Almost from the earliest beginnings of the crypto industry, along with the revolutionary tokenization of the economy, new fundraising methods entered the market, and the world met the ICO (Initial Coin Offering). The first successful completion of an ICO was made in 2013 by the Mastercoin protocol. This approach allowed anyone to issue and sell new cryptocurrencies anonymously, without extensive proof of concept or even a detailed presentation, just after the release of a smart contract. However, due to the lack of validation depth and the boom in popularity among users and investors, such activity could not avoid a huge amount of fraud. The market faced the challenge of separating genuine projects with real technology from obvious scams, which became achievable with the rise of secure launchpad crypto platforms. The IEO (Initial Exchange Offering) and IDO (Initial DEX Offering) fundraising models were determined as the solution.
Now, let’s quickly review these most frequent fundraising methods.
What Is IEO and How Does it Work?
The IEO crypto fundraising model developed as an alternative to the ICO model, aiming to address the risks associated with scam projects.
In an IEO, all listing and token sales phases, including marketing campaign support and project compliance, are handled by a centralized exchange (CEX). The CEX acts as an intermediary and guarantor throughout the process, providing the necessary infrastructure for launching the IEO. By leveraging its reputation, the exchange offers a level of trust and credibility to the participating projects.
During an IEO, the CEX conducts a crowdsale where the project tokens are listed on the exchange platform and made available for purchase by interested investors. The exchange charges a fee for its services, typically a percentage of the funds raised during the token sale.
This model benefits both the projects and the investors. For projects, the IEO provides access to the exchange’s user base and liquidity, which can enhance the visibility and marketability of their tokens. Investors, on the other hand, benefit from the assurance that the project has undergone some level of due diligence by the exchange, reducing the risk of scams and fraudulent activities.
Overall, the IEO model offers a more secure and regulated approach to fundraising compared to the ICO model, as it involves the collaboration of established exchanges that vet projects before listing their tokens and provide ongoing support throughout the fundraising process.
While the IEO model addressed some of the concerns associated with ICOs, it does have its drawbacks. Developers have highlighted high fees, limited exchange options, and sometimes opaque entry requirements for listing early-stage projects. Furthermore, the centralized nature of IEOs contradicts the decentralized concept of blockchain technology. The IDO (Initial DEX Offering) model has emerged as a decentralized solution in response to these concerns.
What Is IDO and How Does it Work?
An IDO is a fundraising model involves leveraging decentralized exchanges (DEXs) to offer newly created crypto tokens to the public. In the case of IDO blockchain startups, they are relieved from the obligation of handling token infrastructure development or exchange listing tasks. Instead, these responsibilities are managed by launchpad crypto platforms, which are commonly utilized for conducting IDOs.
During an IDO, investors participate by locking their funds into a smart contract shortly before the project launches its native token. In return for their locked funds, investors receive the project’s tokens when generated, allowing them to become early holders of the tokens and potentially benefit from their future value appreciation.
Compared to traditional ICOs, IDOs provide a faster and more cost-effective approach to token distribution and fundraising. They also offer enhanced security for investors. In most cases, participants are required to join a whitelist in advance through a designated website or social media platform.
Running an IDO on a DEX makes it accessible to any user, allowing investors to purchase IDO tokens at a discounted price before they are listed on exchanges. This early access presents an opportunity for investors to achieve a favorable return on their investment, as token prices can multiply after the project’s official launch.
Regarding how an IDO works, funds are typically raised through smart contracts that act as automated market makers (AMMs) on the DEX. These smart contracts enable traders to swap assets directly from the liquidity pool. An advanced pricing algorithm called a bonding curve determines the specific exchange rate. This algorithm ensures that the price of the tokens fluctuates based on the asset ratio in the pool. When investors buy tokens, the price rises, and when they sell, the price falls.
Traders play a crucial role in maintaining the pricing structure by providing liquidity to the pool. They accomplish this by staking their owned assets, effectively “locking” them in the pool. In return for their participation, traders receive compensation through profits.
Conclusion
The crypto fundraising landscape has evolved, providing more attractive options for investors and developers. IDOs have gained preference among cryptocurrency investors due to their decentralized nature and accessibility, even for projects with limited budgets. Also, the decentralized model, such as an IDO, can be a launching pad for talented teams and groundbreaking projects with limited budgets. On the other hand, if budget is not a primary concern, the IEO method can be more profitable and offer a flashy marketing approach.
Regardless of the chosen fundraising model, choosing the right market maker partner is crucial for any successful token launch and post-listing growth. Such a company as Bitquant will also assist the project`s secure token listing on leading exchanges (both, CEX and DEX), supporting the team with marketing services and liquidity providing.
So, get the full power of the BitQuant Capital expertise obtaining highly adaptable algorithms for both the CeFi and DeFi landscapes, to skyrocket your project with the best partner on the way up and succeed in the fundraising journey.