TL;DR

An IDO is an offering of crypto tokens executed on a Decentralized Exchange (DEX). Liquidity pools (LP) play an essential role in IDO's, generating post-sale liquidity. Generally, an IDO allows users to lock up funds in exchange for new tokens during the token issuance event. Part of the funds raised are then added, with the new tokens, to an LP and are subsequently returned to the project.

IDOs provide a cheap and simple way to distribute project tokens. IDOs have been around for some time, but they are still evolving and providing new models such as the Initial Farm Offering (IFO). We may also see KYC verification requirements increase as regulatory advances occur in the industry.

If you want to participate in an IDO, you will need a digital wallet like MetaMask, as well as some cryptocurrencies for registration and to pay transaction fees. Always do your own research on the project and invest using a reliable DEX platform. This includes closely analyzing the mechanics of the IDO, the team responsible and the economics of the project (tokenomics). As always, only invest what you can afford to lose, as token offerings involve high risk.


Introduction

Generally, a token offering is an exciting opportunity for investors in the crypto ecosystem. The chance to purchase a token at its launch price can be extremely rewarding. But this is just one side of the story. Analyzing the strong trend of ICOs (Initial Coin Offering) in 2017 on Ethereum (ETH), we see that the results are not always positive. There were several scams/frauds, scams and rug pulls. Many investors suffered huge losses.

Since then, the cryptocurrency community has developed alternative methods for token offerings, including the Initial Exchange Offering (IEO), Initial DEX Offering (IDO), and Security Token Offering (STO), among others. IDOs have become a popular choice, but what is the difference between an IDO and an ICO? Is it a safer choice for investors?


What is a token offering?

A token offering is a fundraising method in which a project or startup provides a new cryptocurrency for sale. Crowdfunding methods vary. The management of the process can be done through a centralized cryptocurrency exchange platform (IEO), in conjunction with a local financial regulator (STO) or simply in isolation (ICO). Some investors buy coins for their utility, while others do so for speculation. For example, you can use the currency for farming, staking in a governance mechanism, or to pay transaction fees.


How does an IDO work?

IDO uses a decentralized exchange (DEX) to facilitate the sale of tokens. A crypto project provides its tokens to the DEX, users pledge their funds through the platform, and the DEX completes the final token distribution and transfer. These processes are automated and executed by smart contracts on the blockchain.

The rules and stages of an IDO depend on the DEX running it, but there are some common methods:

1. Before the IDO is executed on a DEX, the project goes through a verification process. They offer a supply of tokens for a fixed price and users lock up their funds in exchange for these tokens. Investors will receive the tokens later, during the token issuance event (TGE - token generation event).

2. There is usually a list of pre-registered investors (whitelist). In some cases, to be whitelisted you need to complete marketing tasks or simply provide your wallet address.

3. Some funds raised are used to create a liquidity pool with the project's tokens. The rest of the funds go to the team. Investors can then trade the tokens after the issuance event (TGE). Typically, the liquidity provided is locked for a certain period.

4. On TGE, tokens are transferred to users and the LP is opened for trading.


What is the future of the IDO model?

Although the model described above is a typical IDO, token offerings are always changing. For example, the IFO (Initial Farm Offering) model is increasingly popular. It's hard to say whether we can classify it as a traditional IDO, but it relies on the same core concepts: liquidity pools and decentralized exchanges.

Instead of locking their tokens directly, investors must first stake a Decentralized Finance (DeFi) LP to receive LP tokens. For example, a project that wants to sell its tokens for BNB in ​​an IFO on PancakeSwap will require investors to stake BNB and CAKE in the liquidity pool (LP) of the BNB-CAKE pair.

The BNB-CAKE LP tokens are locked for the new tokens and the project receives BNB while the CAKE is burned. The number of tokens you receive will depend on how many participants there are in the sale, and any excess staked funds will be returned to you. Some projects use measures such as [Basic Sale] and [Unlimited Sale] features in PancakeSwap's IFO, as shown below, to make participation fairer for small investors, allowing them to get a share of the IDO.


Another possible change to IDOs could be the requirement for KYC (Know Your Customer) and AML (Anti-Money Laundering) verification processes. Financial regulators around the world are increasingly interested in the DeFi sector and its regulatory status. AML and KYC checks are standard on centralized exchanges and in the future, DEXs are likely to be subject to the same rules.


What are the advantages of an IDO?

Over time, token offerings have become fairer and safer for investors. IDOs have some advantages that contribute to this:

1. No need to directly deal with a project and trust its smart contracts. A reliable IDO platform will have multiple sales completed successfully. If the smart contracts are the same, users can have more confidence in the platform's offerings.

