What is an IDO?

Up-and-coming crypto projects, like all companies, have expenses. And nobody could say crypto development is one of the cheaper hobbies. When we talk about projects, we don’t mean the usual moon-shot shitcoins, which are typically a copy-paste of existing code written “overnight.”

We are, of course, talking about serious projects that have a vision. To give you an idea, dApp developer is one of the most lucrative professions in the world today. A developer can earn up to $10,000 a month writing lines of code and building the next blockchain that will revolutionize the crypto world.

Small to mid-sized teams usually consist of 3–5  developers and can easily grow for a more complex project. On top of that, once you add rent, marketing costs (shilling) and the tools they need, expenses climb rapidly.

Raising liquidity and capital is an everyday challenge that every company or crypto project has to deal with.

DEXs offer every project an instant liquidity market, so it can raise capital right away by putting its token into a pool.

Ways to raise capital

Let’s review the traditional ways a crypto project raises money. If a project wants to raise capital, it has several options. The traditional route is to get funded through loans or investments from banks and/or large investors (known as venture capitalists). 

The arrival of DeFi, with Uniswap in 2018, was revolutionary for the crypto world. The DeFi revolution demonstrated in practice, for the first time, how useful smart contracts are. Smart contracts created a decentralized environment for raising liquidity (among other things), breaking crypto projects’ dependence on centralized sources of funding (banks, corporate groups, venture capitalists, etc.). 

This was achieved through decentralized exchanges (DEXs) built on smart contracts, along with AMMs. We won’t go into detail about how they work, since that is covered in the Cryptonomy education section. What you need to understand is that smart contract technology created a decentralized environment for raising money, away from the traditional financial system. Somewhere around here, the idea of the IDO was born.

What is an IDO?

An IDO, or Initial DEX Offering, is a fundraising model for an up-and-coming project in the crypto world. The IDO fundraising model differs from the traditional one and seeks liquidity from decentralized sources.

DEXs work with liquidity pools. You can picture liquidity pools as buckets that always contain two coins: 

• a stablecoin, say USDT, and 
• the cryptocurrency that is looking for liquidity (let’s call it CRY, for Cryptonomy). 

The ratio between the two coins at any given moment determines the value of CRY.

At the start of the IDO, the project announces how much capital it wants to raise. It then fills the pool with a number of CRY tokens (the ratio between the target capital and the initial number of CRY sets CRY’s initial sale price).

When the IDO opens, prospective investors are invited to buy, or rather swap, their USDT for CRY. The price of CRY is then set automatically by a simple mathematical ratio. The IDO ends as soon as the USDT in the pool matches the capital the project wanted to raise, or after a set period of time.

DEXs offer every project an instant liquidity market, so it can raise capital right away by putting its token into a pool. In addition, every transaction during the IDO happens on the blockchain, so there is full transparency: there are no under-the-table deals. 

Finally, an IDO moves each project away from the traditional funding system and toward the community, which gets to evaluate the project. This is quite important! The intrinsic value of money, cryptocurrencies, metals, art and so on comes from the mechanism of social consensus. Without social consensus, none of these would have any value.

So an IDO gives the community, through social consensus, the chance to fairly assess a cryptocurrency’s price. With IDOs, the community goes from simple observer to evaluator.

The pros

As a way to raise capital, the IDO method has many advantages. The project’s token is delivered immediately in exchange for liquidity. As soon as a token is issued on a DEX, anyone interested can start trading it. 

In our experience, IDOs can quickly and easily deliver huge profits, sending the initial investment sky-high.

With IDOs, the community goes from simple observer to evaluator.

*Figure 1: The Shield Finance IDO. At first we see huge interest and profits. When the project went to public sale, everyone who had bought in the IDO dumped their bags.

The cons

The advantage of a token trading on the market immediately is also its drawback. Investors who get into an IDO late risk paying many times the starting price. At the start of every IDO, the price rises exponentially. The whales who managed to grab a huge share of the tokens drive the price. In Figure 1, you can see how the SHLD IDO rose in its first two hours (+1,700%). Those who got in later, in the public sale, ended up in trouble as the whales dumped their tokens to take profits.

In reality, very few investors are lucky enough to get in at the issue price, because the token’s price starts rising as soon as the order book starts filling up.

Another risk is rug pulls, although some platforms have put safeguards in place to prevent them. A rug pull happens when a dubious project pulls the token’s liquidity from the DEX, leaving the token worthless due to lack of liquidity.

Our view

IDOs are a new way for up-and-coming crypto projects to raise capital. IDOs offer quick, big profits to those who take part. Of course, there are risks too. Usually, to get into an IDO you need “luck on your side,” since getting whitelisted is quite difficult.

In addition, many IDOs take place on ERC-20 platforms, so be prepared to pay Ethereum’s sky-high gas fees as well. 

By trying to get into an IDO, you will learn a lot about blockchain. You will learn about and discover new platforms and opportunities that may interest you. You will understand what affects price, what role whales play, how to use each blockchain explorer, how to find information, and so on.

Every week we will update our list and remove the ones that have ended. 

What we at Cryptonomy recommend to stay safe when taking part in IDOs:

• Create a second Twitter account that you use only for IDOs. Many IDOs ask you to share a tweet or follow a project.
• Create a new email address just for IDOs. Yes, there is a lot of spam.
• Research the project you are getting into thoroughly. We can’t stress this enough. Join its Telegram and Discord, ask your questions and get a feel for the community’s overall mood.
• Read the tokenomics carefully.
• We suggest checking which DEX will host the IDO and buying that DEX’s native coins. Holders of the DEX’s tokens usually get price discounts.