First popularized in 2017, ICOs are back again in a somewhat new form. Really though, it’s essentially the same, only even a little riskier than before. And yes, they are now called IDOs.
IDO is an initial project token offering on a decentralized exchange, another way of public fundraising. There is no official definition of IDO. Some community members consider it an acronym for Initial DEX Offering.
IDOs began to gain traction in 2020 amid growing interest in decentralized finance (DeFi) sector. With IDO, fundraising is done using smart contracts. The tokens issued by the projects are already backed by investor liquidity pools on DEX. Often, the IDO token grants its holder the right to vote and control the direction of the underlying protocol development. However, more and more IDOs currently being conducted have nothing to do with DeFi.
One distinctive feature of IDO is a limited supply of tokens, so the organizers resort to special methods to allow in the maximum amount of participants. For example, they limit the number of tokens for purchase per user or hold lotteries.
The most common model is when only the “elite”, people on the whitelist, can participate in the initial purchase of tokens. The conditions for getting on the whitelist may vary from holding a certain amount of coins to a simple repost, tweet, joining a chat, etc. After getting on the whitelist, a person has the right to buy tokens for a certain sum.
So how did this form of fundraising gain such popularity?
I can still remember 2017-2018, the period of numerous ICOs. It then took only a few months for a useful mechanism of attracting investors’ funds, due to its simplicity, to be turned into a tool in the hands of fraudsters and failed businessmen.
Originally, through the sale of tokens, money was raised for really important and interesting projects, most often in the IT-sphere. Then various con artists joined in and began to create non-existent or non-viable projects that nevertheless promised colossal profits. Another group that rushed to conduct ICOs were businessmen who couldn’t win the favor of traditional investors and were desperate to raise funds for their endeavors.
I remember how, at the end of 2017, a guy professionally engaged in roasting green coffee in Minsk turned to the author of these lines for help. He wanted to start his own business: build a plant near Minsk (!) for roasting coffee beans brought from Brazil. His business plan – clearly unviable – was rejected by banks, private investors, and business angels. As a result, he decided to raise funds through ICO (which didn’t work either, by the way).
Today you often hear that 80% of ICOs were scams and only brought losses to investors. I think in many cases, the scam was not intentional, though. It was simply inept businessmen bypassing financial experts in banks and investment companies to push their doomed projects to the market.
At that point, caught in the wave of crypto-hype, everyone was looking for that precious “Get Cash” button. Some conducted ICOs to easily raise funds for a very raw business idea or technological development. Others – small investors – were not interested in the project itself, rather how many Xs its tokens would bring if they were sold soon after the ICO. And then some, of course, were outright scammers. It comes as no surprise that with this state of affairs, the ICO concept quickly lost all credibility.
But now it’s all coming back, this time as IDO, which in fact, isn’t fundamentally different from ICO. Even the ads seem to be written by the same people. Here is one example you get after a quick search: “Projects after IDO make Xs 2 to100 times immediately after being added to DEX. That’s why the idea is so popular and profitable, even in a bear market. Often, within a few days following the IDO, the project appears on Uniswap, Binance Dex, Bancor or other exchanges with a significant increment to the initial price.”
It is still worth looking at the differences between ICO and IDO. The most significant one is that the tokens issued during an IDO are guaranteed to be placed on a decentralized crypto exchange. This was one of the main problems with ICO, many of which didn’t live to see the listing of their tokens on any centralized platform. I remember that crypto exchanges then charged a lot of money for listing the project, simply profiting from the hype. But not all ICOs, especially the “honest” ones, had funds for such a listing. And without entering the crypto exchange, the project was not long for this world.
Now, on the other hand, many investors don’t realize that listing a token on a decentralized crypto exchange doesn’t guarantee the growth of its quotes. Yes, many of these projects have already managed to make their own Xs – they are the ones shown off in advertising articles. But participating in an IDO, you risk losing 100% of all funds, as developers can simply run away with the money they raised. It is even easier for them to do so than before, given that decentralized exchanges are not regulated by state laws, which means control over projects is very weak.
One more time, for clarity. An IDO is fully and independently organized by the token issuer, so anyone who chooses this form of token sale can carry it out. This event is 100% organized by the issuer offline with the project’s own IT system or online within the blockchain using transactions of the project or the issuer.
Since an IDO can be conducted by anyone, technically it should be regulated by the issuer’s jurisdiction. But in reality, it depends entirely on the token issuer with no guarantees to speak of. For example, in the case of Binance DEX, Binance Chain validators only vote for the listing of a project, which is based solely on the proposal and discussion on the community forum.
There are several main platforms for initial token offerings. Different sites have their own requirements for getting on their whitelists, but usually you need to stake a certain number of site tokens, subscribe, repost and like on social networks.
Some popular IDO platforms include:
After the initial purchase, tokens can be sold on the same exchange where the investor bought them. If there is no lockup period (tokens are not locked on the account), you can sell immediately after the token is listed on the exchange. Otherwise, you’ll need to wait until the tokens are unlocked and sell them gradually.