2. Immediate liquidity provided after sale. IDOs lock some of the funds raised in liquidity pools to create a highly liquid aftermarket. This helps reduce slippage and volatility.

3. No registration or registration is required. To participate in the sale, you only need a wallet and funds. Your personal data will not be required. This offers accessibility to all types of users. However, the absence of KYC or AML processes can also be seen as a disadvantage (more on this below).

4. IDOs are affordable for projects. It is often easier and cheaper for a small, lesser-known project to launch its token through a DEX rather than on the platform of a large centralized exchange.

5. IDOs generally have anti-whaling measures, ensuring that no investor purchases a large number of tokens.


What are the disadvantages of an IDO?

Some positive points of IDO are also associated with some of its disadvantages. These problems mainly arise from the decentralization and anonymity aspects of an IDO.

1. Lack of KYC or AML checks. Investors and projects have more protection when adequate checks are carried out. These measures help prevent money laundering and the evasion of economic sanctions. For example, some countries are legally prohibited from participating in an IDO if the token is considered a security.

2. Less due diligence/project audits. It is much easier for an unreputable project to distribute its tokens with an IDO than through an IEO held by a large regulated exchange.


What are the differences between IDO, IEO and ICO?

Although the results are basically the same, the methods used in an ICO, IDO and IEO are quite different. See the main differences below:


EYE

YES

ICO

Verification process

DEX evaluates the project

CEX evaluates the project

There is no verification process as the project carries out the sale on its own

Fund raising

DEX manages investor funds

CEX manages investor funds

The project manages investor funds

Smart contracts

DEX creates and executes smart contracts

CEX creates and executes smart contracts

The project creates and executes smart contracts

Token listing

Open liquidity pools on DEX

Token listing carried out by the broker

The project needs to find a brokerage for listing

KYC/AML

No

Yes

No


Where do I find IDOs?

The first place to find an IDO is in the project itself. A good way to start is to engage with the project's community and follow their social media channels. You can also check DEXs like PancakeSwap or DODO and see the list of upcoming IDOs. If you want an overview of all upcoming IDOs, CoinMarketCap has a list of token offerings available. Not all will be IDOs, but CoinMarketCap clearly labels what types of sales are.


How to participate in an IDO?

To participate in an IDO, you need a cryptocurrency wallet that can connect to DApps like MetaMask or the Binance Chain Wallet. You will also need some cryptocurrencies to purchase the tokens and pay the transaction fees. The required cryptocurrency depends on the sale offering and can even be LP tokens in the case of an IFO.

After setting up your wallet, you need to connect to the IDO DApp, using the connect button usually located in the top right corner. Here is an example:


You will receive specific instructions on how to lock up your funds in preparation for the token issuance event. Make sure you have enough funds to pay transaction fees. In most cases, when the sign-up period ends, the tokens will be transferred to your wallet. Some sales may, however, lock or stake their new tokens for a certain period. Please read all information carefully before participating in an IDO.


Security Tips for IDOs

As with any investment, there are easy and practical tips that improve user security:

1. Use the correct link to register for an IDO. Scammers take advantage of the excitement and hype of an IDO and create fake sign-up pages. You will permanently lose any crypto value you transfer to a scam/fraud page.

2. Use a reliable Launchpad DEX platform. There are many reliable DEXs for you to participate in IDOs, including PancakeSwap and BakerySwap. By using them, you reduce your risks and have the best chance of receiving your tokens from the sale.

3. Research the project before investing. Is it a project from a known and trusted team? Will the funds raised be invested in the project? Is there already a product available for use? Questions like these can help you determine the likelihood of a possible rug pull.

4. Check the IDO terms and conditions. There may be a delay in the distribution of tokens. In some cases, tokens may be locked or staked for a period of time. Almost anything is possible depending on the economics (tokenomics) of the project and it is important that you understand all the details.

5. Only invest what you can afford to lose. Token sales tend to be highly volatile. Be careful not to get carried away and invest more than you should. Remember, sales offers are risky. Even with solid research, you can still fall victim to a scam, fraud, or rug pull.


There are many DEXs on different blockchains that offer IDO services. A simple way to search for them is through CoinGecko's list of Top Coin Launchpads by Market Capitalization. Any DEX that has its own currency, which is almost all of them, is present on the list. However, a large market capitalization value does not necessarily mean that the DEX is reliable or safe. Before choosing a DEX for an IDO, you need important information and fundamentals.


Conclusion

With the combination of ease of use and accessibility, IDOs have become a standard fundraising model for new projects in the crypto market. In fact, token offerings have become an industry in themselves. In short, it is generally safer to participate in a sale through a Decentralized Liquidity Broker than through a project. However, a large part of the success of an IDO comes from choosing the right project. In this regard, nothing beats good, traditional research in the crypto sector.