Home IDOs (Initial Dex Offering), the ultimate fundraising model?

IDOs (Initial Dex Offering), the ultimate fundraising model?

7 min read

We are talking more and more about IDOs (Initial Dex Offering) because it is the latest fundraising model that has been implemented in the crypto universe. It is quite simply, the successor and the improved version, in theory of anticipated fundraising such as ICOs, STOs or even IEOs.

It is therefore a way on DeFi for businesses to raise funds and develop their activity. While in traditional finance, it must resort to bank financial loans or find capital from investors like venture capital companies, there, in DeFi, anyone can invest.

More precisely, what happens is that the company will raise funds by selling its tokens, in exchange for bitcoin, Ether, other cryptocurrencies and even in national currency (rare but it happens more in addition).

This process can take different aspects, such as the best known which is the ICO, the STO, theIEO and recently the IDO (Inital Dex Offering) method.

The very first IDO was launched by Binance DEX (it was also from this moment that Binance slowly established itself as a leader in the crypto universe). The first IDO was inaugurated by the Raven protocol on June 17, 2019. This is a protocol for improving deep-learning software. This lasted 24 hours and 3% of the token supply was sold causing an immediate increase in the value of the token.

UMA is also a project that launched an IDO. Uma is an Ethereum-based platform that enables the issuance and trading of synthetic assets. During the UMA IDO, the token's initial price of $0,26 immediately rose to around $2 upon IDO launch.

So that’s the whole point of our article here, to know a little more about IDOs.

What is an Initial Dex Offering (IDO)?

So, to put it simply, an IDO is a type of fundraising in which the token is issued via a decentralized platform (hence the name DEX within the acronym).

A decentralized exchange (DEX- Decentralized Exchange) is therefore a platform where you can exchange crypto assets, via the establishment of a liquidity pool system.

Liquidity pools are made up of pairs of crypto assets and stablecoins. To take a basic example, we find in the Uniswap liquidity pool, the USDT/ETH pair in which traders will be able to exchange USDT for ETH on the decentralized exchange platform that is Uniswap.

What is then interesting for companies is that by launching their tokens on a DEX, they already have access to immediate liquidity (It is an understatement to tell you how essential it is to have liquidity when you wants to get cryptos).

Why are developers increasingly opting for IDOs?

We clearly see a clear trend currently for IDOs. This method is gaining popularity among businesses, of course, but also among investors.

For a business, this is a bit of a boon for raising funds, as you can imagine. It is an easy fundraising method, without greater control from an institution, for example. It is also the company that completely controls the event.

In an ICO, companies take on and manage all fundraising responsibilities. In an IEO, this is already made easier because it is rather the centralized exchange that organizes and manages the event. And, the IDO actually sits a bit in between. We can say that IDO is a hybrid form of ICO and IEO. Or even, what we can say is that the IDO is simply the decentralized version of the IEO and it is indeed more logical to consider it as such.

We are far from the STO method, which remains the most complex form because it is the most regulated. Indeed, an STO is carried out in accordance with precise government regulations and can be a hindrance for companies wishing to raise funds. As a result, it is also more difficult for an investor to participate in an STO. He would have to submit documents etc before he can invest.

What are the advantages of the IDO model?

Since IEOs and IDOs are relatively similar, we can, as mentioned in the title, say that IDOs are the new IEOs. Both methods allow you to sell your tokens directly with individual investors.

Organization: IDOs are much more accessible for entrepreneurs and are also more flexible in terms of organization. In an IEO, for example, it is the platform like probit who decided on the sales parameters with costs etc. In short, the company lost some of its decision-making power. An IDO can be entirely organized by the company completely independently.
No contract clause: IDOs are also more practical because often in IEOs there were contract clauses stipulating that the offering could not be carried out on other competing platforms, for example.
Less costs: There, in IDOs, there are no fees either because you had to pay sometimes very large sums to be listed and organize an IEO on an exchange platform.
Fair fundraising: It's accessible to everyone. For an ICO or IEO, the largest private investors could have early access to the project and purchase a large number of tokens to resell them when the tokens were open to the general public. Anyone can organize and participate in an IDO with equal ease, in an IDO.
Speed of trading: In an IDO, the token can be traded immediately because there is immediate and available liquidity.

Now that we have seen the strengths of the IDO, it would be fair to consider the negatives.

The disadvantages of the Initial Dex Offering model

Of course, it would be far too good to imagine that there are no flaws in IDOs. Here are some flaws inherent to the decentralized fundraising model.

No control : As we have seen, this is a quality and an advantage because it opens up possibilities for businesses. But, at the same time, we can then see malicious actors launching irrelevant IDOs and crypto projects with risks of Rug Pull for example, without there being any supervisory jurisdiction to stop them.
The price of the token : This can vary at any time. In reality, only investors who invest early can truly purchase the token at the indicated price. Whales and larger investors can purchase large amounts and thereby manipulate the price of tokens. There is no purchase limit in IDOs. So, the price of the token can be affected by the bond curve. Companies may therefore not know the exact amount of funds raised.
No KYC: This can certainly again be an advantage because it makes access to the IDO democratic but at the same time, it can serve money laundering and we do not know who are behind the investments. It could also be a group close to the developers who do it only to jump prices…

Moreover, to combat these problems, we are seeing more and more IDOs releasing tokens in regular installments (during a rights acquisition period called vesting). This helps avoid pump & dump effects which are visible upon opening to the public market.

Time pressure (IDOs are carried out in a very short time) pushes investors to act quickly and therefore do not have the time to properly verify the project.

This is why more and more IDOs are adding a mandatory KYC procedure and some control mechanisms such as the possibility of setting a fixed price until the collection is completed.

Final word on IDOs and the future of crypto fundraising

IDOs are following an evolution of the forms of fundraising that we have known until now. The models are improved each time and this is what we can see if we consider the first form that was ICOs. Fundamentally, the fact that IDOs are completely decentralized is also very consistent with the philosophy of DeFi.

However, very obviously, we cannot avoid the maneuvers of the whales or the crooks who still seek to defraud the community. We play a bit like with hackers a sort of cat and mouse game in which we seek to increasingly reduce the risks.

What we can say in conclusion is that even if this remains a completely coherent and interesting model for both parties (entrepreneurs and investors), we also know that this is not the last model...Necessarily , we will find other forms and always improve fundraising in cryptocurrencies.

It should also be remembered that IDOs still represent a new and emerging form in DeFi. We do not yet have the hindsight to judge the merits of such a fundraising structure. We only have a few months to experiment and make retrospective judgments. In fact, the tokenomics on this subject is still being written…

For example, we are currently seeing a new process via what we call "launchpads" which are proving to be very interesting. We are also seeing the emergence of new models such as IFOs (Initial Farm Offerings) like those launched by PancakeSwap. We will talk about this again in a future article.

What we must remember, however, from this whole fundraising story is that despite everything, we must be well aware of crowd psychology, the effects of FOMO, etc. Before investing, take care to always check the fundamentals of the project, this is really the only way to make good investments, and therefore, to record big profits.

To go further on the subject of fundraising

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Note: No financial advice is given on the zonebitcoin blog. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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