The cryptocurrency community has been particularly creative when it comes to finding new ways to bootstrap projects and raise funds.
In late 2017 and 2018, we saw the appearance of initial coin offerings (ICOs), where teams would raise money by selling a part of their total token supply to the public. This created an absolute euphoria as these freshly minted coins would multiply in value once they were listed on an exchange and open for trading.
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ICOs were mainly deployed through Ethereum’s ERC-20 protocol standard, and they quickly became the leading use case for ETH-based tokens. The first ICOs in 2016 raised just a few million, but a year after that, the average sum was between $20 and $30 million. Soon after that, bigger projects like Bancor raised over $150 million.
The hype was so strong back then that some projects managed to raise whopping sums. The best example of the peak is perhaps EOS – the project received more than $4 billion in funding throughout its long-lasting token sale.
Like everything that becomes too hyped too fast, the ICO bubble burst in 2018, but it didn’t take long for us to see a new model with a few key differences. Towards the end of the first quarter of 2019, initial exchange offerings (IEOs) made their grand entrance.
Largely spearheaded by the Binance Launchpad, these IEOs followed the crowdfunding model of ICOs, but the projects were vetted a lot more carefully. Since they were launched on popular exchanges such as Binance, KuCoin, Huobi, OKEx, and so forth, the exchange teams did extensive due diligence, hence why IEOs aren’t so plentiful as ICOs – there is a higher barrier to entry. Aside from the fundraising, IEOs also benefited from getting listed on the exchange, which managed their token sale. One of the biggest pains of ICOs investors back in 2018 was whether or not exchanges would agree to list their tokens.
Some of the more popular projects that are currently multi-million and even multi-billion dollar enterprises started off as IEOs. These include Elrond, Matic Network (now Polygon), Celer Network, WazirX, and more.
In light of the listing concerns, together with the growing popularity of decentralized exchanges such as Uniswap (Ethereum) and PancakeSwap (BNB Chain), anyone can list a new token and start providing liquidity to it. So, it was just a matter of time until token sales would take advantage of this.
So, in 2021, a new kid on the block rendered the above rather obsolete. Initial DEX offerings (IDOs) have taken center stage, so let’s have an in-depth look at what they are and everything you should know about them.
It’s worth noting that the original concept of initial DEX offerings has shifted tremendously over the years, and, in its current most popular form, it has little to do with what it was intended to be back when the first IDO took place.
In its essence, an initial DEX offering is a successor to ICOs and IEOs in that it aims to raise money and bootstrap a project. However, unlike ICOs and IEOs where the tokens are sold prior to the listing, with IDOs, they are listed immediately on a decentralized exchange (DEX) – hence, the name.
The first-ever IDO to take place happened in June 2019 – Raven Protocol. The team behind the protocol chose to use Binance’s decentralized exchange – the Binance DEX. They put up the token there at a specific price, and traders could buy it until the hard cap was reached. This is how the first few IDOs took place on the majority of platforms.
This particular way of fundraising had, in theory, a few powerful benefits, including:
However, investors weren’t satisfied. The reason was that these token sales would essentially get bought up in a matter of seconds, leaving little chance for the average Joe investors to get a share and participate. The notion that they were getting scooped up by bots and insiders was born, and the industry had to adapt to satisfy the growing demand.
This led to the birth of IDO launchpad platforms – one of the hottest topics of late 2020 and 2021.
In their most popular shape and form, nowadays, initial DEX offerings are particularly similar to initial exchange offerings (IEOs) with a few key differences.
With an IEO, it was the exchange vetting the project and conducting the token sale. With an IDO – it’s a third-party platform that’s vetting the project while the token sale itself happens in a somewhat decentralized fashion.
In theory, anyone can raise funds through an IDO with a third-party launchpad platform, as all they’d have to do is open a pool.
The way this works is fairly simple. A project goes to a launchpad, and if they meet their requirement, they are chosen to conduct an IDO. The process itself might vary from one launchpad to another, but the concept is always the same.
There is a pool where users can buy “IOUs” of the token that the project wants to launch. An IOU is an acknowledgment of debt. In other words, the investors pay for their tokens in advance but receive them upon the Token Generation Event (TGE), which usually happens very shortly after the IDO itself (typically within a few hours).
Once the IDO is successfully concluded and the TGE takes place, the token is immediately listed for trading on a decentralized exchange. In most cases, this happens on Uniswap as the predominant number of projects are still built on Ethereum, and their tokens are based on the ERC20 protocol standard.
However, other blockchains are also growing in popularity, including Solana, Avalanche, Polkadot, Arbitrum, Optimism, and many others. The reason why some projects prefer to have their tokens launched on networks other than Ethereum is to avoid high fees, among other things.
With this said, we can already see some differences and some similarities between ICOs and IEOs. Here’s a comprehensive comparative table:
Unlike initial coin offerings, especially during the peak of 2017-2018, IDOs typically have a very low market cap when their public listing happens. It’s usually just a few million or, in many cases, even less than a million. This is because of vesting periods for almost all token holders (including the team and seed and private investors) apart from those who participate in the actual initial DEX offering process.
