With the introduction of the initial coin offerings, commonly abbreviated ICO, fundraising took a totally different dimension not witnessed until now. What started with initial coin offerings led to the development of initial exchange offerings and security token offerings. Initial exchange offerings gave the fundraisers an opportunity to directly get listed on an exchange, while the security token offering brought the entire process of fundraising into the purview of regulatory bodies like the SEC.
In all of this, it cannot be denied that there is a certain degree of centralization associated with all the fundraising methods. It is also known that the basic philosophy of blockchain technology is all about centralization without compromising on security and transparency.
Converging the ideas of complete decentralization with the idea of crypto fundraising, initial decentralized exchange offerings, shortened to be initial DEX offerings (IDO), were created.
What is an Initial DEX Offering?
To understand what IDO is about, we need to understand the way IEOs and ICOs work. In the ICO, the utility token is offered to almost every investor. They can buy the token and they need to bank on the uncertainties on whether or not their token will be listed on an exchange.
IEOs, on the other hand, eliminate the uncertainty associated with the token listing. However, it comes at a considerable cost, not only in terms of the listing fees to be paid if the exchange is reputed, but also the tokens that they have to part with as a commission to the exchange.
The IDO tries to create the best of both worlds. As the name implies, the IDO makes the entire process completely decentralized. It is offered via reputable decentralized liquidity exchanges like Binance DEX and Bancor. Most of these exchanges follow liquidity protocols like Uniswap.
How to launch your own IDO?
The issuance of the new token can be carried out by the token issuer independently. It can even be carried out offline with the in-house IT team of the project or online on the blockchain using transactions from the issuer itself.
The fact that the IDO can be launched without any intervention from a centralized body shows how decentralized it is by default.
Advantages of an IDO
IDO brings to the table a lot of advantages.
One of the biggest advantages of IDO is that it promotes and facilitates open and fair fundraising. It has been observed that private investors buy and stake a large number of tokens. This discrepancy largely stems from the centralization present usually in exchanges. However, with an IDO, and with a completely decentralized fundraising approach, such possibilities are completely eliminated as the token issuer does not need any authorization or permission to kickstart the fundraising event. Since the entire offering is open for every investor and not just private investors, the fundraising process is completely fair and open.
IDO also facilitates fast trading. The investors can quickly buy the token in an IDO and sell them at a higher price later during the same IDO. There have been instances where some tokens have jumped by 800% in an IDO.
Another major advantage that the IDO brings to the table is enhanced liquidity. Liquidity, by definition, is the magnitude of the ease with which an asset can be converted to cash. Liquidity has been one of the major concerns for a lot of crypto exchanges, and especially the centralized ecosystems. However, with an IDO, the liquidity is taken care of by protocols that liquidity pools use. A liquidity pool is a huge repository of multiple tokens guarded by a smart contract. People can invest in these pools and turn returns on their investments.
With such humongous amounts of tokens locked in the liquidity pool, it becomes easy for a decentralized exchange to facilitate easy trading of newly issued tokens, making it a lucrative choice for any new investor to earn returns and crypto project initiators who need fresh funds for their project.
The challenges with IDO
It is not a bed of roses for IDO. There are a few disadvantages that have drawn some criticism from crypto enthusiasts in all corners.
Dubiously, decentralization can also be called anarchy. In the case of decentralization, it also means that there is no control mechanism. While this is expected to be an advantage on paper, there are considerable chances that it can turn into a disadvantage. This is one of the reasons why the previous fundraising models still have prominence over this new decentralized fundraising model in spite of the advantages it brings.
The token price is susceptible to large variations as an investor swaps the token. This would mean that only a small number of investors can buy the token at the initially listed token price. This leads to a really serious consequence where investors who hold large amounts of tokens, also called whales, manipulate the token price. There are no buying limits in an IDO, and this can lead to a bonding curve model. Eventually, the token issuers might not have any clarity on the amount they have raised through this token offering.
If the price of a token starts moving towards a profitable direction, investors need to decide without much delay on whether or not to invest in a new swap listing. There are also chances that fake tokens can be listed in the IDO, and even these tokens might acquire some initial liquidity. This liquidity rug pooling can lead to investors losing their money, and eventually the interest not only in the token but in the entire process of issuing IDOs.
Although blockchain technology is all about anonymity, the same argument cannot be extended into the world of investments. Since the entire process is decentralized, and IDO does not have any KYC/AML integration. This would mean that there is no validated information about the investors, their identity, their authenticity, and their credibility.
Much like the basket technology that governs all these token offerings, IDO is still in its most nascent stages. It would take some time before the IDO ecosystem addresses these concerns and arrives at a fine point balancing everything between offering a considerable amount of centralization without compromising on security. It is quite likely that the IDO will be the most popular blockchain-based fundraising method in the future.
If you would like to capitalize on this new method of fundraising and would like to launch your own IDO, all you need to do is get in touch with a blockchain development company that specializes in initial DEX offering development. They will take care to understand your requirements and present you with perfect solutions in line with what your business needs.