An IDO is a crypto token offering run on a Decentralized Exchange (DEX). Liquidity pools (LP) play an essential role in IDO's by creating liquidity post-sale. A typical IDO lets users lock funds in exchange for new tokens during the token generation event. Some of the raised funds are then added with the new token to an LP before being returned later to the project.
IDOs provide a cheap and simple way for projects to distribute their tokens. IDOs have been around for a while, but they are still evolving and providing new models like the Initial Farm Offering (IFO). We may also see increasing KYC requirements as the area becomes more regulated.
If you want to enter an IDO, you’ll need a digital wallet like MetaMask and some crypto to subscribe and pay transaction fees. Always do your own research on the project and invest via a trusted DEX. This includes looking closely at the IDO's mechanics and the project's team and tokenomics. As always, only invest what you are comfortable losing as token offerings involve high risk.
A token offering is usually an exciting opportunity for investors in the crypto ecosystem. The chance to buy a token at its launch price can be extremely rewarding. But this is just one side of the story. Looking back at the ICO (Initial Coin Offering) craze of 2017 on Ethereum (ETH), it wasn't all entirely positive. Scams and rug pulls were widespread, and investors often suffered big losses.
Since then, the crypto community has developed alternative token offering methods, including the Initial Exchange Offering (IEO), Initial DEX Offering (IDO), and Security Token Offering (STO), among others. IDOs have become a popular choice, but how does this differ from an ICO, and is it safer for investors to use?
What is a token offering?
How does an IDO work?
The rules and stages of an IDO depend on the DEX running it, but there are some common methods:
1. After a vetting process, a project is accepted to run an IDO on a DEX. They offer a supply of tokens for a fixed price, and users lock their funds in return for these tokens. Investors will receive the tokens during the token generation event (TGE) later.
2. Usually, there is an investor whitelist. You might have to complete marketing tasks to join the list or simply provide your wallet address.
4. At the TGE, the tokens are transferred to the user, and the LP opens for trading.
What’s the future of the IDO model?
While the model above is a typical IDO, token offerings are always changing. For example, we also have the IFO (Initial Farm Offering) model, which is increasingly popular. It's hard to say whether it can be called a traditional IDO, but it depends on the same core concepts: liquidity pools and decentralized exchanges.
BNB-CAKE LP tokens are then locked for the new tokens, and the project receives the BNB while the CAKE is burned. The number of tokens you get will depend on how many participants there are in the sale, and any excess funds staked will be returned to you. There may even be measures in place to make it fairer for small investors to get a share of the IDO, such as the [Basic Sale] and [Unlimited Sale] features on the PancakeSwap IFO below.
Another possible change to IDOs may be the requirement of KYC (Know Your Customer) and AML (Anti-Money Laundering) processes. Financial regulators worldwide are taking a bigger interest in DeFi and its regulatory status. AML and KYC are now standard for centralized exchanges, and DEXs may also be subject to the same rules in the future.
What are the advantages of an IDO?
Over time, token offerings have mostly become fairer and more secure for investors. IDOs have some distinct advantages that support this:
What are the disadvantages of an IDO?
Some of the strengths of the IDO also bring about some of its weaknesses. These problems stem mainly from the decentralized and anonymous aspects of an IDO.
What’s the difference between an IDO, IEO, and ICO?
The methods used in an ICO, IDO, and IEO are quite different, even though the results are mainly the same. Here’s a quick overview of the key differences:
DEX vets the project
CEX vets the project
No vetting process as the project runs the sale themselves
DEX handles investors’ funds
CEX handles investors’ funds
The project handles investors’ funds
DEX creates and runs smart contracts
CEX creates and runs smart contracts
The project creates and runs smart contracts
Liquidity pools open on the DEX
Exchange lists the token
The project has to find an exchange to list on
Where can I find IDOs?
How to enter an IDO?
You’ll now be given specific instructions on how to lock your funds in preparation for the token generation event. Make sure you also have enough funds to pay your transaction fees. In most cases, once the subscription period is over, the tokens will be transferred to your wallet. Some sales might, however, lock or stake your new tokens for a certain period. Make sure to read the details before participating in an IDO.
Tips to stay safe in an IDO
Just like any investment, there are easy, practical tips to help keep yourself as safe as possible:
Popular IDO launchpad platforms
With their mix of ease-of-use, affordability, and accessibility, IDOs have become a standard fundraising model for many new projects in the crypto market. In fact, token offerings have become an industry in itself. To summarize, you're usually safer taking part in a sale through a Decentralized Liquidity Exchange than a project. Nevertheless, a huge part of success in an IDO is picking the right project. For this, nothing beats good, old-fashioned research in the crypto space.