Robert Steinadler, 6 months ago

Initial Dex Offering (IDO) explained

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?

A small history lesson concerning IDOs

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:

  • Security Token Offerings: This type of token sale is highly regulated and the tokens that are sold during an STO are considered to be securities with all legal implications that may apply.
  • Initial Exchange Offering: These token sales are held by centralized crypto exchanges often combined with some sort of benefits for investors holding tokens affiliated with the exchange.
  • Initial DEX Offering: These sales are held by decentralized exchanges and follow a different procedure than ICOs.

How does an IDO work?

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:

  • There is an investor whitelist. Applicants have to perform marketing tasks or simply register before becoming enlisted.
  • Some of the project’s funds are used to build a liquidity pool which creates a secondary market instantly after the sale has been successful and the tokens have been created.
  • Investors don’t have to trust the smart contract of the project in question but benefit from trusting the DEX smart contract as a battle-proven environment for the sale.

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.

What do I need to participate in an IDO?

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.

Which risks are involved with IDOs?

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:

  • Make sure to use correct links to subscribe to the IDOs. Phishing and typo squatting are risks.
  • Understand how the DEX and its launchpad are run and who is responsible for it. You are trusting this party with your money.
  • There is no KYC involved and you are operating in an unregulated environment. It is hard if not impossible to make any legal claims if anything goes wrong.
  • During an IDO tokens are sold at a fixed price. However, the secondary market is highly volatile. Depending on the tokenomics of the token that you are interested in, your capital may be at risk.

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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