Summary
IDO is a cryptocurrency token offering run on a decentralized exchange (DEX). Liquidity pools (LPs) play an important role in IDOs by creating liquidity after sales. A typical IDO lets users lock up funds in exchange for new tokens in a token generation campaign. Part of the funds raised are added to the liquidity pool along with new tokens before being returned to the project.
IDO provides projects with a simple, easy and low-cost way to issue tokens. IDO has been around for a long time, but it is still developing and providing new models such as Initial Mining Offering (IFO). As the field becomes more regulated, identity verification (KYC) requirements may gradually increase.
If you want to participate in IDO, you must use a digital wallet such as MetaMask and some cryptocurrencies to complete the subscription and pay transaction fees. You must always do your own research and invest with a trustworthy DEX. Specific measures include paying close attention to IDO’s mechanics, project teams, and its token economics. Token issuance carries high risks, so you should always invest within your own tolerance.
Introduction
In the cryptocurrency ecosystem, token issuances often cause investors to cheer. Purchasing tokens at the issue price can bring huge benefits, but there are also risks behind the benefits. Looking back at the ICO (Initial Coin Offering) craze of Ethereum (ETH) in 2017, opportunities and risks coexist. Scams and getaway scams abound, and it's not uncommon for investors to suffer huge losses.
Since then, the cryptocurrency community has successively launched other token issuance methods, including initial exchange offerings (IEOs), initial DEX offerings (IDOs), and security token offerings (STOs). IDO has become a popular choice these days. How is it different from ICO, and can it ensure the safety of investors?
What is a token offering?
Token issuance is a fundraising method for projects or startups to promote new cryptocurrencies for sale. Crowdfunding methods may vary, such as through centralized digital currency exchange management (IEO), cooperation with local financial regulators (STO), or direct independent operations (ICO). Some investors purchase tokens for use, while others purchase tokens for speculation. For example, you can use your tokens for mining, staking in governance mechanisms, or to pay transaction fees.
How does IDO work?
IDO facilitates token sales through decentralized exchanges (DEX). Cryptocurrency projects provide tokens to DEX, users invest funds through the platform, and DEX completes the final distribution and transfer. These processes are automated through smart contracts in the blockchain.
The rules and stages of an IDO depend on the operating DEX, but there is a general approach:
1. After completing the review, the project can launch IDO on DEX. Projects supply tokens at a fixed price, and users lock funds in exchange for tokens. Investors will later receive tokens during a token generation event (TGE).
2. There is usually a whitelist of investors. Investors may need to complete marketing tasks to join, or simply provide a wallet address.
3. Part of the funds raised will be used to create a liquidity pool for the project’s tokens. The remaining funds are reserved for the team. Investors can trade tokens after TGE. The liquidity provided is usually locked for a period of time.
4. In the TGE stage, tokens are transferred to users and the liquidity pool is open for trading.
How will the IDO model develop in the future?
The above model is a typical IDO, but token products are always changing. For example, we also have the increasingly popular IFO (Initial Mining Offering) model. This model can hardly be called a traditional IDO, but the core concepts it relies on have not changed. They are still liquidity pools and decentralized exchanges.
Investors must first stake in a decentralized finance (DeFi) liquidity pool to earn liquidity pool tokens, rather than locking tokens directly. For example, if a project wants to sell tokens in PancakeSwap's IFO in exchange for Binance Coin (BNB), investors must hold BNB and CAKE in the BNB-CAKE liquidity pool.
The BNB-CAKE liquidity pool tokens are then locked in exchange for new tokens, the project receives BNB, and CAKE is destroyed. The number of tokens you get depends on the number of people who participated in the sale, and any excess staked funds are returned. Some IDOs even have mechanisms to help small investors get their share of the IDO fairly and equitably. The [Basic Sale] and [Unlimited Sale] features launched by PancakeSwap IFO are a typical example.
Another big change for IDO is the KYC (identity verification) and AML (anti-money laundering) process requirements. Financial regulators around the world are paying increasing attention to DeFi and its regulatory status. Currently, AML and KYC are standard operations for centralized exchanges, and are expected to become necessary processes for DEX in the future.
What are the advantages of IDO?
As time goes by, most token issuances become more fair and reasonable, creating a safe environment for investors. IDO has obvious advantages in this regard:
1. There is no need to deal directly with the project, nor do you need to trust smart contracts. The trustworthy IDO platform will successfully help multiple projects to be sold. If the new project uses the same smart contract, the credibility will naturally increase a few points.
