IDOs
How does the process work?
With an IDO, anyone can launch a project on a decentralized exchange and receive instant liquidity for their project. The funding of IDOs comes from investors and there are no barriers to entry such as those set by centralized exchanges in IEOs.
“ Projects launched using an IDO can range from cryptocurrencies to music albums. “
The fundraising method allows investors to gain early and fair access to projects in exchange for IOUs (project tokens) which are debts that can be reclaimed, exchanged for other tokens as soon as the liquidity is available on the decentralized exchange. Decentralized exchanges such as Binance Dex and Uniswap reward liquidity providers for facilitating the exchange of such tokens which serves as an incentive for holding the new tokens issued in the IDO. Most tokens launched using IDOs are based on ERC20 and BEP20. The open fundraising feature coupled with immediate liquidity and trading makes IDOs a preferred method of launching for new projects.
“ The launch process with IDOs is also more secure since hackers can hardly target decentralized exchanges. “
The blockchain doesn’t also hold investor funds, so investors do not need to trust an exchange. Since Decentralized exchanges function on the blockchain they record transactions automatically on the blockchain which makes transactions more reliable.
The Drawbacks
IDOs are not without drawbacks. First, they lack control mechanisms as fundraisers cannot control who buys tokens and the number of tokens they buy. IDOs are not also integrated with personally identifiable information of investors like on centralized exchanges, which increases the risk of malicious use cases. Although IDOs offer more advantages than IEOs, they also share a common flaw known as “rugpulls” in the case of IDOs. “Rugpulls” are a common problem where developers with access to the main contract addresses abandon the project and disappear with investor funds. Liquidity pools on decentralized exchanges use a constant product market make function x*y=k which determined the price of a token, based on another token like a stable coin added on a 50:50 ratio in the same pool.
Decentralized exchanges supporting IDOs allow projects to raise funds using a launchpad, which sets better evaluation terms than unregulated issuances on a project website. Some of the most popular Dexes at the time of writing this article are PinkSale, DxSale, Unicrypt, and Polkastarter. It is important to keep in mind that while ICOs are hosted by the issuing project that invites the public to buy its shares, IDOs are hosted in a decentralized way on a Dex. Now you have seen that IDOs are a funding method hosted on decentralized exchanges that allow fair investment in cryptocurrency projects and reduce some of the risks such as insecurity and ease of manipulation by founders in ICOs. We hope that you enjoyed reading this article.
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