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From ICO to IDO: Evolution of the Crypto Funding Hype Cycle

Initial DEX Offering / Initial Decentralized Exchange Offering. Part of the Crypto Funding Hype Cycle. From the first ICO in 2013 to the first IEO and IDO in 2019. Crypto funding models are continuously evolving to improve upon inherent pitfalls. Source: NGRAVE.

Crypto is awash with acronyms and esoteric abbreviations that baffle the uninitiated but are dispensed like machine gun fire across TG groups, live streams, and Twitter.

One acronym you won’t hear touted frequently these days is ICO, once synonymous with crypto fundraising but since replaced by a phonetically similar term: the IDO. What’s the difference between the two and why has the latter replaced the former? Let’s jump into the jargon and find out.

PS: For a brief history of ICOs and all the acronyms that followed until the IDO, have a read at my previous article that goes in depth about all the differences, pros, and cons:

1. What Became of the ICO?

During the height of the 2017 crypto bull market, a wave of high-risk ICOs (Initial Coin Offerings) hit the market, and the need for more secure crowdfunding platforms became apparent, something I deeply explored in an article I wrote back in early 2019, as in that same year, cryptocurrency exchange platforms like Binance pioneered the idea of the IEO (Initial Exchange Offering) to provide a more secure launchpad environment. In parallel, other experiments were taking place as well, amongst which the Decentralized ICO (DAICO), a concept put forward in 2018 by Vitalik Buterin, which followed the ICO fundraising logic but improved it by a.o. not releasing all funds at once, the latter a major downside of ICOs.

The safety and convenience of IEOs was a success but the centralized nature of such launches was a major drawback, with an intermediary deciding which projects should be approved and extracting a fee for the privilege. Not exactly the decentralized ethos of crypto.

Now, following the rapid growth of the DeFi ecosystem, DEX platforms with billions in total locked value and daily trading volumes have made decentralized crowdfunding viable too. Leveraging those DEXs, IDOs (Initial DEX Offerings) can provide an alternative to their centralized predecessors.

The safety and convenience of IEOs was a success but the centralized nature of such launches was a major drawback, with an intermediary deciding which projects should be approved and extracting a fee for the privilege. Not exactly the decentralized ethos of crypto.

So what is an IDO, and how do the benefits stack up against the ICOs and IEOs that came before?

2. What Is an IDO?

Initial DEX offering / Initial Decentralized Exchange Offering / IDO. What is an IDO?

Initial DEX Offerings are token crowdfunding sales taking place on decentralized exchange platforms like Uniswap, SushiSwap, and PancakeSwap, rather than centralized fundraising or cryptocurrency exchange platforms. The earliest and most prominent DEXs were built on the Ethereum blockchain, but alternatives are growing in popularity on blockchains like Binance Smart Chain (BSC), Solana, and Polkadot. Through an IDO, a crypto project can launch its token’s public debut on a DEX, attracting interest from retail investors.

Initial DEX Offerings are token crowdfunding sales taking place on decentralized exchange platforms.

Making history, Raven Protocol initiated the first-ever IDO in 2019, shortly followed by projects such as Compound, UMA, and Curve that have gone on to become household names within the defi ecosystem today.

The Crypto Funding Hype Cycle. From the first ICO in 2013 to the first IEO and IDO in 2019. Crypto funding models are continuously evolving to improve upon inherent pitfalls. Source: NGRAVE.
The Crypto Funding Hype Cycle. From the first ICO in 2013 to the first IDO in 2019. Crypto funding models are continuously evolving to improve upon inherent pitfalls. Initially introduced by Ruben Merre in a 2019 article. Source: NGRAVE.

The big difference from traditional exchanges is that IDOs launch project tokens on DEXs by opening liquidity pools of token pairs, for example, ETH/USDT, rather than order books. This means that the price will only vary if the token is bought or sold and the ratio of tokens in liquidity pools is changed.

Separating them from both the IEO and ICO fundraising models, IDOs can be autonomously carried out by the token project and trustlessly listed on a decentralized exchange. This allows new projects to engage directly with a decentralized investment community rather than via intermediaries — much more in line with the peer-to-peer foundations of the space.

Separating them from both the IEO and ICO fundraising models, IDOs can be autonomously carried out by the token project and trustlessly listed on a decentralized exchange.

3. IDO versus IEO and ICO

Comparison ICOs versus IEOs and IDOs. Initial DEX offering versus Initial Coin Offering and Initial Exchange Offering.
IDOs versus IEOs and IDOs.

IDOs present several benefits over ICOs and IEOs beyond the decentralization ethos. Principally, Initial DEX Offerings provide frictionless liquidity, immediate trading, and significantly lower listing costs without restricting users. By cutting out intermediaries, IDOs are considered a more open, transparent, and fair way to launch a new crypto project than the pre-mined ICO models of the past that rewarded founders over sufficient community distribution.

In contrast to ICOs, IDOs will typically have a very low market cap following the public listing. This is due to the vesting period for any private investors and the small amount of money raised from the actual IDO, with each participant winning a relatively small allocation. By using this model, demand tends to be more sustainable, and a healthy market develops, rather than the ICO/IEO model where investors may rush to sell upon listing.

Unlike centralized options, there is no requirement to pay a huge fee or offer a portion of the tokens to an exchange. Platforms cannot prohibit projects or require approval to launch IDOs, nor can they stop them from listing on other DEXs. IDOs have complete control over the parameters of the sale in line with the project’s vision rather than the commercial requirements of a crowdfunding platform. Further, token projects and buyers retain control over their own funds at all times, instantly secured using their own wallets and private keys without having to transfer in and out of a centralized exchange. As many DEXs accept a variety of wallet types, it also simplifies the user experience.

IDOs, therefore, deliver a more cost-effective, non-custodial method of token listing, offering quick liquidity and instant trading with low slippage through liquidity pools on a variety of decentralized exchange platforms with significant user volume.

Benefits of IDO versus IEO. Benefits of IDO versus ICO.
Benefits of IDOs versus IEOs and ICOs.

4. The Future for IDOs

Right now, IDOs tend to be focused on launching new defi projects into an ecosystem of pre-existing defi users. Not all crypto startups are defi-oriented, however. Their target user may not be as crypto savvy, presenting a learning curve barrier to an IDO launch. Conversely, defi users may be less inclined to invest in non-defi projects.

For IDOs to scale, improvements in education, awareness, and convenience will need to be made. That’s happening, and IDOs have certainly established themselves as the next step in decentralized fundraising across multiple blockchains, opening up the potential for launches beyond the defi niche.

As leading DEX platforms continue to outpace the growth of centralized exchanges and challenge them for market dominance, larger user bases will make them an increasingly popular and necessary choice in the long run. Until then, projects will most likely select the most beneficial centralized, decentralized, or hybrid launch strategies according to their market philosophy.

Worth a further read:

About the author: Ruben Merre is a repeat tech entrepreneur, polyglot, life-long learner and founder and CEO of NGRAVE, the digital asset security company behind “ZERO”, the most secure cryptocurrency wallet in the world. Since 2018, Ruben and his team have partnered up with the top tier in nanotechnology, cryptography and hardware security, as well as thought leaders such as Jean-Jacques Quisquater, famous cryptography professor and second reference of the bitcoin paper. The result: a true end-to-end solution for managing digital assets, at maximum security (EAL7, highest security certification in the world), and an intuitive user interaction.

Other articles by Ruben Merre:

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Ruben Merre

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Co-Founder & CEO NGRAVE | www.ngrave.io | Protecting Your Private Keys From A — Z. The Coldest Wallet.