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What Is Initial Dex Offering (IDO)?

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by José Oramas · 6 min read
What Is Initial Dex Offering (IDO)?
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IDOs presents broad opportunities for upcoming DeFi projects. Nowadays, more and more of them are choosing Decentralized Liquidity Exchanges to promote their work through an Initial Dex Offering. Let’s have a deeper look at this fundraising model.

One of the hottest topics in the crypto sphere is Initial Dex Offering (IDO). It is believed that this concept can lead to a progressive revolution in the fintech world. When it comes to cryptocurrencies, a number of new and unique events such as Initial Coin Offerings (ICOs) or Initial Exchange Offerings (IEOs) have taken place. But Initial Dex Offering is different from the rest.

What Is IDO?

The Initial Dex Offering (IDO) is the brainchild of Binance DEX. According to Raven’s blog, there is not an exact definition for it yet. At the same time, IDOs present a broader set of tools for incoming tech projects or startups to move from being just an idea and expand into the crypto ecosystem.

To get the idea of IDOs, it is first necessary to understand the importance of liquidity for a token. Without liquidity, nobody would want to buy tokens. As a result,  DeFi projects are approaching Decentralized Liquidity Exchanges using Initial DEX Offerings to raise capital and distribute tokens.

The advantage of Decentralized Liquidity Exchanges is that they do not rely on the decentralized order book model to match sellers and buyers. Because of lack of liquidity, that could lead to price slippage. Instead, Decentralized Liquidity Exchanges use Liquidity Pools. There, investors deposit their funds in a smart contract, which means there is always immediate liquidity to swap tokens.

Nowadays, more and more DeFi projects are choosing Decentralized Liquidity Exchanges to promote their work through an Initial Dex Offering, similar to an Initial Coin Offering or Initial Exchange Offering.

First Initial Dex Offering

The first IDO project was the Raven Protocol. It took place back in June 2019, when the Raven Company was listed on Binance DEX. Raven is a decentralized and distributed deep-learning protocol, known for its efficiency and high speed. As the Raven team believes, this protocol not only can revolutionize the blockchain but also help the Artificial Intelligence (AI) industry to become fully decentralized.

The event lasted 24 hours, the team distributed a total of 3% of the supply to the IDO. Participants could buy the Raven token at 0.00005 Binance Coin (BNB) for a single raven token. The event paved the way for IDOs and became one of the greatest experiments in the DeFi space, with the Raven team named the pioneers of the IDO movement. Many similar projects followed, like bZx —a protocol for tokenized margin trading and lending.

Difference Between IDO and IEO / ICO / STO

Some could think of IDOs as the successors of Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEO), and Security Token Offerings (STOs). They all share a similar structure. However, unlike the above-mentioned offerings, IDOs are purely based on the DeFi ecosystem and are fully decentralized. Besides, in IDOs, companies do not need to pay an exchange fee, unlike IEOs, where the more the market develops, the higher the fees are.

IDO is different from IEO, ICO, and STO as the exact potential of the concept has not been explored until now. It is a work in progress that enables users from different nations to participate in a trade where they will be sold tokens of a specified token vendor such as Raven Protocol. However, this process involves risks similar to risks relating to cryptocurrency purchases.

How Does an IDO Work?

Fundamentally, an IDO works like a fundraising model. DeFi projects will use Decentralised Liquidity Exchanges to issue tokens in a liquidity pool (smart contract). These liquidity exchanges, unlike centralized exchanges within IEOs, work with Liquidity Pools where retailers swap tokens.

Likewise, Liquidity Pools are funds (pairs of cryptos) locked in a smart contract. In these pools, investors add liquidity every time they deposit their funds so that other traders can have access to immediate liquidity.

What Are the  Pros/Cons of an IDO?

Of course, IDO models are not perfect. There are several pros and cons to consider with this relatively new fundraising method.

Pros of IDOs:

  • Lower Cost. Regular IEO models come with high fees that can increase with time. As the market develops, DeFi companies may end up paying large sums of money for using IEO. However, in an IDO, you will not face such a problem.
  • Decentralization. Another aspect to consider is that IDOs do not depend on CEX. In a typical IEO model, there is always centralization, as projects depend on CEX to issue their tokens and have no control of the fundraising afterward.
  • Liquidity. DeFi companies looking to fund their projects can expect a longer survival for their tokens. Liquidity Exchanges allow access to immediate liquidity, which is an essential aspect for cryptocurrencies.
  • Fairness. There have been several scandals regarding the pre-sale of a token due to private and institutional investors buying tokens massively in CEX. As a result, this leaves behind retail traders and other investors as the price increases in a short amount of time, before the sale goes public. But IDOs do not depend on centralized exchanges. The decentralization allows them to have full control of the kickstart and can control the parameters of the fundraising.

