Cryptocurrency fundraising and bootstrapping began with Initial Coin Offerings (ICOs) in 2017. This saw several billions raised to create new tokens, start a crypto/blockchain company, etc.
However, ICOs were pretty unregulated, so they put investors at risk. Initially, many of these ICOs were successful and became the go-to fundraising method. But unfortunately, the lack of regulation with the model saw a lot of numerous scam projects and rug pulls, casting a dark shadow on ICOs.
In Q4 2018, Initial Exchange Offerings (IEOs) started to replace ICOs; since the fundraising was done on reputable exchanges like Binance, Huobi, KuCoin, etc., the companies were very well vetted, and the entry barrier became much higher.
Hence, a solution was needed for smaller projects in a way that protects investors (unlike ICOs) without having such high requirements (like IEOs). This birthed Initial DEX Offerings (IDOs), facilitating transparency and lowering entry barriers.
This decentralized exchange, or DEX, has been growing in popularity as an alternative to the centralized exchanges that dominate the market today. As the number of DEXs increases and their capabilities expand, many investors wonder if it's time to hop aboard the DEX bandwagon. However, what exactly is an initial DEX offering (IDO)?
How do these new decentralized exchanges work? This article will cover everything you need to know about initial DEX offerings, whether they could be right for you, how they work, and how you can participate.
What Is An Initial DEX Offering (IDO)?
The Initial DEX Offering, or IDO, is an offering that symbolizes any asset maintained on a decentralized exchange (DEX). Tokens are instantly posted on the DEX, via which they are launched in an IDO. This implies that project creators are no longer required to acquire pool assets; instead, the pool is formed on a DEX after an IDO through its launchpad or a third-party launchpad.
An initial DEX offering primarily aims to raise funds and bootstrap a project. However, unlike other offers in which tokens are sold before listing, IDOs are instantly listed on a decentralized exchange.
The IDO model gained popularity because crypto projects could raise funding without having to fulfill high eligibility standards set by ICOs and IEOs; also, investors could profit from rapid token trading, resulting in a win-win situation for everybody. IDOs may be formed for any purpose, and they provide businesses with a mechanism for engaging their communities in an economy that enhances their products and services while also allowing them to make sound economic decisions about their assets.
How Does An IDO Work?
It’s important to note that the IDO is not the same as the coin it sells. When the project begins, investors will utilize the Initial DEX Offering crypto to trade or pay for utilities within the enterprise.
The project will be published on the DEX after a whitepaper for the token is developed. The tokens are now accessible at a low cost. In exchange for these tokens, users begin to sponsor the initiative. The idea is that their prices will spike at the start of the project, and profit will come as a result.
IDOs utilize a decentralized exchange (DEX) to enable token sales. The DEX receives tokens from a crypto project, users commit funds through the platform, and the DEX completes the ultimate distribution and transfer. These procedures are automated and take place via blockchain smart contracts.
The amounts raised during the IDO are placed in a liquidity pool. The liquidity pool will be accessible for trade after the project is completed. Investors who purchased the token early on can begin trading immediately.
The Advantages of an IDO
The total amount of capital raised for cryptocurrency projects is increasing rapidly. IDOs offer many advantages over their centralized counterparts, including enhanced security, greater transparency, and faster project execution.
Some of the advantages of a DEX offering include
• Transparency: All transactions on a DEX platform are fully transparent, allowing users to easily track every transaction on that platform. This differs from traditional exchanges, which often hide behind opaque trading volume and pricing data policies.
• Security: Decentralized systems tend to be more secure than centralized ones since they eliminate single points of failure. For example, if hackers could breach one server in a decentralized system, they would not gain access to all the information stored on that network—they would only gain access to information stored on that particular server.
• Faster Execution: A vital advantage of the DEX offering is its ability to execute transactions once the listing occurs, as tokens are instantly available for trading.
The Challenges of an IDO
While IDOs are beneficial for both parties involved, they're also complex transactions with unique challenges and risks. Therefore, it's essential to recognize its challenges.
The challenges of the DEX offerings are
• Lack of Price Stability: This happens because token trading is immediately available, token swapping starts pretty quickly, and only a few investors can grab the token at the listed price. As such, it becomes challenging to make an investment decision as there may be insufficient information regarding how much people are willing to pay for tokens once trading opens. As such, it becomes difficult to make an investment decision as there may be insufficient information regarding how much people are willing to pay for tokens once trading opens.
• Vague Vetting Process: Because there is such a significant demand for IDOs, scammers may develop ambiguous ventures and get them bootstrapped rather rapidly. As a result, determining which projects are valid and which are not can be challenging.
How To Enter An IDO
With so many exchanges popping up in recent years, it's no wonder that many crypto consumers are still unsure how to participate in Initial DEX Offerings (IDOs). IDOs are a relatively new concept, but they are expected to grow in popularity.
To participate in an IDO, you must first get a whitelist space on a launchpad for decentralized exchange offers. Because IDOs often raise modest sums, they must limit the number of purchasers and the number of tokens that investors may purchase.
Almost every launchpad platform needs potential investors to possess a specific quantity of its tokens or offer liquidity in some way to be eligible for an allocation. The more tokens you have, the more entries you receive; however, in some cases, you can only win once.
To become eligible for allocation via the whitelist, you may be required to do marketing chores like following particular Twitter accounts, retweeting specific tweets, and joining specified Telegram groups, which might occasionally boost your chances of earning an allocation.
Some of the cash received will be utilized to establish a liquidity pool using the project's token. The remaining money is distributed to the team. Following the Token Generation Event (TGE), investors will be able to exchange the token. Typically, the offered liquidity is locked in for a set time.
We believe you now understand what IDOs are and how they serve as low-barrier fundraisers for crypto projects. However, before participating in an IDO, you should conduct extensive research on the project, read the whitepaper, and investigate the team, to ensure that it provides real value, and is not a scam.