An initial DEX offering (IDO) is a decentralised fundraising and bootstrapping method for crypto startups that is growing in popularity. It is in some ways a natural successor to the initial coin offering (ICO) or the initial exchange offering (IEO) that have been hugely popular in recent years.
The crypto world is still very much in its infancy, highly experimental and constantly evolving.
As in the world of traditional business and especially startups, new crypto projects need to raise capital to fund the development and marketing of their tokens and services.
One of the original and biggest funding methods has been initial coin offerings (ICOs), something akin to an initial public offering (IPO) in the traditional business world.
ICOs certainly helped the likes of crypto giant Ethereum get going in their early days.
Next came the initial exchange offering (IEO) which is a centralised form of crypto fundraising and of course, now we have the initial DEX offering (IDO), a new type of decentralised funding process used mainly by DeFi crypto startups at the moment.
Below we briefly talk about ICOs and IEOs to help you get a better idea of what each one does and hopefully help you to make better sense of what IDO crypto is in relative terms.
Initial coin offerings (ICOs)
Initial coin offerings (ICO) provide a means for aspiring crypto projects to raise money directly via the organisations creating the new tokens/services.
In an initial coin offering, there is no central body to verify the legitimacy of a project. The founders of the project would typically produce a whitepaper, something similar to a pitch deck, business plan or prospectus in the traditional business world and they would sell their tokens directly to people who think the idea is good and want to get in early.
In the traditional business world, it would be a little bit like a startup directly approaching investors and offering them shares in their company.
Investors wanting to get in early would take a risk and become investors/shareholders only here they hold tokens and not shares.
It is important to note that, unlike IPOs, initial coin offers (ICOs) are not regulated and therefore even more risky.
Whilst a huge amount of funding has come about via initial coin offerings there have also been a huge amount of frauds, scams and poor performers.
This is due in part to the fact that just about anybody can issue an ICO. In recent years the initial coin offering has been getting less popular, paving the way for the Initial Exchange Offering and most recently the Initial Dex Offering.
Initial exchange offerings (IEOs)
This leads us nicely to initial exchange offerings (IEO), they are also unregulated, however, there is a central organisation in place (an exchange) such as Binance, Kucoin or Huobi that performs some due diligence on the project before allowing the IEO and offers tokens to its existing user base.
This of course makes things a bit safer for early investors. Aside from the due diligence or whitelisting process, another advantage of the IEO is the increased probability that a token will be listed on said exchange.
In comparison, with an ICO there is no certainty that a token will get listed at all and there is no independent due diligence.
At least with an IEO, if an exchange is performing an IEO there is a more than fair chance that the token is going to get listed on the exchange and increase the chances of success and importantly, gain instant liquidity.
Unlike ICOs and IEOs, tokens are released after the IDO
Now, let’s move on to the IDO. In both of the above examples, the initial coin offering and the initial exchange offering, tokens are sold prior to the listing. Initial DEX offerings are different. They are sold and issued after.
Initial DEX offerings, what are they?
Now that you have a bit of background info and understanding of what ICOs and IEOs are it´s easier to understand what an initial DEX offering is and how it is different.
Let’s get into IDOs and what they do.
Initial DEX offerings are in contrast decentralised and are instead promoted by specialised platforms called launchpads.
This is one of the fundamental differences between the IEO and IDO, the IEO is a centralised exchange whereas the IDO uses a decentralised exchange but is promoted by a 3rd party launchpad.
IDOs also tend to raise relatively smaller amounts when compared to ICOs. The ICO would be similar to a company going public via an IPO and raising a huge amount of money whereas an IDO could be similar to a company raising a few million via crowdfunding.
So, you could think of IDO launchpads like crowdfunding platforms such as Kickstarter but for crypto and instead of the IDO taking place entirely on the crowdfunding platform, it takes place on a decentralised platform.
If a crypto project would like to raise capital they can approach a launchpad like PolkaStarter or Dao Pad.
The beauty is that launchpads are gatekeepers and decide who can promote a project and promote an IDO on their platforms and therefore they need to ensure quality and credibility.