With the numerous advantages of IDOs, several drawbacks still exist.

Cons of IDOs:

  • Lack of knowledge. At present, IDO models have no control over how many tokens are bought, and, ultimately, the project does nott know how much money has been raised.
  • Volatility. The price increases drastically when traders buy tokens at the beginning. Only a few people can get their hands on the token at first. As a result, there is an immediate price movement.
  • No KYC support. Being in a DeFi area, IDOs have no Know Your Customer (KYC) integration. In other words, the company running an IDO does not have any information from investors.
  • Market manipulation. As follows from the previous point, an IDO does not provide any information from investors. This means that whales, hackers, and malicious actors can exploit the market without any problem.

The Future of IDO models

IDOs presents broad opportunities for upcoming DeFi projects, and much has been said about the future of this new concept. IDOs can become the new fundraising model preferred by most projects. The method is also called the successor of IEOs and ICOs, as IDOs were introduced with the objective of dealing with the issues that traditional fundraising models face.

Conclusion

Despite its benefits, the IDO model needs a lot of work to bring out its maximum potential. The integration of the KYC system and more control mechanisms could help reshape the DeFi and the crypto world. After that, IDO models will be ready to become the next step for cryptocurrencies.

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FAQ

What is IDO in crypto?

IDO is a fundraising model used by DeFi companies through Decentralised Liquidity Exchange to issue their tokens with a Liquidity Pool. Investors deposit their funds in a smart contract to add liquidity to these pools so that traders can swap tokens immediately. IDOs can help the crypto community to move from centralized exchanges to fully decentralized protocols.

What is DEX?

DEX stands for Decentralized Exchange. Any Peer-to-peer (P2P) transaction is decentralized, which means it doesn’t need a third party. DEX is the opposite of CEX (Centralized Exchange) because it works on-chain through smart contracts, which is a type of programmed agreement. Notably, traditional institutions do not have jurisdiction over DEXs.

A prime example of DEXs is LocalBitcoin — a marketplace where buyers and sellers meet and conduct peer-to-peer transactions. Users can set their selling orders and get contacted by buyers. Unlike typical CEXs that take custody of crypto assets, DEXs allow users to fully control their funds. 

What is DeFi?

DeFi stands for Decentralized Finance. It can be defined as a movement or ecosystem of financial applications built on blockchains. Most of these applications are built on Ethereum, as it is the most efficient blockchain network at the moment. DeFi products, called Decentralized Applications (dApps), offer modern financial services for upcoming DeFi projects.

DeFi encompasses P2P financial transactions using cryptocurrencies and smart contracts — programmable agreements that eliminate the need for a third party. As a whole, DeFi is about decentralized processes and products regarding financial activities without centralization and the need for a traditional bank.

Currently, there is an exponential growth in the development of DeFi projects that rely on the Ethereum network. However, other blockchains such as EOS, Cosmos, Ontology, Tron, among others, are also joining. There are several platforms currently available, growing each year to be part of the DeFi ecosystem.

What are Automated Market Makers (AMM)?

An Automated Market Maker (AMM) is a decentralized financial tool and an essential aspect of the DeFi ecosystem. It allows investors to trade digital assets in a permissionless manner through liquidity pools.

AMM is a unique concept of the DeFi space. Always available for traders, it remains fully decentralized. In a traditional marketplace, a seller would set a price — an order — for an asset, and a buyer would try to negotiate it until both reach an agreement. Instead of the classic buyer/seller market, AMM uses mathematical algorithms to determine crypto-token prices.

AMM can be seen as the closest financial tool to the original concepts of DeFi and cryptocurrencies — full decentralization, fairness, participation, and scalability.

How does an IDO work?

An IDO works similarly to an Initial Exchange Offering (IEO). Basically, it works the same as a fundraising model. DeFi projects use Decentralised Liquidity Exchanges to issue tokens in a liquidity pool (smart contract). These liquidity exchanges, unlike centralized exchanges within IEOs, work with Liquidity Pools. There, retailers swap tokens.

Likewise, Liquidity Pools are funds (pairs of cryptos) locked in a smart contract. In these pools, investors add liquidity every time they deposit their funds so that other traders can have access to immediate liquidity.

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