What is an IDO initial DEX offering in crypto: If you’ve been reading us for a while, you know that there are a lot of acronyms in Web3. Among them, we have IDOs, yet another barbaric term in the world of cryptocurrencies.
IDO is an English acronym, which stands for Initial DEX Offering. The most fervent of our readers will then link with two other Web3 expressions: DEX ( Decentralized Exchange ) and ICO ( Initial Coin Offering ).
An IDO is, therefore, an issue of tokens, aimed at financing a crypto project, and carried out via a decentralized platform. Let’s take a look at the main points of these crypto-style fundraisers.
IDO is a means of financing specific to decentralized finance
How to define the Initial DEX Offering?
IDO is a crowdfunding method when a token is launched on a decentralized exchange platform, the famous DEX. To fully understand, you really need to have the image of classic crowdfunding in mind.
Imagine that you have an idea for a project based on blockchain, and therefore involving the creation of a native token for this project. However, as for a person wanting to launch a revolutionary toothpaste, you are missing something: money (that can be useful sometimes ). The creator of the toothpaste will therefore ask a community of individuals for funding in exchange for toothpaste.
For an IDO, it’s the same thing. The creator of the project will ask individuals to finance it by purchasing their tokens at a given price. As a reward, the creator can offer advantages, such as privileged access to the future protocol.
IDO: not to be confused with ICO and other means of financing!
The ICO ( Initial Coin Offering ) is the cousin of the IDO. Only difference? It is not carried out on a DEX, but directly on the project website.
Furthermore, the ICO is much more regulated. If we take the example of France, there is even an optional visa from the Financial Markets Authority (AMF) to certify that the ICO is not a scam. Thus, unlike the ICO, there is no formality to follow to launch an IDO.
In the world of blockchain, other means of financing should not be confused with IDO. For example, there is classic fundraising, led by investment funds, whether they specialize in crypto or not. There is also the purchase of shares in the form of tokens without going through a DEX, but directly on the website or application of the company in question.
Finally, there is the IEO ( Initial Exchange Offering ), which is exactly like the IDO, but on a CEX (centralized crypto exchange platform) like Binance. The leader in crypto trading platforms even gave it a little name: Binance Launchpad / Launchpool.
How does a cryptocurrency IDO work?
IDO involves the use of a DEX
Initially, we have the launch of a project which involves the creation of a native token. To request crowdfunding, the project creator will have to use a DEX like Uniswap or PancakeSwap
The DEX used will often depend on the protocol the project is built on. For example, if it is built on the Binance BNB Chain, the IDO will need to be launched on PancakeSwap. For ERC-20 tokens (from the Ethereum blockchain), Uniswap will do the trick.
During this step, investors should not confuse the project and the token. The latter is used to finance the project, but, ultimately, it will become a token like any other. For example, Polkadot DOT is today listed on all major exchange platforms and anyone can buy it, without participating in the financing of the project.
When the IDO is launched, the funds raised are placed in a liquidity pool, along with another token, often the one with which the investors obtained the native token. For example, if Finance Héros decides to launch an IDO with its FHT token on PancakeSwap, you will need BNB cryptos to acquire it. The liquidity pool will then consist of the BNB-FHT pair.
IDO, automation thanks to smart contracts
An Initial DEX Offering takes advantage of the technology offered by decentralized finance protocols (DeFi) and more particularly smart contracts. Thus, even before acquiring the token, investors will have to block cryptocurrencies in a smart contract.
The condition for their release is simple: the issuance of the first native tokens of the project. All this is done automatically thanks to smart contracts. This is also one of the main differences with the ICO, where everything is done “by hand”.
In summary, when an IDO is launched, there is no need for human intervention to allow investors to receive their tokens, and for the project team to receive money from these same investors.
How to participate in an IDO?
A relationship of trust between the creators of the token and investors
An IDO mainly relies on the trust placed by investors in the team behind the project. The usual checks are quite minimal. Before a crypto’s IDO is launched on the DEX, the DEX team usually briefly verifies the project. The objective is to rule out all bogus or scam projects, at least in principle.
We believe that this is not enough. You must carefully read the project whitepaper to find out at least the following information:
- Project team, with as much detail as possible that can be verified,
- Tokenomics, or in a way the “ monetary policy of the token” and the different allocations between private investors and the project team,
- A clear and determined objective of the project, responding to a real need.
Once the DEX validates the IDO, the parties (DEX and the project team) agree on a price per token. This is the price that will be offered during the IDO. Then, this is where smart contracts come into play.
Investors must connect a crypto wallet, such as a MetaMask, compatible with cryptos authorized for the IDO. Once the IDO is open, you can purchase many tokens, unlimited or restricted depending on the operation’s policy, within a defined time.
Once the purchase is made, your funds are blocked in the liquidity pool and will be released according to the provisions provided by the smart contract.
Furthermore, be aware that you will sometimes have to wait a long time before finding the token on a centralized platform. And a minimum holding period is sometimes imposed (we speak of vesting ). So, you will not necessarily be able to resell your cryptos straight away, even in the event of a profit.
What are the advantages and disadvantages of an IDO?
The advantages of an IDO
The main advantage of an IDO is the extreme ease of launching and underwriting. Indeed, the team does not need to do a KYC ( Know Your Customer, i.e. identity verification) of each investor. It’s the complete opposite of an ICO.
The second advantage is the cost, which is very low. The true cost is that of the project and not of the IDO itself. Note, however, that the DEX will be remunerated, for example with a share of the tokens.
Finally, the third advantage is that the IDO is open to all types of investors, even those with limited means.
The disadvantages of an IDO
The disadvantages generally meet the advantages. The absence of KYC means that profiles that are not necessarily advisable can invest in an IDO. You also need to pay attention to DEX security, as some decentralized protocols are not as secure as they should be.
In the same vein, the lack of verification of the seriousness of projects by several DEXs means that investors themselves must be particularly careful of scams. Or even simply empty projects, which will not generate any profit in the long term.
Finally, for the project, you should know that the funds raised during an IDO are much lower than those of ICOs. Indeed, few projects can boast of having raised more than a million dollars.
Our opinion on IDOs: a simple means of financing for crypto projects, but risky for investors
We value IDO as a crypto investment. This openness is for the benefit of both the project team and the investors. The IDO is simple and corresponds to this desire to democratize Web3.
However, this requires more knowledge and work than investing through IEOs, conducted by centralized exchanges. However, to take full advantage of it, you generally need to own a significant number of tokens from the platform, for example, BNB for Binance. Some will therefore criticize the fact that it is the big fish that are favored.
It is up to you to make your choice.