IDO

An Initial DEX Offering (IDO) is a fundraising method that pools investment capital from retail investors. IDO was created to address the shortcomings of the “traditional” ICO crypto crowdfunding model. Because IDO works with a DEX rather than a centralized exchange, the DEX can be considered a decentralized liquidity exchange.

IDOs are the latest model for crypto projects looking to raise funds from investors. But they are not without limitations. For example, DEX is less scalable. It’s not uncommon for ICOs and IEOs to raise over $1 billion in funding. For DEX, this is unheard of.

How Does IDO Work?

IDO uses a decentralized exchange (DEX) to facilitate token sales. A crypto project provides their tokens to a DEX, users submit their funds through the platform, and the DEX completes the final distribution and transfer. These processes are automated and occur via smart contracts on the blockchain.

IDOs work because DEXs can provide instant liquidity of tokens. This is why DEXs tend to reward liquidity pool providers with generous returns. Liquidity allows DEXs to operate without any unexpected problems for users.

To assist trading, most projects provide liquidity to the DEX by allocating a portion of the funds. This approach has become standard practice. Many projects also employ a proof-of-stake (PoS) consensus mechanism. PoS consensus is designed to protect the network. But in this case, the mechanism is mainly used to stop investors from selling prematurely.

PoS consensus involves letting investors hold their funds in supported tokens within their wallets. In return, investors are rewarded for their “stake” in the network.

As the project launches, investors can immediately start trading project tokens. Once the IDO goes live, early investors can sell their tokens at a higher price. Investors who arrive early can purchase a large bag of tokens at a discounted price.

Once the public sale begins, the token value will increase. Once the first sale occurs, the price will start to increase.

With a liquidity exchange, gas fees for executing new smart contracts are negligible because ample liquidity is provided for trading pairs. Smart contracts help manage asset tokens and liquidity pools. Unlike traditional fundraising models, IDOs can mint tokens instantly.

Moreover, any good project can be eligible to raise funds. Circumventing strict approval procedures allows many projects to reach retail investors. The same can be said about avoiding the high costs of initial exchange offerings (IEOs).

However, the lack of due process has also led to the launch of many projects of poor quality. Such projects also include outright scams, in which project owners disappear after defrauding investors of their money.

Investors don’t have to wait long for their desired tokens to be listed on exchanges. Listing usually occurs immediately upon completion of the IDO. This timing gives investors the opportunity to cash out their investments faster compared to ICOs.

That’s not to say DEX is all positive. Yes, they can be considered more trustworthy because they are not trustworthy. (They don’t need a human intermediary). But DEXs are still vulnerable to technical attacks. For example, it's not uncommon to hear news about potential vulnerabilities that allow hackers to escape with investor funds.

Advantages of IDO

• You don't need to deal directly with the project and trust their smart contracts. A reliable IDO platform will result in multiple successful sales. If the smart contracts are identical, you can have some trust in the product.

• Provide instant liquidity after sale. IDO will lock part of the raised funds in a liquidity pool to create a liquid market after-sale. This helps reduce slippage and volatility.

• No registration required. All you need is a wallet and funds to participate in the sale, no personal details are required. This makes it open to all types of users. However, the lack of KYC or AML processes can also be seen as a disadvantage (more on that below).

• IDO is affordable and accessible to projects. For a small, little-known project, launching a token on a DEX is often easier and cheaper than on a large centralized exchange.

• IDOs often have anti-whale measures in place, meaning no one investor can purchase large amounts of the token.

Disadvantages of IDO

• No KYC or AML. When proper checks are completed, investors and projects are protected. These measures help avoid the laundering of illicit funds and the evasion of economic sanctions. For example, if the token is considered a security, it may not be legal to participate in an IDO in some countries.

• Project due diligence is less. For a disreputable project, it is easier to distribute tokens through an IDO than through an IEO with a large regulated exchange.

How to Participate in IDO?

When you select a project, you'll see all the details and ways to get involved. Of course, each project and platform has its unique features, so before participating, you should research and check which features best suit your purposes.

1. Must Obtain IDO’s Whitelist

IDOs must have a cap on the number of participants and the total number of tokens they can purchase because they are much smaller than IEOs and ICOs. Investors typically need to own a certain number of Launchpad tokens to be whitelisted, with tokens holding more specialized tokens more likely to be accepted. To increase liquidity, non-token holders can stake their tokens. They can also choose to participate in whitelisted draws hosted by several Launchpads

2. Integrate Web3 Wallet with KYC

KYC checks are often part of the whitelisting process, and investors require a web3 wallet like MetaMask. Unfortunately, most IDOs do not allow investors from banned countries, including U.S. citizens or citizens of countries such as Iran, Iraq, Cuba, North Korea, or Venezuela.

Future of IDO

While the model above is a typical IDO, token offerings are always changing. For example, we also have the increasingly popular IFO (Initial Farm Offering) model. It’s hard to say whether it can be called a traditional IDO, but it depends on the same core concepts: liquidity pools and decentralized exchanges.

Investors must first invest in a decentralized finance (DeFi) LP to obtain LP tokens, rather than locking their tokens directly. For example, a project that wants to sell its tokens for BNB in an IFO on PancakeSwap will require investors to stake BNB and CAKE in BNB-CAKE LP.

The BNB-CAKE LP tokens are then locked into new tokens, and the project receives BNB when the CAKE is destroyed. The number of tokens you receive will depend on how many participants are in the sale, and any excess funds will be returned to you. There may even be steps taken to give small investors a fairer share of IDOs.

Another possible change to IDOs could be the requirements for KYC (Know Your Customer) and AML (Anti-Money Laundering) processes. Global financial regulators are increasingly interested in DeFi and its regulatory status. AML and KYC are now standards for centralized exchanges, and DEXs may be subject to the same rules in the future.