The crypto world is moving at a fast pace. The number of exchanges and token projects is quadrupling. Essentially, the decentralized nature of cryptocurrency has allowed anyone to launch token projects on their own. This revolutionary change in the financial industry is made possible by Initial DEX Offering or IDO.
Crypto tokens often go public after fundraising events. There are three types of fundraising events in this regard. ICO, IEO, and IDO. The one model becoming popular these days is IDO. It has numerous advantages over other fundraising methods.
What is Initial DEX Offering?
Initial DEX offering or IDO involves leveraging services of liquidity exchange for launching a token. IDO fundraising model has been in use for the past 4 years. It costs less and gives the token immediate access to liquidity.
Liquidity exchanges are different from regular decentralized exchanges. The regular exchange uses an order book for matching makers and takers in the market. It leads to poor trading results in the long run as decentralized order books don’t have enough liquidity.
Developers in the crypto space invented liquidity exchanges to solve the issue of decentralized exchanges. A liquidity exchange depends on liquidity pools. Crypto traders can swap their tokens with this liquidity pool which contain digital assets locked in a smart contract.
Examples of decentralized exchanges (DEX) with liquidity pools include Uniswap, Bancor, SushiSwap and Curve etc. Any investor can be a liquidity provider on these exchanges. He/she creates a market by adding the equal value of two tokens into a pool. Resultantly, they get a trading fee against the traded happening in the pool.
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As traditional startups get venture capital before launch, the token projects get funding from individual investors through an initial DEX offering. However, in IDO, investors do not own any equity in the project.
Launching a token with a decentralized liquidity exchange increases its chances of survival. Furthermore, the price starts moving with immediate access to liquidity.
Examples of IDO Model
One of the first IDO was Raven Protocol. It was listed with Binance DEX in June 2019. The IDO was held for 24 hours. The total token supply assigned was 3%. The value of a single Raven token went up to 0.00005 BNB in the given time.
IDO and IEO (Initial Exchange Offering) are similar in makeup, but there are a few differences in both.
Difference between IEO and IDO
IEO involves the launching of tokens using centralized exchanges (CEX). This involves certain restriction put forth by CEX:
- A token shall not be listed with competing exchanges
- Giving a certain number of tokens in bulk to the exchange
- Adhering to the fundraising parameters set by the exchange
IDO, on the other hand, has different criteria.
Benefits of Initial DEX Offering
There are plenty of benefits when it comes to listing token with an IDO. Here are some in detail.
Fundraising is Open & Fair
The IDO fundraising model is open and fair. Anyone can participate in it. Moreover, the token launching with initial DEX offerings doesn’t entirely rely on private investors.
In the past, we have seen some coin offerings in which private investors’ shenanigans hurt the project in the very beginning. Quite often, investors buy large stacks of coin at a lower price. Upon token going live, they swiftly sell their holdings to the general public for profit.
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These practices damage the spot price of a token in the crypto market. Moreover, a project immediately lands in hot water with long term investors walking out of the door with profit.
Tokens Get Instant Liquidity
Liquidity is important for the success of a token project. Lack of liquidity can cause a crippling blow to the coin prices. Hence, liquidity pools provide instant access to liquidity. Moreover, liquidity is available at every price level facilitating the trade of tokens.
IDO is open and fair. Investors can start the trade of a coin as soon as the project launches it. Consequently, investors try to acquire the coin at the earliest. Later on, they can sell the coin as the price moves upward.
The price of the coin gets moving due to the bonding curve model. This model is used by liquidity pools. When a trader swaps an asset with a new token, the price of the incoming asset diminishes. On the other hand, the price of the other asset surges. Resultantly, the token’s price starts increasing with the very first purchase.
UMA protocol used the IDO model for the launch of its tokens. The liquidity exchange took the price of the token from $0.26 to $2.
Lower Cost of Listing
Launching a token and getting it listed on exchanges is a difficult task. Many time exchanges require payment of millions of dollars for listing a project’s token. Moreover, there is a vetting process for coins as well.
Initial DEX offering involves listing with liquidity exchanges. The token project only has to pay a small gas fee for deploying a smart contract on the exchange. The smart contract, in turn, handles the liquidity pools and project’s tokens.
We have discussed numerous advantages of initial DEX offerings. However, it isn’t all that. There are some downsides of IDO too.
Risks Associated with Initial DEX Offering
Here is a list of issues with Initial DEX Offering.
Liquidity exchanges are not entirely in the interest of the IDO model. Thus, they give less control to the project owner over the fundraising. Lack of control causes the following problems.
- The price of token starts moving after the very first swap.
- Big investors can buy stacks of tokens of a project which gives them damaging powers over the token project.
- There is no way to identify who is buying how many tokens.
- The bonding curve model also makes it impossible to gauge how much funds have been raised through IDO.
As mentioned earlier, the coin price starts rising with the very first swap. Thus, only a few initial investors get the chance to buy a token at the listed price.
Traders can take unfair advantage of moving price. This happened during BZRX token sale with IDO. A group of traders developed a trading bot. The bot quickly purchased a large number of project tokens at the initial price. In the meanwhile, traders spammed the ethereum network preventing other investors from buying tokens. Afterwards, they sold the tokens at a higher market price to investors and bagged millions of dollars in profit.
Investors have to quickly decide whether to invest in a token project or not. This pressure of quick thinking often leads to wrong decisions. Scammers can list their genuine-looking tokens and gain some liquidity. Subsequently, they take the Ethereum from the liquidity pool and run away. Investors are left with fake tokens.
Liquidity scams pose a big threat in crypto market.
Conclusion: The Future of Initial DEX Offerings
Initial DEX offering is a revolutionary model of fundraising. It solves the issues of IEO and ICO. However, there are some inherent problems with this model. The lack of control mechanism, shooting price, and liquidity rug pulls are risk factors for the token projects.
In conclusions, we can say that IDO is great for the success of new token projects. Nonetheless, existing issues need to be resolved. Introducing a governance mechanism and fixating price in the liquidity pool will be a good start in this regard.