The IDO process itself usually raises the smallest amount of money. As mentioned above, each participant can win an allocation of a few hundred dollars, and the total sum raised is rarely more than $500K.
What’s the point of this? There are a few things to consider:
This is another typical part of basically every single initial DEX offering – the whitelisting process. Because the demand for those token sales is very high, the launchpad platforms can only allow a limited number of users to participate and provide them with a very limited size allocation, usually worth a few hundred dollars.
This is why most IDOs out there go through an extensive whitelisting process that narrows down the participants to a supported maximum.
To be eligible for being whitelisted, users need to perform various marketing tasks, which oftentimes include:
This creates a complete marketing storm for the IDO that sees the growth of these communities exponentially. It’s not a surprise to see a future IDO project collecting over 100,000 followers on Twitter and just as many people in their Telegram groups in a matter of days.
Another shared criterion is for users to have to hold a certain amount of tokens that are native to the launchpad’s platform itself.
Typically, there would be two rounds of whitelisting: one for those who hold the launchpad’s native tokens and one for the wider public. Naturally, the second round sees astronomical competition, leaving inconsiderably small participation odds. This is why some platforms have moved to another token distribution model of guaranteed allocations.
The two above create a gigantic marketing effect that helps generate demand for the IDO token on the secondary market, something that was often missing as compared to ICOs and IDOs.
To get an allocation in an upcoming IDO, most platforms now require their users to hold their own native tokens (as mentioned above) to increase the odds of participation.
To avoid lotteries, however, some platforms have decided to give guaranteed allocation based on the number of native tokens a user holds.
So, for instance, if an IDO wants to raise $100,000 and there are 1,000 qualifying participants, they would each receive $100.
However, to incentivize larger holders, launchpad platforms have also created tiers where the more of their tokens the user holds, the higher their allocation would be. This is why the prices of many tokens belonging to IDO launchpads have also increased in value substantially.
As it is with everything, initial DEX offerings also have their advantages and disadvantages. Let’s have a closer look.
Removing the vigorous vetting procedures of IEOs has given plenty of projects access to crowd-sourced capital, which, in theory, benefits the wider industry. Of course, this can also be a disadvantage – read below.
Investors don’t have to wait long periods of time for the tokens to be listed on an exchange. The listing usually happens immediately after the IDO is completed, allowing them the flexibility to cash in on their investment quicker than it was with ICOs.
It has become a practice for most of the projects to lock a considerable portion of their crowd-sourced funds as liquidity on the DEX where the token starts to trade. On top of that, many projects will immediately offer staking programs to incentivize holding.
Because everything happens on-chain, there’s traceability, and everyone can verify the token contracts in advance (if they are public, of course).
In continuation of the first advantage, the fact that there’s such a high demand for IDOs also allows scam artists to create obscure projects and have them bootstrapped fairly quickly.
While most platforms have a public round where anyone can participate, the odds of winning an allocation are practically non-existent because of the sky-high competition. This is why users have to hold a large number of launchpad tokens to get a sizeable investment and a proper return.
Most IDOs will keep the majority of the tokens for the team and seed/private round investors. As mentioned above, the vesting over time assists in preventing a price discovery dump of the token. However, once the unlocking dates as per the vesting schedule are reached, this almost always results in massive profit-taking. Pro tip: by tracking smart contracts, investors can easily see when such an event takes place (usually once a week, once a month, or once a quarter).
Participating in an IDO is a process that can vary depending on the launchpad of choice. However, there are a few requirements that most projects tend to follow, regardless of the launchpad.
The wide majority of IDOs require their investors to perform a KYC/AML screening procedure before allowing them to participate. This is done because the regulatory framework for cryptocurrencies in the majority of countries has become a lot more stringent. To avoid any potential legislative issues, almost all IDO projects conduct a KYC. This is also the reason for which US citizens are rarely allowed to participate.
This is also something that almost every launchpad platform requires potential investors to do. If they want to be eligible for an allocation, they must hold a certain number of its tokens or provide liquidity in some shape or form.
As mentioned above, sometimes it increases the chances of winning an allocation.
As mentioned above, to be eligible for an allocation, users need to be whitelisted. Apart from a KYC check-up, they also have to perform various tasks such as following certain pages on Twitter, retweet certain posts, and join specific Telegram groups.
To participate in an IDO, users have to interact with the launchpad platform first to invest and, second, to receive their tokens.
There are plenty of options out there, with the most widely used wallet, also one of the most reputable, being MetaMask.
Assuming you manage to get an allocation and receive the tokens in your wallet, you would want to start trading them eventually.
To access the immediate listing, you should familiarize yourself with how Uniswap and other decentralized exchanges work. Given that a lot of them share similar interfaces with Uniswap, this guide is a great starting point.
