors.
The project needs to create tokens and provide them to the exchange it chooses. Technically, that's all there is to it. IDOs offer a streamlined fundraising process, so projects don't need to raise funds through traditional sources.
The DEX acts as an intermediary between the project and its investors. It conducts the initial token sale right after their distribution.
For investors, it's just a matter of keeping track of all IDOs to find new promising tokens before they become popular. You can participate in IDOs by registering in advance on the whitelist and then purchasing tokens at a fixed price before the official token listing occurs.
How does IDO work?
Here's how the whole process looks:
1. Preparation stage. Developers analyse and prepare their crypto project for launch. This involves creating a technical roadmap, outlining token economics, and building the project's website.
2. Finding an exchange. A crypto project seeking to conduct an IDO looks for a suitable crypto exchange to list its tokens. It undergoes an audit and raises capital through the trading platform’s launchpad. Some of the most popular platforms include Uniswap, PancakeSwap, and SushiSwap.
3. Token presale. Early investors who have pre-registered on the whitelist (a list of users who are allowed to participate) take part in the token presale. They purchase the new token at a special price, which may be lower or higher than the IDO price. It's important to note that investors receive token commitments during the presale, not the actual tokens. Tokens are distributed later during their generation.
4. Public token sale. After the presale, the public token sale begins either in batches or through an auction. When a project sells its tokens in batches, it means that it sells them in portions and pre defines the volume and price of these portions. In the case of selling through an auction, there is no fixed price — tokens are sold through competitive bidding.
5. Token listing. The project team creates a liquidity pool, using its tokens and external contributions, such as a portion of the proceeds from the IDO. This launches a liquid secondary market for the new token.
6. Post-IDO. Once the IDO is complete, investors receive their tokens, which they can use for trading on the exchange or participating in the project's crypto ecosystem.
The role of liquidity pools in IDO
Another crucial detail in this whole process is liquidity pools (LP). These pools hold tokens used for trading on the exchange.
Usually, liquidity pools contain two coins – for instance, ETH/BNB, BTC/XRP, ADA/SOL, or any other currency pairs. A liquidity pool is where you can swap one digital asset for another.
Liquidity pools are essential components of IDOs as they ensure liquidity after the sale. In standard IDOs, participants lock their funds to acquire new tokens during the token generation event. A portion of the funds raised is subsequently combined with the new tokens in a liquidity pool, where it remains until it's returned to the project.
Benefits of IDO for crypto projects
If a crypto project chooses to go through an IDO, it can significantly save on the token issuance process. The initial DEX offering opens up many prospects and advantages for startups. Among them are:
- Affordability. IDOs practically do not require listing fees for tokens on DEXs, making the procedure much cheaper compared to token launches on CEXs.
- Simplified fundraising. Instead of the labour-intensive process of raising funds, projects can directly attract investments through liquidity pools without intermediaries.
- Simplified market access. With IDOs, tokens do not need to be listed on centralised exchanges since they become immediately available for trading.
- Increased liquidity. Projects conducting IDOs can gain access to new liquidity pools and expand their audience.
- Security. Since DEXs do not store users' funds, it's not possible to steal from them.
Token pricing and distribution in IDO
Another important aspect of IDOs is token pricing and distribution. In simple terms, this is called the project's tokenomics. Let's dive into it.
The token price is not stable. Yes, the project team sets a fixed price for their coin, but with the start of the token sale, it will inevitably change – both upwards and downwards.
During the public sale stage, the new token’s price usually rises after the first sale. Early investors who have participated in the pre-sale are in the most advantageous position. They get the opportunity to purchase a large number of coins at a reduced price. Later, when the price starts to rise, they sell their tokens at a higher price, thus earning on the price difference.
Token distribution is like a plan. It describes what percentage of the issued tokens each group of investors will receive. Usually, coins are distributed as follows:
- Part of the cryptocurrency assets goes to the public. These are the investors who liked the project and decided to invest in its token.
- Another part is dedicated to the project’s community. It includes traders and investors who not only invested in tokens but are also passionate about the project, willing to follow its progress and support it at all stages of its development.
- Insiders also receive a certain amount of coins, including the team of founders, consultants, and venture capitalists (VCs).
- And finally, funds are also directed to the foundation, which is a non-profit entity that operates the project.