For investors looking to get in really early, these launchpads and IDOs provide quite a nice and perhaps slightly safer vehicle when compared to the ICO.
Additionally, IDOs are relatively less expensive and also make it a little easier for smaller investors to get in early. They also tend to be less expensive for the project operators in terms of fees.
How do initial DEX offers (IDO) work?
Unlike with ICOs and IEOs, IDO-issued tokens are not pre-sold, instead, prospective investors create a sort of IOU within a pool by contributing their funds in the form of crypto, say BTC or Eth.
In other words, they pay for their tokens in advance. Once the IDO has been completed the tokens are issued and this event is called a Token Generation Event (TGE).
Usually, within a matter of hours, they are instantly liquid when they are listed on a decentralised exchange such as Uniswap.
Uniswap is popular as currently the majority of projects are built on Ethereum and their tokens are based on the ERC20 protocol standard.
Still, not all the action is taking place on say Uniswap/Ethereum.
Other blockchains are growing in popularity including Polkadot, Binance Smart Chain (BSC) and Solana.
Some projects prefer to launch their tokens on blockchains such as these to avoid the high network fees on Ethereum.
In this case, the token would be listed on native exchanges such as BSC´s PancakeSwap as an example.
A new trend, multiple launchpads and multi-chain IDOs
As IDOs evolve, there is a trend developing towards projects launching on multiple launchpads in order to be on more blockchains and thus attract a wider range of investors.
For example, a project could perform an IDO on an Ethereum-based platform and another or maybe even on several other platforms built on Polkadot, Solana or Binance Smart Chain as examples.
Users can then choose where they would like to participate and the project improves its chances of a successful raise.
The instant and powerful marketing and community-building effect of IDOs
One of the major benefits of IDO crypto projects is the almost instant marketing and community-building effect.
As in the traditional business world, if nobody knows about your startup it’s difficult to successfully raise money or grow.
Think of crowdfunding campaigns on platforms like Kickstarter or Seedr, the successful ones almost always have a fair amount of marketing / PR / social media running behind the scenes drumming up awareness of their crowdfunding campaign. Something similar happens in IDOs but in a slightly different way.
Due to demand for IDO tokens tending to be high, the launchpad platforms can only allow a limited number of users to participants and as a result can only provide a very limited size allocation, typically only a few hundred dollars worth each. This process is called whitelisting.
Whitelisting and participation in IDOs
To this end, every single IDO out there goes through an extensive whitelisting process that narrows down the participants to a supported maximum.
To be eligible for being whitelisted, users often need to perform various marketing tasks, which can typically include joining the projects Telegram chat, retweeting and commenting on a projects tweets and also liking a project on its social media platforms.
This can rapidly elevate awareness of a project and community growth which can not only help a successful IDO fundraise but also help the project to more rapidly gain traction.
It is not uncommon to see a future IDO project gathering over 100,000 followers on Twitter and as many people in their Telegram groups in just a matter of days. This is in itself pretty phenomenal.
Another whitelisting criteria can be for users to hold a certain amount of tokens that are native to the launchpad´s platform itself.
As an example, the IDO platform PolkaStarter has two pools, one is open to everyone and the other is only for the participation of POLS holders.
Naturally, the competition for allocations is considerably less.
As IDOs are getting increasingly popular it is becoming clearly beneficial to be a token holder in the launchpad and have a better chance of getting in on the hottest new crypto projects.
In many cases, the number of native tokens you hold in the launchpad can help to increase your probability of getting an allocation and also the size.
In summary, the IDO is the latest evolution in crypto fundraising and is perhaps in many ways an improvement on its predecessors, the ICO and IEO.
Crypto is a rapidly changing landscape and this rate of rapid change, evolution and adoption of new techniques, projects and methods can make crypto very exciting indeed.
The IDO is something that investors should certainly be aware of and can potentially offer access to promising early-stage crypto projects that are independently vetted, the IDO can be especially beneficial for smaller investors if they are able to get in on IDO projects in time and all being well, benefit from the rapid growth that will hopefully follow.