Understanding IDO in Cryptocurrency

Cryptocurrencies have opened up a new world of digital finance where users can benefit from the global network with no centralized institutions taking charge of their assets and regulating them. However, the cryptocurrency ecosystem has still not reached its full potential in terms of development and adoption. While these aspects can never reach saturation, a deeper understanding of how the world of digital finance works can help boost adoption. 

Today, we will take a look at the world of investing with Initial DEX Offerings or IDOs, which play a huge role in the world of cryptocurrency. We will also be understanding its benefits and shortcomings while taking a look at some influential IDO platforms.

What is an IDO?

Initial DEX offering refers to a type of asset offering that happens on blockchain projects, specifically a decentralized liquidity exchange. It is a type of crowdfunding technique, exclusive to the crypto market and helps projects raise funds from several investors. The investors are allowed to purchase the tokens of a project at an early bird price and become a part of the project as it undergoes development. 

IDO creates an excellent opportunity for investors to invest in an exciting and potential-rich project, while the project can raise funds for further development. To incentivize investment, a project can also offer rewards for engaging and investing in a project. Some projects also offer community members excellent rewards to become a part of an IDO. 

For instance, Adlunam is a Web3 investing platform that is the industry’s first NFT-integrated Engage to Earn seed crowdfunding and IDO launchpad that utilizes a unique Proof Of Attention Model. In this PoA model, the community members are rewarded for engaging with the platform such as posting on socials, doing tasks, etc. This way, even the community members get a chance to become a part of the IDO without having to invest using their money.

What are the different types of crowdfunding platforms?

IDO is not the only crowdfunding method used in the cryptocurrency industry, however. For instance, ICO and IEO are two other popular ways to raise investments. The main difference between an IDO and an Initial Coin Offering or ICO lies in the way the crowdfunding process takes place. While IDO takes place on a DEX hosting platform, an ICO happens on the native project itself. ICO is the predecessor of IDO.

Initial Exchange Offerings or IEO are organized by a centralized exchange platform. In this crowdfunding method, a CEX holds and organizes the token sale and everything. However, an IDO is organized by a decentralized crypto exchange or a DEX. 

Diving in deeper with IDOs

In an IDO, all the investors have the ability to lock their invested funds to lock in as smart contracts on the IDO launchpad right before the project launches its token. Upon the launch, these smart contracts are released and the tokens are distributed to the investors. Then the investors can either HOLD these tokens to exchange later at a higher price or can immediately trade on the exchange. 

IDOs are one of the most used ways to hold crowdfunding as they are transparent and ensure benefits for both the investors and the project team. Here are some other benefits of IDOs:

Accessibility

IDOs are accessible to everyone and any investors can choose to invest a large or small sum of money to purchase tokens from the available liquidity pools. Moreover, investors do not have to go through the vetting process and can simply join the whitelist to become a part of the IDO, purchase the project’s tokens and wait for the public release for trading. 

Security

IDO is a more secure way to invest in crypto projects because investors don’t need to send their money to a centralized cryptocurrency exchange account. Moreover, as the funds are locked in a smart contract, the investors can rest easy about their investments. Also, unlike a centralized exchange, a decentralized exchange does not keep users’ private keys, financial information or private data. 

Fair Fundraising Mechanism

An IDO is more fair in raising funds as anybody can launch an initial DEX offering and anyone can invest in the token with their funds. The token sale is not exclusive to accredited investors or venture capitalists. Moreover, after the token is launched publicly, it can be immediately traded in the market. All of these features make the IDO model attractive to investors, traders, users and the project team. 

Lower Cost

Crypto projects have to generally pay higher fees to deploy these smart contracts for enhanced security and the investors have to pay blockchain fees for the secure and encrypted transactions on a DEX. However, these fees are generally much lower than the fees levied by a centralized exchange. 

These are some of the benefits contributing to the vast popularity of Initial DEX offerings. As an IDO can only be held by a DEX or a launchpad, there has been massive growth in these projects as well. However, IDOs are not without shortcomings. Here’s what you need to know. 

Shortcomings of an IDO

While IDO presents the safest and most effective way for crowdfunding, it has certain drawbacks, such as:

Risk of Fraud

The cryptocurrency ecosystem is prone to hacks. If a project is hacked and invested funds are stolen, the project may or may not be able to compensate for them. Over $10 billion in cryptocurrencies were stolen from the DeFi market last year. 

Moreover, while any crypto project can launch its coin offering, not all projects are vetted for long-term growth. These projects might not have long-term sustainability and even scam projects can launch their IDOs on certain decentralized exchanges. 

However, certain launchpads such as AdLunam vet the projects themselves to ensure the security of their investors and users. Although, it is advisable for the investors to vet the projects for themselves to avoid any risks. 

Token Volatility 

The way the crypto industry works is that when a token is released and distributed to the IDO participants, the price of the token shoots up immediately. However, when the trader starts to trade the tokens, the price starts to drop, causing a downfall in the investment of the investors. Ultimately, the token’s market capitalization and trading volume will stabilize to reduce volatility. 

This volatility can be used to benefit traders as they can trade the tokens when the price is high, but for long-term token holders, this volatility might cause some confusion.

Price Manipulation

The crypto space is prone to price manipulation of new coins as the value of a project’s native token is susceptible to price pumps and dumps. To counter this, projects can limit the maximum number of tokens distributed to a single buyer. However, some investors can use bots to purchase additional tokens. 

Later, on a price surge, the investors will dump these tokens to drop the price. This activity is often seen by whales of crypto when they dump or purchase tokens in bulk to manipulate the price of the token. 

Conclusion

Clearly, IDO has its own set of benefits and drawbacks. However, the benefits outweigh the drawbacks by far and are arguably the best way to crowdsource. To be safe, it is always advisable to do your own vetting before investing in a process and invest in only projects launched on a trusted launchpad.