Decentralized finance (DeFi) exploded in 2020 and we’re still currently riding the waves of the boom. Previously, much of the crypto space was centralized for ease of use, but as blockchain technology has developed we have seen more of what the blockchain can do. With advancements in smart contract platforms, we are seeing more centralized finance tools pop up in the detralized sphere.
One of the newest tools - Initial DEX Offerings (IDO) - mirror Initial Exchange Offerings in the centralized world. Despite all of the types of offerings in the cryptocurrency space, most of them are centralized, but the IDO brings a new tool that is exclusive to DeFi, which we will be exploring in this article.
IDO stands for Initial Decentralized Exchagne (DEX) Offering, which is when a project launches a token through a decentralized liquidity exchange. If you’re wondering what is a DEX, it is a decentralized exchange, which differs from a centralized exchange in that they are not owned and operated by one entity, instead they use automated smart contracts to facilitate peer-to-peer trading and execute trades without a middle man.
When a crypto project needs capital before they launch, they typically offer coins or tokens to investors in an initial offering. This is a way of fairly distributing tokens to those that want to participate in the network. Projects that use the IDO receive this funding from individual investors instead of venture capital firms and those who invest never own any equity in the project. Many IDOs can also set limits on the number of individuals that participate and the amount of tokens they’re allowed, which prevents whales from getting all of the tokens.
An IDO differs from an IEO and an ICO in a few ways. Initial Exchange Offerings (IEOs) are when a project uses a centralized exchange platform to release their token. Initial Coin Offerings (ICOs) are like an initial public offering in the traditional finance world, a project issues its own token directly to people in order to raise funds.
IEOs make the token distribution process easier for projects because everything is handled by the exchange. For example, the exchange would handle KYC/AML and automatically prevent certain jurisdictions from participating. All that’s necessary is paying the exchange for their service, and once your tokens are distributed they become immediately available for exchange on the platform. The disadvantages are that exchange fees can be high and the project has little control in the parameters of the token sale.
ICOs allow the project full freedom on managing transactions and operations on their own platform. But this also means that it’s up to the project to make sure that the sale goes smoothly and everyone receives their tokens once it has ended. Then the project will need to find an exchange to list their token.
Since tokens that are sold start trading on the host DEX immediately, IDOs provide instant liquidity with little to no slippage thanks to the available liquidity pools on the DEX. Instant liquidity for a token is important because if it cannot easily be sold for another token, it can be harder to find investors.
As soon as the first investor buys a token, the token is available for trading on the DEX. This instantaneous trading can allow users to immediately participate in the utility of the network by using the token to do things like staking, governance, and any other utility functions the token offers. This also allows for liquidity of the token because more people can access the token in liquid and stable markets.
IEOs and ICOs can incur huge costs when it comes to paying exchange listing fees or paying exchanges in tokens, but with decentralized exchanges the fees are not as high and there are no issues listing the token as there is no central authority to give permission.
IDO launchpads often limit the amount of tokens you can purchase, effectively blocking whales and bots from locking out small investors. This encourages fairness among investors, and allows smaller investors the chance to get in on initial offerings.
With centralized exchanges, projects usually must be vetted by the exchange before trading can begin with their token. Since there is no central authority with a decentralized exchange, projects don’t need to wait to be vetted in order to start trading their token and raising funds from the public. This can help out smaller projects that don’t have the funding yet to list on a bigger exchange.
Since projects don’t need to be vetted to begin trading, this can lead to scams. The way you can combat this risk is by doing your research and only using a trustworthy launchpad platform. There are platforms that provide anti-scam vetting as well as KYC checks, but it’s also important to do your own research into a project before buying into their token.
It can actually be hard to get on a whitelist, which is a pre-arranged list of addresses that are eligible to participate in the IDO. The number of participants on the whitelist is limited, and if a project is popular it can make it harder to make it on the whitelist, especially for smaller investors who don’t have as high of a quantity of the launchpad’s native token - which is how you enter a whitelist.
If you are interested in participating in an IDO, you will need to win a whitelist spot on a launchpad for decentralized exchange offerings. Since IDOs generally raise small amounts compared to IEOs and ICOs, they have to limit the number of buyers and the amount of the token that investors can buy.
To win a whitelist spot, you’ll need to choose which launchpad you would like and you’ll need to hold at least the minimum number required of the launchpad’s native token. Generally, the more tokens you hold the more entries you get. Usually you can only win once.
Getting on these whitelists usually requires KYC checks as well as needing a crypto wallet, and certain countries like the United States, Iran, Venezuela, and more have banned IDOs, so check with your local jurisdiction if it is even permitted.
As many of you know, Pontem Network plans to eventually launch our own tokens publicly in the future. But which coin distribution method will we use? We did an in-depth look at all the distribution methods in this article, but we didn’t mention that one of the methods we are considering for our own release is the IDO. While nothing is set in stone yet and we’re still exploring options, an IDO is one possibility we’re exploring.
IDOs are one step in building the DeFi world to include many of the tools you only see from centralized entities. Expanding DeFi options allows projects the ability to stay true to blockchain’s decentralized roots, and speed up crypto adoption by expanding what you can do with your crypto. It’s likely that IDOs are only the beginning of what we will see coming out of DeFi.