What is an Initial DEX Offering (IDO)?
An Initial DEX Offering (IDO) is a way for projects to sell their newly created crypto tokens to the community through a decentralized exchange (DEX). A typical IDO allows investors to lock funds into a smart contract right before a project launches its native token. At the token generation event — the moment a project launches its token — these new tokens are released to investors in exchange for the locked funds, which are being transferred to the project. IDOs provide projects with a simple and cost-effective way to distribute their tokens and raise funds, while at the same time granting higher levels of security to investors when compared to ICOs.
Investors wanting to participate in an IDO need a crypto wallet like MetaMask. The wallet needs to be topped up with funds in crypto to subscribe to the IDO and pay for transaction fees. Caution should be used when investing in any IDO. Always do your own thorough research. This includes researching a project’s tokenomics, vesting periods, the founding team, and the specific IDO mechanisms, which can vary from project to project and on different platforms. And most importantly, only invest in projects that are launched on trustworthy DEXs.
IDO vs. ICO
Ever since Ethereum launched through an Initial Token Offering (ICO) in 2014, token offerings are usually exciting investment opportunities for crypto investors. The chance to purchase tokens at their launch price during an ICO can offer spectacular upside to early investors. But this is only one side of the coin. Looking back at the ICO boom in 2017, there were a great number of scams and rip-offs, and many investors suffered significant losses.
In the spirit of investor protection, ICOs have evolved into alternative methods of offering tokens. These include IEOs (Initial Exchange Offerings), STOs (Security Token Offerings) and IDOs (Initial DEX offering). Recently, IDOs have become a popular method to launch new projects. While IEOs and STOs are performed by centralized parties, IDOs enable token offerings on decentralized platforms through smart contracts, which don’t require trust in any centralized entity. Thus, the innovation ICOs introduced to crypto, namely raising funds directly B2C outside of the financial system, carries on in IDOs, and is refined by adding more decentralization and structure to the process.
How Do IDOs Work?
During the ICO boom in 2017, crypto projects that raised funds by selling their tokens simply provided a wallet address to which interested investors could send Ether. In return, investors would receive the project’s token — unless they were ripped off.
To provide investors with full assurance that they will receive their tokens, IDOs have professionalized this process by using decentralized exchanges (DEXs) to facilitate token sales. Instead of selling their token directly to investors, crypto projects provide their tokens to a smart contract run by a DEX. At the same time, investors commit funds through the platform to the same smart contract. The DEX then makes the final distribution and transfer of funds. These processes are fully automated and executed by smart contracts on the blockchain.
Depending on the underlying smart contract and the DEX running it, each IDO has its own rules and stages. Nevertheless, most IDOs follow a similar procedure:
Before projects can run an IDO on a DEX, due diligence is performed by the DEX team. This keeps (most) scammy projects off the platform and protects investors.
- Price Fixing
After a project is accepted, it determines a supply of tokens that will be offered for a fixed price.
Usually, there is a whitelist. Investors might have to register their wallet address, join a community forum on Discord, or perform marketing tasks to be added to the list.
Whitelisted investors can then lock the funds they want to invest into a smart contract on the DEX. In return, they will receive the project’s tokens once released.
- Liquidity Pools and Fund Transfer
Parts of the funds that have been raised are deposited in liquidity pools together with the projects’ token on the DEX. This ensures trading liquidity from day one. The rest of the funds are released to the project. At the same time, the project’s tokens are transferred to the investors’ wallets.
- Trading Starts
As soon as the funds have been exchanged between parties, the liquidity pools open for trading and the token price is determined by the market. Depending on the project, parts of the funds received by the project and the tokens transferred to the investors can be locked up for a certain period, usually referred to as vesting period.
What Are the Advantages of an IDO?
Over recent years, the methods for offering coins and tokens to the crypto community have improved greatly. IEOs and IDOs are safer, fairer, more transparent, and thus more likely to be accepted by investors in the future. As a result, they have almost completely replaced traditional ICOs. Thanks to their decentralized nature, IDOs have some distinct advantages.
- During a token offering, investors solely must trust smart contracts.
- Immediate liquidity for trading and price detection is available after the IDO. This reduces slippage and volatility.
- Unlike with IEOs, no account is required to participate in an IDO. This guarantees privacy and low entry barriers.
- Some IDOs have anti-whale measures. This ensures that no single entity can purchase large parts of the token supply and later dump it on the rest of the token holders.
Keep in mind: The best token offering method is worthless if the project backing the tokens is not going to be successful.
Where Do I Find IDOs?
For an overview over upcoming IDOs, go to CoinMarketCap. They have a list of ongoing and upcoming token offerings available to view. Next, CoinGecko lists all popular launchpads here. Many of these have their own list of projects that are currently launching on their sites and can be invested in. PancakeSwap has a list of upcoming Initial Farm Offerings on their platform, which are a special form of IDOs. BSCPad is a decentralized IDO platform, which runs IDOs on the BSC Chain.
If you are interested in a specific crypto project that does not have its own token yet, make sure to follow that project on social media. Most projects announce upcoming IDOs on their Discord and Twitter channels and inform the community ahead of the event on how they can be whitelisted for an upcoming IDO or airdrop.