IDO: The New Decentralized Protocol for Effective Crowdfunding
Updated: Dec 3, 2022
Crypto projects are experiencing a quantum leap in new functionalities and potential for financial transactions. One of such functions is the introduction of crowdfunding techniques where crypto projects can leverage the Blockchain's Decentralized Finance (DeFi) while soliciting funds from their prospective customers.
The Crypto Fundraising ecosystem has evolved from traditional options of getting financial loans and investments from banks, uploading website whitepapers to coin offerings, initial exchange offerings, and traditional seed rounds.
This ecosystem's advancement has recently seen the emergence of Initial Decentralized Exchange Offering( IDO) - a preferred fundraising model that offers better liquidity and transparent trading.
The crowdfunding model has been listed as an improved alternative to other antiquated models, from Initial Coin Offerings (ICO) to Security Token Offering (STO) and Initial Exchange Offering (IEO).
I would now provide a more precise outline of an IDO, how it offers a more egalitarian crowdfunding model, and how it can benefit its custodians.
What Is an IDO?
An Initial Decentralized Exchange Offering (IDO) is a crowdfunding model where the newly established crypto project or issuer disburses IDO coins using liquidity pools on a decentralized liquidity exchange platform. This decentralized liquidity exchange is a crypto-asset exchange dependent on liquidity pools as a tool for token swapping among traders.
P.S: Liquidity pools are tradeable crypto pairs comprising crypto assets and stablecoins, namely the pairing between USDT and ETH (USDT/ETH). Crypto traders leverage the unfluctuating nature of stablecoins to ensure and secure their volatile crypto assets by swapping them at their discretion or especially during the bear market.
In its essence, IDOs are augmented successors to the ICOs and IEOs whose primary aim is to bootstrap crypto projects. With IDOs, tokens are automatically listed on a decentralized exchange(DEX) by anyone without any brokerage or third-party interference.
Many of these Decentralized exchanges accommodate the launch of IDOs. Some of these exchanges include Binance DEX, Polkastarter, and Uniswap.
To understand why IDOs are gaining traction among different startups and business establishments, let me elucidate how IDOs work.
How Do IDOs Work?
To provide an insightful idealization of this paradigm-shifting innovation, I will highlight the various steps required for an IDO to function effectively.
They are as follows:
Preparation: This stage is where the crypto project analyzes and describes the project they are about to commence. Often, this process involves launching a technical description of the product or offer. A professional whitepaper or even a Demo version of the offering is required to expound the project's competence to the public.
Decentralized Generalization: To circumvent some of the lapses experienced by some previous crowdfunding models like the ICO - which was left vulnerable to dodgy activities like spam and outright scam - IDOs must be scrutinized and verified at this stage.
The crypto project is sent to the chosen DEX startup platform for an IDO to get verified. External auditors vet and verify the project if they match their credibility criteria.
Once verified, the given project is automatically bootstrapped to raise capital by installing it on a DEX launchpad.
Presale: At this stage, project enthusiasts attempt to register on the whitelist by supporting the startup, primarily through signing up for their social network. Other times, this process is also determined through a lottery.
Public Sale: Also conducted on the DEX platform, this process involves the raising of capital through the combination of ETH and stable coins (USDC, USDT, and DAI). The public sale can be carried out in two possible ways:
The token-holder sells in batches, with the price of tokens rising with every batch. Investors are more interested in this technique because the first buyers can get tokens at a discount.
Instead of selling tokens at a set price, the holder organizes an auction where supply and demand determine the selling price. MTA tokens are sold in this manner.
Token Listing on the Cryptocurrency Stock Exchange: Funds are raised to build a liquidity pool at this stage, and the balance is provided to the team. Investors trade the tokens after the Token Generation Event (TGE), and the liquidity pair (LP) is customarily locked for a set time before being opened for trading.
Liquidity Simulation: Though this stage is not obligatory, it is highly relevant. After crypto projects list their tokens, some create incentives for specific actions to stimulate investors' interest in their ecosystem.
With their combination of simplicity, affordability, and accessibility, many new projects in the crypto market are now using IDOs as a regular financing technique. Token sales have even grown into a whole industry.
Unlike some technology that oversees token auctions, IDOs are still in their infancy in a financial sector that is only 12 years old. Still, by bringing their benefits of Instant Liquidity, Instant trading, Lower costs, and Efficiency, these new offerings could become the most popular blockchain-based fundraising mechanism in the future. This results from IDOs having surmounted their other exchange counterparts like the IEO.
As a blockchain enthusiast, I reckon IDOs have the potential to emerge as a frontrunner in the domain of fundraising mechanisms. What do you think? Would you adopt this service as a backbone in your portfolios or your next crowdfunding event?
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