The IDO, or Decentralized Initial Offering, is a funding modality for blockchain initiatives, its main distinction being that it is run directly on a decentralized exchange (DEX) or through a specialized decentralized launchpad. Unlike ICOs ( which were self-managed by the project) and IEOs (managed by centralized exchanges), IDOs capitalize on the fundamental principles of decentralization.
How does an IDO work?
The process of an IDO is designed to be more transparent and accessible, eliminating the need for a centralized intermediary:
- Platform selection (Launchpad DEX): launching an IDO requires working with a decentralized launchpad (a specialized platform for IDOs) or DEX. These platforms may have their own verification processes, but are by definition less centralized than traditional exchanges.
- Creating the liquidity pool: Before the sale, the project creates a liquidity pool on the DEX. This pool contains the project’s new tokens and a stable cryptocurrency (or another established cryptocurrency such as ETH or BNB) required for the purchase. A portion of the funds raised through the sale is added directly to this pool to provide immediate liquidity.
- Selling tokens: Investors participate in the IDO by connecting their decentralized wallets (such as MetaMask) to the DEX/launchpad platform. They can buy new tokens directly from the liquidity pool, often at a fixed price set at the beginning of the IDO.
- Immediate distribution and trading: Immediately after the sale is completed, the tokens are automatically distributed to investors and become immediately tradable on the same DEX in the liquidity pool initially created. This provides instant liquidity, a major advantage.
Advantages of IDOs
IDOs emerged as an evolution of ICOs and IEOs, responding to the need for more decentralization, transparency and accessibility.
Advantages for projects:
- Instant liquidity: Projects benefit from instant liquidity for their tokens, facilitating trading after the sale.
- Low listing costs: Compared to the high fees charged by centralized exchanges for IEOs, the costs associated with an IDO are generally much lower.
- Wider access: Allows anyone to participate without having to go throughKYC/AML processes managed by a centralized exchange (although some launchpads may impose their own requirements).
- Decentralization and Transparency: The entire process is managed by smart contracts, which provides a high level of transparency and eliminates dependency on centralized intermediaries.
- Increased control: The project has greater control over the terms of sale and distribution of tokens.
Advantages for investors:
- Early access: Opportunity to invest in new projects at early stages.
- Quick liquidity: The possibility to trade tokens immediately after purchase.
- Transparency: The process is on-chain and can be verified.
- Custody-free: Investors retain full control of the funds in their own wallets throughout the process.
IDO risks
- Risk of Rug Pull: Although there is some level of verification by launchpads, the risk of fraudulent projects is higher than with IEOs as the barrier to entry is lower.
- Volatility: The price of new tokens can be extremely volatile immediately after listing, leading to large price fluctuations.
- Network congestion: A very popular IDO can lead to congestion on the grid and high gas fees.
IDOs are an important innovation in the crypto funding landscape, reflecting the ethos of decentralization and offering a more accessible and transparent alternative for launching new projects.
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