What Is an Initial Coin Offering?
An initial coin offering (or ICO for short) is a crowdfunding technique that blockchain projects use to raise capital and create a new cryptocurrency. The ICO market was thriving in 2017 and 2018 — but these days, due to a variety of factors, other methods for token offerings are more popular.
How Does an ICO Work?
At first glance, ICOs are not too different from an initial public offering, where companies start selling shares to the public on the stock exchange. But although IPOs are regulated by the U.S. Securities and Exchange Commission, as a rule, ICOs are unregulated, and thus many ICO tokens have ended up in hot water because they didn’t comply with federal securities laws. Another big difference is that buying crypto tokens doesn’t mean you’ll have an ownership stake in the company.
For legitimate ICOs, the first step is devising a business model and exploring how blockchain technology will be used. Startups may seek early feedback from ICO investors or venture capitalists. From here, the new project will develop a white paper that explains what their digital currency is for — and the document may include forward-looking information about the return on investment a contributor can expect.
Many crowdsales struggle to gain momentum at this stage because they lack legitimacy — in 2020, we are a long way from the ICO craze of 2017. The new token could be regarded as a solution looking for a problem. A lack of hype on social media could also make raising money impossible. According to Blockchain Simplified, up to 53.3% of ICO projects failed to close their token sales in 2018.
ICO projects that are successful will need to get their digital assets listed on cryptocurrency exchanges. Ethereum has commonly been used for token sales because of the blockchain’s smart contract functionality.
📚 The Danger of Scams
As the hype surrounding utility tokens surged in 2017, scammers saw an opportunity to hold fraudulent ICOs — and sadly, a lack of regulation meant many managed to get away with it.
Some criminals promised returns from virtual currencies that were simply too good to be true. Even ICO projects backed by celebrities, such as the boxer Floyd Mayweather, were later found to be fraudulent.
Just like any other investment in fintech, due diligence is essential. Before backing an ICO, ask yourself these questions: Does the white paper give you everything you need? Is the team behind this blockchain project credible? Is transparent information provided about the progress of the token sale?
📚 The SEC Flexes Its Muscles
The United States has taken a dim view toward initial coin offerings — irrespective as to whether they were for legitimate projects or not.
Telegram, a popular encrypted messaging app, raised $1.7 billion in an ICO in 2018 for a new blockchain project known as the Telegram Open Network. But last year, the SEC accused the company of breaking federal securities laws by failing to register the token sale. Telegram has now been forced to cough up an $18.5 million fine, and return $1.2 billion to investors.
Despite all the doom and gloom, there have been some big successes in the world of ICOs. Ethereum and NEO are just some of the big names that successfully managed to raise capital through an initial coin offering. Now, ETH is the world’s second-largest cryptocurrency by market cap.
What is IDO — the new alternative to IEO and ICO?
Blockchain and Crypto world aims to solve the dependency on centralized platforms and financial models. Still, there are major players as exchanges that are running in a fully controlled manner. The solution recently presented itself in IDO — Initial DEX Offering.
As I work with crypto projects, I see that the last two months more and more projects ask to help them to promote their IDOs. That indicates an increasing interest in the decentralized token listing, not only because of higher cost efficiency, but also because of no restrictions on who, when, and from where can buy tokens on DEXs. So I decided to tell you what is IDO.
Initial DEX Offering is becoming the preferred method to distribute tokens and raise capital in DeFi, along with IEOs, ICOs and direct listings at CEX.
However, it’s difficult to constitute that DEX method is fully examined. It’s only a few months of history, and the community doesn’t have full experience in that. Still, what is it and how to do so?
In some particular way, the fundraising method of IDO is similar to IEO, ICO, and STO, despite it is based on DeFi, which created a way to build innovative, robust, and easily scalable open finances. IDO is decentralized and offers ways for DeFi.
📚 Examples of IDOs
One of the first IDO was hosted on Binance DEX and was built on Raven Protocol. Besides that we already possess BZX, a lending, margin trading protocol, and UMA (a Synthetix assets).
Many other platforms also want to jump on the trend and are launching the IDO dashboards.
The community expects a new approach to crypto fundraising from IDO, this idea already gathers it’s fans.
📚 What is the difference between IDO, ICO and IEO?
IEO and IDO in general are the same, except for the platform that hosts the fundraising process. Speaking of ICO — a project’s takes full responsibility to manage transactions and operations on an inner platform. If it’s IEO — a centralized exchange host the “ICO” in-house. IDO is the ICO and IEO both in one, but a centralized exchange is replaced with decentralized.
IDO has a great advantage on IEO, because For IEO you need to pay exchange fee, which are raising up and up as the market develops, but for IDO you do not need anybody’s permission. Its a completely synonym of decentralization — Instead of exchanges, vocal community members are the ones who vet projects and tokens. It opens new horizons.
COMP, BZRX and UMA were released on Uniswap, which also caused fixation of distribution mechanic. Uniswap is famous for the easiest way to deliver tokens on the market in a fair manner. Tokens are being delivered in a proportion that lined up with their desired IDO price, public access is granted to the public.
The most important thing is that IDO 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.
📚 Still raw
Every new approach has to stabilize firstly before being fully implemented. The Synthetix assets platform’s UMA example, that has already been mentioned above, displays and reveals the current situation that needs to be solved: UMA put up to 2% of total supply and about 500k$ into a liquidity pool under a a starting price of 0.26$, the same that was paid by seed investors a few years ago.
Investors quickly lined up to purchase tokens whose price is affected by the bonding curve, this process resulted in a raising with a great pace price of the token.
Traders tried to front-run others by setting up higher gas costs, which resulted in a $2 price of UMA in a matter of a few minutes. Some of the buyers were extremely unsatisfied, as they got it with a higher price than pre-sale investors did.
BZX’s buyers face the same problem on Uniswap. The BZRX token price increased up to 12x times compared to the listing price in just 60 seconds.
IDO — the new IEO?
IDO is certainly a next step in Blockchain Finance and DeFi especially. Still we need to see how it will be developing and correlating itself after a series of lessons learned.
Where to participate in ICO projects ?
References and Disclaimer
Baloyan, S. (2020, December 18). What is IDO — the new alternative to IEO and ICO. Retrieved from https://hackernoon.com/what-is-ido-the-new-alternative-to-ieo-and-ico-70l34zf
Other Source: coinmarketcap.com
Airdrop & Crypto™ DO NOT own any rights from the sources taken. Resources are only used for educational purposes!