Initial DEX offering or IDO is a new fundraising model that offers better liquidity of crypto assets, faster, open, and fair trading. IDO model is the successor of fundraising models such as ICO, STO, and IEO.
Before we learn about Initial Dex Offering, let’s brush up on our knowledge on the fundraising concept via token sales. If a company wants to raise funds to build new products or expand its business, it has multiple options. The traditional option is to go for financial loans or investments from banks and VCs.
However, since the success of cryptocurrencies — Bitcoin, and Ethereum, more companies had used it as an instrument for raising funds via token sales. Here, the company would create crypto tokens and issue them to the general public in exchange for Bitcoin, Ethereum, other major cryptocurrencies, and fiat currencies. This process is called fundraising via token issuance.
There are different methods to do token sales, namely Initial Coin Offering or ICO, Security token offering or STO, Initial Exchange offering or IEO, and the latest method — Initial Dex Offering or IDO.
- An IDO is a fundraising method in which the token is issued via decentralized liquidity exchange.
- A decentralised liquidity exchange is a type of crypto asset exchane that relies on liquidity pools with which traders can swap tokens.
- Liquidity pools are pairs of crypto assets and stable coins. Fo example, USDT/ETH is a liquidity pair. Traders can swap between crypto asset and stable coin based on market conditions. As volatility of stablecoins are negligible, it offers a safe option for traders to manage the high volatility of crypto tokens and assets by swapping it with each other.
- As a result, decentralized liquidity exchanges enable companies to launch a token and access immediate liquidity.
In an IDO, the token is issued via decentralized liquidity exchanges, such as Uniswap, Bancor, or Binance. The first ever IDO was hosted by Binance DEX. According to them, this fundraising method enables protocols available for traders without being controlled by others. Also, since IDO can be self-organized by anyone, it does not bear any assurance or guarantee as the issuer controls the event.
So, what makes it different from earlier fundraising methods in the crypto space?
In ICO’s case, which is the same as an initial public offering (IPO) process, the issuers manage all the responsibilities. In contrast, in IEO, it is done by a centralized exchange host. When we compare IDO with the other two approaches, we can see that it is basically a combination of both ICO and IEO. The only difference is that IDO replaces the centralized exchange (CEX) with a decentralized one (DEX).
In the case of Security Token Offering (STO), the investment contract is backed by the security token. STO deals with assets that offers monetary profits. Plus, STO complies with the government regulations, whereas in the latter, regulations are yet to be framed.
Initial Exchange Offering (IEO) and IDO are almost the same; we can even call IDO the new IEO. In both approaches, the organizations can directly exchange the tokens to individual investors or traders. But in IDO, you don’t have to pay an exchange fee as you pay in IEO since it is self-organized and decentralized. Moreover, IDO solves some of the problems associated with IEO such as, in most cases, issuers are not allowed to list token with competing exchanges. Issuers also need to pay a sizeable token stack or paying a vast sum to list the token in an exchange. Moreover. Issures are not able to control the parameters of fundraising
Examples of Initial Dex Offeringss
As we already discussed as a brainchild of Binance, the first IDO was on Raven Protocol. The Raven protocol is actually a distributed and deep-learning training protocol for providing cost-efficient, faster deep neural networks training. It was listed on June 17, 2019, and held for 24 hours. A total of 3% of the token supply was assigned, and the value of each Raven token went up to 0.00005 BNB.
Another example of IDO was the UMA protocol, an Ethereum-based platform for issuing and trading synthetic assets. Recently a decentralized autonomous organization, MahaDAO, announced that they are going to launch IDO for MAHA, which is their governance token. According to issuers, this token regulates the world’s first non-depreciating cryptocurrency ARTH.
- Open and fair fundraising
Usually, it is observed that in the token offerings method, as soon as the token sale goes public, private investors buy a large number of tokens for a lesser price. They will resell these tokens to the general public gaining a huge profit. With the IDO fundraising approach, companies, especially startups, don’t need a centralized exchange and permission to kickoff the fundraising event. Also, anyone can organize or participate in IDO, not just private investors.
Another benefit of IDO is that the token can be traded immediately. This way, investors can buy their tokens quickly when it is launched and resell them at a higher price later during the IDO. For example, during the UMA protocol fundraising, the initial token price of $0.26 immediately jumped to just around $2.
liquidity means the ability to buy or sell easily on the market. Or, in simple terms, how quickly you can get your hands on your cash. Here in the IDO, the project’s token gets access to immediate liquidity, which can benefit the token price.
According to Binance DEX, an IDO can be organized by the token issuer completely independently. It can be carried out either offline with the project’s own IT system or online on the blockchain via transactions from the issuer itself.
Now it’s time to see the issues with this new fundraising model.
- Decentralized exchange means no control mechanism. This is an example of how an advantage can, in turn, become a disadvantage. When it comes to fundraising, it is important to have some control over it, like that in ICO, STO, and IEO models.
- The token price can vary as an investor swaps the token. Only a small number of investors can buy the token at the listed token price. This will lead to the following point.
- Whales, investors who hold large amounts of tokens, can manipulate the token prices since there is no limit to buying tokens in IDO. This can result in a bonding curve model. Thus, the token issuers will have no idea how much they’ve raised through this token offering event.
- When the token price starts to move, investors have to immediately decide whether to invest in a new swap listing or not. There is an increased chance of fake tokens being listed in IDO to acquire some initial liquidity. This liquidity rug pull can cost the investors their money.
- There is no KYC integration, which means no validated information on the investors.
Messari, a leading Crypto research firm says on their Twitter handle that initial event shows IDO is a reincarnation of initial coin offerings (ICO) and warns average investors to learn how to “avoid getting dumped” by analyzing supply schedules and understanding crowd mentality.
The Initial Dex Offering (IDO) approach has been introduced to address the issues with its predecessor’s ICO, STO, and IEO to an extend. With its decentralized exchange model, where there is no need for permission to organize the fundraising event, it does work to raise funds.
However, at the same time, it leaves loopholes that whales and scammers can exploit, affect the token issuers with issues like immediate price movement.
Of course, Initial Dex Offering (IDO) is the next step of crypto fundraising. But it needs a lot of work to be done. Like it is important to integrate control mechanisms into the existing IDO model. This can help in eliminating variations in token prices until the fundraising has finished. Also, by making use of KYC regulations, issuers can gain more control over who’s buying how many tokens.