Differences between an ICO, IEO or IDO
The cryptocurrency market is very creative when it comes to raising funds for new projects. In the traditional financial sector, raising funds is limited to taking loans or seeking the help of venture capitals (VCs). However, this strategy ends up harming the founders of new projects in the long run.
The cryptocurrency space is diverse, and the funding options available for new projects allow them to raise funds while engaging the community. Blockchain and crypto startups can issue their tokens in exchange for fiat currency or other cryptocurrencies. The funds raised are redirected to the growth of the project.
The three popular ways that crypto projects raise funds are an initial coin offering (ICO), an initial exchange offering (IEO) and an initial DEX offering (IDO). Below, we explain each of these methods, alongside their pros and cons.
Initial Coin Offering (ICO)
An Initial Coin Offering is a form of crowdfunding. An ICO is similar to an Initial Public Offering (IPO) in the stock market. ICOs were the first way that crypto and blockchain startups started raising funds from investors.
In an ICO, a company will offer their blockchain-based token, and any investor can buy these tokens using popular cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) or using stablecoins such as Tether (USDT). The tokens offered by the company can later be traded on a decentralized exchange (DEX) or a centralized exchange (CEX).
The history of ICOs dates back to 2013, when Mastercoin launched the first ICO. The platform managed to raise around $600,000 from the process. Ethereum, the second-largest blockchain network by market cap, also launched an ICO in 2014. The ICO raised $18 million within 42 days.
The best thing about ICOs is that they allow companies to raise funds without going through the extensive process of getting regulatory approval. While this is advantageous for the project, it poses significant risks to the investor. Below are the pros and cons of ICOs as a funding method:
One of the major benefits of ICOs is that they make it very easy for a company to raise funds. Moreover, they also provide major returns for the ICO managers. These managers generate tokens as per the term of the ICO and then distribute them to individual investors.
If a project is viable and has potential, an ICO can provide it with the funding needed to push to new levels. Such was the case with Ethereum, where the project utilized the funds to achieve growth. Those who invested in the ICO and have held on to the tokens over the years have also seen major returns.
The fact that ICOs are not regulated makes them very risky for investors. A project will lure investors into participating in an ICO by promising them high returns. However, most projects end up being fraudulent, and the developers end up fleeing with investor funds.
The US Securities and Exchange Commission has warned about the potential dangers of ICOs to an investor. However, the potential for staggering returns has seen some people fall for projects that never really took off or projects that were abandoned. Therefore, before investing in an ICO, take the time to run a thorough background check on a project to assess its vitality.
Initial Exchange Offering (IEO)
An Initial Exchange Offering is similar to an ICO in so many ways. However, there is one key difference: an ICO is offered on a cryptocurrency exchange platform. Exchange platforms are the companies that facilitate the trading of digital assets.
The cryptocurrency exchange platform will be like a third party in this process. The project will seek the services of an exchange, which are normally offered at a fee, and the exchange will float the tokens on behalf of the project. Just like in ICOs, an IEO allows an investor to buy the tokens before they are officially launched in the market, creating room for major returns.
Because the cryptocurrency exchange will be facilitating this process, the projects that want to raise their funds through this method have to ensure they provide all the details that will make their projects appear more authentic. The project has to submit a proposal that will be rigorously reviewed by the exchange supporting it. Exchanges have to perform due diligence to preserve their reputation.
IEOs offer various benefits to the projects, and one of these is that they can lure many investors. The fact that they are vetted by exchanges also means that once the presale is over, the token will be listed on the exchange, boosting its liquidity as soon as it enters the market.
The main benefit is that the projects have to pass due diligence. This lowers the risk of an investor falling victim to scam projects in the cryptocurrency market.
The other benefit is that a token listed through an IEO will have higher liquidity on the exchange where it has been listed. The token will immediately gain access to a large user base, boosting its values as the level of demand grows bigger. Moreover, listing on the exchange will also act as a marketing strategy.
While an IEO is less risker than an ICO, there is a tradeoff. An IEO is more centralized, which limits your access to the token to a specific exchange. To participate in the IEO, you have to create an account on the exchange platform. This could not be ideal for investors that prefer the full decentralization aspect of the crypto market.
Even though the project has been vetted, this does not protect it from the volatility of the crypto market. Moreover, the SEC has also warned that some IEOs can be as risky as ICOs if they fail to comply with the federal securities laws.
Initial DEX Offering (IDO)
An Initial DEX Offering is one of the recent strategies developed in the crypto and blockchain space to allow projects to raise funds. IDOs allow projects developed on blockchain to raise funds after selling their tokens on decentralized exchanges (DEXs).
The first IDO was conducted by RAVEN on the Binance DEX in June 2019. The IDO was a success, and since then, more have sprouted in the market, including the Universal Market Access Protocol IDO and the SushiSwap IDO.
Projects that want to raise funds through an IDO offer their tokens on DEXs. DEXs offer a higher level of decentralization than CEXs. Some of the most popular DEXs are Uniswap and PancakeSwap. However, there are more of these exchanges in the market.
The projects use various coins such as Bitcoin, Ether and USDT to create a liquidity pool. Anyone who has a Web3 wallet supported by the exchange can then invest in the token. The best thing about DEXs is that there is no need for Know Your Customer (KYC) requirements or the need for any identification.
IDOs have characteristic differences from IEOs and ICOs. The project will not own any of the tokens raised during the fundraising process in an IDO. Moreover, IDOs are decentralized in that there is no strict set of rules and regulations that these projects need to follow.
IDOs have recorded significant growth over the past few months due to their diverse nature. Since the first IDO by RAVEN, this new funding method is now replacing traditional funds in the blockchain sector.
One of the main benefits of IDOs is that they boost liquidity for decentralized exchanges (DEXs). Decentralized exchanges control fewer trading volumes in the crypto space than centralized exchanges. Through IDOs, DEXs can hopefully fill this gap and gain control over a large share of the crypto trading volumes.
Moreover, IDOs provide a more decentralized way for projects in the crypto and blockchain sector to raise funds. IDOs are also compatible with DeFi protocols and liquidity pools, allowing them to tap into one of the spaces in the blockchain sector that are fast booming and becoming popular.
The IDO crowdfunding strategy is still new in the space. It is yet to gain the kind of traction that ICOs and IEOs have recorded over the past few years. This can be a disadvantage for projects that want to raise funds through IDOs because fewer funds are generally raised from the process.
On the side of the investor, there is limited knowledge about IDOs. It can be hard for the average investor to understand DEX launchpads. These launchpads are usually technical, and the usability can prove hard for those without adequate knowledge.
New projects are constantly sprouting in the crypto space. Most of these projects need funding, and ICOs, IEOs and IDOs present the perfect opportunity to raise funds needed to achieve success.
However, crowdfunding comes with significant risks for the investor. The digital asset sector is less regulated compared to the traditional financial sector. There is always a risk that some of the projects raising funds might not be genuine, and investors end up losing money. Therefore, it is best to do due diligence before investing in these crowdfunding platforms.