2. Provide liquidity immediately after sale. IDO will lock part of the funds raised in the liquidity pool to create an after-sales liquidity market. This helps reduce slippage and volatility.
3. No registration required. Prepare your wallet and funds to participate in the sale, no personal details required. Therefore, it can be used by all types of users. But the lack of KYC or AML processes can also be considered a disadvantage (see below for details).
4. IDO is reasonably priced and convenient for project use. . For smaller, less well-known projects, it is often easier and cheaper to issue tokens through a DEX than large centralized exchanges.
5. IDOs usually have anti-whale measures, that is, investors cannot purchase tokens on a large scale.
What are the disadvantages of IDO?
Part of the advantage of IDO is a double-edged sword. These problems mainly stem from the decentralization and anonymity of IDO.
1. No KYC or AML. When proper vetting is completed, investors and projects are protected. These measures help avoid laundering illegal funds and circumvent economic sanctions. For example, if the token is considered a security, a handful of countries may not be able to legally participate in an IDO.
2. The project lacks due diligence. Notorious projects can issue tokens through IDOs, which is much easier than conducting IEOs through large, compliant exchanges.
What are the differences between IDO, IEO and ICO?
ICO, IDO and IEO use different methods, but the results are basically the same. The main differences are briefly described below:
Where to get involved with IDO?
The first way to participate in IDO is the project itself. Participating in the project community and following its social media channels are great ways to get involved. You can also visit DEXs such as PancakeSwap or DODO to learn about upcoming IDOs. To learn about all upcoming IDOs, check out the list of token offerings provided by CoinMarketCap. Some tokens will not conduct IDO, but CoinMarketCap clearly marked the tokens that will conduct IDO.
How to participate in IDO?
Prepare a cryptocurrency wallet that can be associated with DApp, such as MetaMask or Binance Chain wallet, to participate in IDO. You will also need some cryptocurrency to purchase tokens and pay transaction fees. The required cryptocurrency depends on the sale, and even liquidity pool tokens need to be prepared if participating in an IFO.
After preparing the wallet, click the connect button to associate IDO DApp, usually located in the upper right corner. The following examples are available for reference:
You will see instructions on how to lock your funds in preparation for the token generation event. Be sure to deposit sufficient funds to cover transaction fees. Generally, the tokens will be transferred to your wallet after the subscription period ends. However, some sales may lock or stake new tokens for a period of time. Before participating in an IDO, all details must be fully examined.
Tips for safely participating in IDO
As with any other investment, here are some simple and practical tips to keep your trading safe:
1. Participate in IDO through the correct link. Criminals took advantage of the public's enthusiasm for IDO to create false subscription pages. Cryptocurrencies transferred to scam pages can never be recovered.
2. Participate in the trustworthy DEX Launchpad. There are many trustworthy DEXs in the market (such as PancakeSwap and BakerySwap), and you can safely participate in the IDOs launched by them. These are the best opportunities to harvest tokens during sales events.
3. Conduct in-depth research on investment projects. Is the project party a trustworthy and well-known team? Are funds raised vetted? Is there a product out there that you can use? Questions like these can help identify possible runaway scams.
4. Review IDO’s terms and conditions. There may be a delay in getting your tokens, and your tokens may even be added to the staking pool and locked for a period of time. Depending on the project's token economics, anything can happen, and you should have a deep understanding of the benefits and risks behind it.
5. Invest rationally and act within your capabilities. Token sales are notoriously volatile. Blind investment can easily make people lose control and exceed their tolerance. There is always a risk in selling, and even with thorough research, there is still the possibility of encountering a scam, scam, or run-off scam.
Popular IDO Launchpad Platform
There are numerous DEXs in different blockchains that provide IDO services. A simpler search method is to visit CoinGecko and view the Launchpad token list sorted by market capitalization. All DEXs that launch exclusive tokens (including almost all DEXs) are included. However, it should be noted that a high market capitalization does not mean that the DEX is trustworthy. Before deciding to launch IDO's DEX, this information should be combined with other basic knowledge to conduct a comprehensive analysis.
in conclusion
IDO is simple, affordable and has a wide audience, and has gradually become the standard fundraising model for many new projects in the cryptocurrency market. In fact, token issuance has gradually developed into an industry. All in all, it is generally safer to participate in sales through decentralized liquidity exchanges than through the project itself. Nonetheless, if you want your IDO to be a success, choosing the right project is critical. Therefore, in the field of cryptocurrency, doing traditional in-depth research is more important than anything else.