There are different models of token distribution, including pre-sale, private sale, public sale, airdrops, liquidity mining, or yield farming.
How to participate in IDO
Participating in IDOs doesn't require you to go through complex quests. All you need is:
1. To register in the project's whitelist. This point has already been discussed above. Projects announce the start of registration before the beginning of IDO, so it's essential to keep an eye on the list of upcoming IDOs. Further in this text, you'll find useful resources to help you stay updated on industry news.
2. An active cryptocurrency wallet. For these purposes, any hot wallet like MetaMask will do. More information on how to choose and set up your wallet can be found in our article.
3. The required amount of cryptocurrency in your account (the specific type depends on the project you choose and its requirements). You'll need it to purchase startup tokens and pay exchange fees.
4. Configured access to dApps. It serves as a bridge between your wallet and IDO. After connecting, go to the chosen exchange and follow the instructions – they vary on each platform.
The digital assets you purchase won't appear immediately in your balance – don't panic! It's important to remember that during the IDO stage, you're not buying tokens – you're only reserving them for yourself. Technically, investors are rather buying a receipt for receiving tokens after their generation.
Speaking of security, it's important to note that when participating in IDOs, you're not transferring your funds to DEXs accounts. In fact, all such transactions are conducted through smart contracts. The exchange merely acts as a provider of contracts; it doesn't store user funds, private keys, or other data.
Nevertheless, before investing, it's still a good idea to assess the reliability of the platform you've picked. Conduct some research and review the list of its successful sales.
Finding the right IDO projects
To stay updated on all the latest IDOs, seasoned members of the crypto community constantly monitor updates in special calendars.
One of the most popular options is CoinMarketCap, a data aggregator. On its platform, you can explore a list of token offerings, both upcoming and already past. In the dedicated section, you'll find project and token names, as well as the token sale date. It's worth noting that the calendar includes not only IDOs but also ICOs and IEOs. The token sale format is indicated in the "Stage" column.
CoinMarketCap calendar
The analytical platform Cryptorank offers similar functionality. In its calendar, you can find not only the start date of IDOs but also basic information about the project, including its name, initial cap, raise, category, and more.
Cryptorank calendar
You can also discover a list of upcoming IDOs on social media by following accounts of renowned analysts, traders, and other experts in the crypto field. By keeping an eye on trends and discussions, you won't miss out on new token sales. Specialised forums and discussions, such as those found on Reddit, are valuable sources of information, too.
Another source of information is advertising. Crypto influencers often promote new projects on their social media. However, it's important not to blindly trust all advertisements. Instead, focus on the reputation of the blogger and the community's reaction.
Risks and challenges in IDO
Despite the numerous benefits of IDOs, they also come with inherent risks and challenges for crypto investors. Here are some of the most common ones:
- Fraud risk. Due to the lack of stringent screening, almost any startup can conduct its IDO, making it a ripe opportunity for scammers. Particularly prevalent schemes include pump and dump and rug pull. The first one happens when the cryptocurrency price is artificially inflated and then quickly devalued. As for rug pull, it implies a situation, in which project developers disappear with investors' money shortly after the token launch.
- Uncertainty. Projects participating in IDOs are often in the earliest stages of development. This means that their future success cannot be guaranteed, and investments may ultimately result in losses.
- Volatility. The crypto market, especially in DeFi, experiences significant price fluctuations. A substantial downturn can lead to a complete loss of investments.
- High competition. If a user fails to register in the whitelist, they cannot participate in an IDO. Moreover, many projects compete with each other, leading to potential overpricing of token initial prices.
The future of IDO in the crypto market
DeFi and DEXs in particular are gaining popularity among members of the crypto community. IDOs are attractive as such offerings democratise the industry. They lower the barrier for projects to enter the crypto market and open up promising investment opportunities in crypto trading for investors.
However, it's essential to always remember about the risks. When deciding to participate in IDOs, you should be aware that investments may not pay off. Moreover, the project you choose may turn out to be fraudulent or unsuccessful. Before making any investments, always conduct thorough research and listen to the opinions of other market players.
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This article is not investment advice or a recommendation to purchase any specific product or service. The financial transactions mentioned in the article are not a guide to action. It’s not intended to constitute a comprehensive statement of all possible risks. You should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.
