Robert Steinadler, 6 months ago
If a company is entering the stock market it is usually interested in starting an initial public offering or IPO. This is a concept that is very promising to both investors and companies. It offers the opportunity to buy shares at a fixed price before they start trading on the stock market. The company on the other hand is raising a lot of capital by selling these shares and has the chance to increase its liquidity.
When the Ethereum blockchain was born it became fairly easy to program a smart contract and issue tokens in the same manner as shares are issued during an IPO. In effect, IPOs became decentralized and even more important tokenized.
What are initial dex offerings? What do they offer and which risks and chances do they carry?
IDOs are standing at the end of a long line of different developments. Before Ethereum, there was a time when so-called initial coin offerings were held on bitcointalk.org and other forums. Developers discovered that it was easier for them to fund a project by selling a pre-mine rather than keeping it for themselves.
A pre-mine is generated by starting the blockchain as a private network allowing the developer to mine a certain number of blocks and receive coins as a reward and then go public at a later point in time.
These ICOs were improved when Ethereum started because ICOs on forums or other channels required a trusted third party like an escrow to hold the funds. Smart contracts on the other hand don’t need a trusted third party, they execute the agreement to the letter. In effect, a gold rush was created in the years 2017 and 2018.
After the boom of ICOs flattened several similar concepts were born that are slightly different:
Using a decentralized exchange for a token sale creates somewhat similar to ICOs. But there are a few differences and they are reflected by the way an IDO works:
After the sale has been concluded a token generation event will bring the new token to life and distribute all token shares among IDO investors. The money that investors paid is usually going through a vesting period to make sure that all demands are met before the team of the project receives any money.
The basic requirement is holding funds in a wallet that is controlled by nobody else but you, which means that only you hold the private keys or the seed. Since IDOs require a blockchain with smart contract capabilities you’ll need the respective cryptocurrency to pay the price for the tokens and the transaction fees.
In order to interact with the DEX, you are going to need a wallet that works as a browser plugin. Once connected to the web interface of the DEX you’ll be able to approve interaction with the dApp and agree with the terms of the IDO or follow the process to get whitelisted.
IDOs are based on decentralized exchanges which are dependent on protocols that are based on smart contracts. This carries risks that cannot be eliminated. Here is a short but non-exhaustive list of additional risks:
One way of mitigating these risks is by sticking to centralized exchanges just like LiteBit. Trading the secondary market on an exchange that follows rules and regulations makes trading a lot safer and more transparent for investors.
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