Last updated on September 25th, 2023 at 06:13 pm
Crypto projects employ numerous methods to raise funding for the development of their architecture. Typically, a project offers investors its native token in exchange for funding. This article examines the definition of an IDO and what to expect throughout the Initial DEX Offering process.
What are IDOs?
Initial DEX Offering or IDO is a token offering organized by a decentralized exchange. With the permissionless nature of this type of exchange, liquidity pools are necessary for the operation of IDOs. Initial DEX Offerings, Initial Coin Offerings (ICOs), and Initial Exchange Offerings (IEOs) are all examples of token offerings.
Any of the abovementioned may be used by a new crypto project to accomplish different goals. IDOs are often used because they allow startups to build a community of users who are interested in the product while also funding its development.
Projects use IDOs to receive financing from investors while offering them the native token of the platform in return. Businesses opt for IDOs over other types of token offering systems such as IEOs and ICOs because of some inherent benefits.
• Immediate liquidity
Many IDOs require potential investors to supply liquidity in a Liquidity Pool (LP) before they can access the native token of the platform. Decentralized exchanges offer immediate liquidity allowing users to trade the project token instantly. With the structure of this token offering, early adopters can sell their tokens to others for a higher value. Typically, traders tend to look for projects that organize IDOs to purchase the project tokens at a lesser price and probably resell once the price increases.
• Fast Listing Period
With the permissionless nature of decentralized exchanges, projects that organize IDOs tend to be listed on the trading platform immediately the process comes to an end. Investors do not have to spend their time waiting for the token to be listed because it is done instantly, allowing them to make profits earlier than what is obtainable in ICOs.
• Lower Cost of Listing
Listing on a centralized exchange is usually expensive. Before crypto projects can utilize the features of a centralized exchange’s launchpad, they are required to pay exorbitant fees, which may not be available on the standard platform. The fees charged to organize IDOs are usually cheaper compared to alternatives.
• Lesser Restrictions
The organization of an IEO on a centralized exchange has constraints. It is tough to go through the stages of several centralized launchpads. Most of the time, average crypto startups can’t scale through due to insufficient funding.
Some custodial trading platforms require that the new platform not publish its token on competitors’ platforms for a specified period. A centralized exchange may request that a project provide them with a significant amount of native tokens to access the exchange’s services.
Using a custodial exchange imposes extra constraints. For example, the project has little to no control over the criteria that govern token sales.
What Are The Drawbacks of IDOs?
Though IDOs provide benefits that transform the way things are done in the crypto space, they also have certain drawbacks.
• Lack of Vetting Process
In an ICO or IEO, the platform hosting the exercise requires participants to submit their personal information before listing their project. The projects are thoroughly vetted, from the use cases to the founding team. The identities of individuals behind a project are known, which cannot be said for an IDO process. Most decentralized exchanges have minimal requirements for launching an IDO on their Launchpads. Sometimes the criteria may not include verifying the identities of the project’s crew.
• Scams and Frauds
Scams and fraudulent activities are prevalent in IDOs due to Decentralized Exchanges’ lax attitude towards vetting the identities of project teams. Sometimes the founding team may not keep their end of the bargain, defrauding investors and leaving them in the lurch. It may also be tough to track down the founding team due to their anonymity.
• Illegal Activities
Generally, centralized exchanges request that potential investors verify their identities before participating in IEO activities on their launchpads. Documents such as proof of identity and address are required at the sign-up stage, although this is not true for most decentralized exchanges.
As a result of the anonymity provided by decentralized exchanges, users can invest in multiple new projects to launder money or engage in other criminal activities.
How does an IDO work?
The required steps to participate in an IDO differ for new projects and potential investors.
• As a Potential Investor
Potential investors are required to carry out some tasks before they can participate in the launchpad activities. Typically, the requirements vary from one exchange to the other. It utilizes a tier system that grants users in higher tiers access to guaranteed and larger token allocations.
To belong to a tier, the user is required to stake the native token of the platform hosting the IDO for the crypto project. Users with large amounts of staked tokens are awarded a spot in the higher tiers. The higher the tier, the larger the number of the crypto project’s tokens that the user can access.
Potential investors must stake their tokens at least a few days before the start of an IDO to be eligible for these launchpads. Those with larger staking pools have a first-mover advantage to purchase large amounts of tokens.
Before they can purchase tokens, some projects require investors to participate in marketing activities to promote the project. After completing the tasks, they are allowed to submit their wallet addresses in the hopes of joining a whitelist.
Immediately after the Token Generation Event (TGE), investors have access to their tokens, which they can trade or hold in their wallets.
• As a Project
To protect their users, some Decentralized Exchanges (DEXs) assess new projects before allowing them to use their launchpads. The steps differ depending on the launchpad.
Vetting
Some DEXs require that the project’s founding team undergo a verification process. Their identities, as well as other vital information about them, must be disclosed. Although, this is not always the case as some DEXs are more permissive.
Token Offering
Investors lock their funds with the team with the hope of getting tokens when the Token Generation Event (TGE) occurs.
Creation of Liquidity Pool
A portion of the funds raised will be used to create a liquidity pool for the crypto project’s token. The remaining funds are in the team’s custody.
How to Be Safe In An IDO?
IDOs are a means of accessing new tokens. However, potential investors must take steps to remain safe.
• Check the Authenticity of the Launchpad
There are numerous DEX Launchpads that host IDOs for projects. It is important to opt for those that have built credibility over time in the crypto space. This reduces the chance of being fleeced of tokens at the TGE.
• Check the Validity of the Link
When an IDO of a project is about to happen, scammers tend to post fake links that direct users to phishing websites, to steal from them. Any crypto transferred to the scam address by the investor cannot be recovered.
• Due Diligence.
It does not matter if the launchpad has built a reputation for vetting the projects that use its services for IDOs. Potential investors must conduct due diligence by researching the team behind the project. They should also learn more about tokenomics, from the vesting period to the amount allocated to the team.
In Conclusion,
- An Initial DEX Offering, or IDO, is organized on decentralized exchanges and has numerous advantages over ICOs and IEOs.
- It has certain advantages but also has some drawbacks, such as being associated with scams and frauds.
- There are precautions to take before participating in an IDO to reduce the chances of getting scammed.
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