Updated: Jun 30
In 2019, Raven Protocol launched an Initial Dex Offering (IDO), a fundraising method that was unheard of at that time. Back then, everyone ran Initial Exchange Offerings (IEOs), and IDOs were uncharted territory. But the public’s trust in Raven’s IDO paid off, and just days later, early investors saw their money double.
Years after it was first introduced, IDO has become one of the most popular ways to raise funds in the crypto space. But to understand how it works, we must explore how IDOs came to be.
The Rise of IDOs
In 2016, companies that wanted to raise money for their crypto project launched an Initial Coin Offering (ICO), which worked just like its stock market counterpart, the Initial Public Offering (IPO). During an ICO, the company sells a part of its token supply to the public. ICOs were beyond effective; teams could raise millions during a single ICO. In fact, Block.one EOS managed to raise a whopping $4 billion through its ICOs.
The catch, however, was that ICOs were unregulated and became a hotbed for scams. And so the IEO was born, which provided more stringent vetting and stronger due diligence. But it also has a downside — IEOs have high barriers to entry.
Enter IDOs, which immediately became the crypto crowd favorite. It enables teams to raise money, with a reasonable amount of regulation and lower barrier to entry and allows any and all types of teams and investors to participate. In addition, the tokens involved in an IDO are listed immediately on a decentralized exchange (DEX), but more of this later.
At its core, an IDO is a fundraising method for crypto projects. IDOs take place in a DEX, a platform where traders can buy and sell crypto assets directly without brokers or intermediaries. This is in contrast to an IEO, where an exchange (the broker) conducts the sale.
During an IDO, the company offers crypto assets to retail investors. Investors buy the assets through a DEX, and their payments are pooled in a liquidity pool, a digital pile of funds locked in smart contracts. The company then uses the money to fund its crypto project.
How IDOs Work
If a team decides to launch an IDO:
The team approaches a DEX launchpad (decentralized platforms that allow investors to buy tokens before they’re publicly listed) and meets their requirements for an IDO.
If their IDO application is approved, the team can conduct the IDO. They also set the hard cap (maximum amount of funds to be raised), the number of tokens allocated to the IDO (which is a percentage of the total token supply), token price, and more.
The team conducts the IDO, where retail investors buy tokens at the IDO token price. IDO ends at a certain time limit or when the hard cap has been reached. Take note that investors don’t lay hands on their purchased tokens immediately. They’ll receive the tokens later on.
Shortly after the IDO, the token generation event (TGE) takes place, where investors receive the tokens.
Immediately after the TGE, the token is listed on a decentralized exchange, where early investors can sell their tokens at a higher price.
The Pros and Cons
It’s not hard to see the appeal of IDOs:
It’s decentralized. As mentioned earlier, IDOs have a lower barrier to entry compared to IEO. This means it can be conducted by any team or company, without cumbersome vetting or legwork.
It allows for open and fair fundraising. IEOs are often dominated by private investors. In contrast, the decentralized nature of IDOs allow public, small-time investors to join and get big gains.
It enables fast trading. After IDOs, tokens are listed immediately, allowing investors to trade quickly.
However, IDOs are far from perfect. Its decentralization makes it vulnerable to scams, draining unknowing investors of their funds. On the flip side, there’s no KYC (know your customer) process, which means a company doesn’t have any validated information on their investors.
Like any piece of crypto technology, IDO is evolving quickly, with teams seeking to patch up its shortcomings. The IDO space could go two ways: IDO might become the standard in crypto fundraising, or a better and more secure fundraising approach could dethrone it — it all remains to be seen.