Introduction
Blockchain technology has fundamentally disrupted fundraising for start-ups and businesses by providing new ways of acquiring capital. Fledgeling companies can now source funds from the general public through tokenization on the blockchain, thus breaking the dependence on venture capital, institutional investors and private equity.
Tokenization helps businesses to crowdfund by selling a share of their ventures through blockchain-based tokens. Businesses, entrepreneurs, or basically anyone with a revolutionary idea can secure funding by creating tokens on a blockchain using smart contracts and selling them to the public.
Token launches allow entrepreneurs to bypass the red tape associated with conventional means of fundraising.
However, this relatively new opportunity brings along its own fair share of challenges that we at ZeroSwap aim to address. To do this, we examine the many ways of launching tokens in chronological appearance and the shortfalls of each approach.
Initial Coin Offering (ICO)
As the name suggests, an Initial Coin Offering (ICO) refers to the first sale of a company’s tokens/coins to investors so as to meet the project’s funding goals.
ICOs served as the first means of decentralised fundraising, granting projects access to a global capital pool while widening the investment scope for investors irrespective of their location. Due to their simplicity, efficiency and ability to raise enormous amounts of funds, ICOs became very popular. According to a study by Autonomous, crypto projects raised over $18 billion through ICOs in 2017, and $12 billion in 2018. Projects like EOS and Telegram raised $4.2 billion and $1.7 billion respectively. However, the number of ICOs fell drastically as the format became prone to scams, sham projects and outright fraud.
While ICOs did enjoy an infamous period they also came along with many other costs that were just not practical for initial fundraising. They required an enormous amount of capital to carry out a successful campaign. To run an ICO there are largely legal, compliance and KYC costs. Often projects ran the ICOs themselves with their own smart contract meaning the need for very expensive and stringent security measures. Then alongside all of this to be heard amongst the noise of other projects, they required a large, sometimes global, marketing budget.
After all of this expenditure and fundraising from investors, there was still no guarantee that a project would list on an exchange, especially one with any liquidity and volume from retail traders. Many projects never made it to an exchange, which leads to large losses for many retail investors in a multitude of ICO projects. This ultimately leads to the bear market of 2018 into 2019.
Initial Exchange Offering (IEO)
Fashioned as a more refined version of an ICO, an Initial Exchange Offering (IEO) entails the sale of tokens directly through a centralised exchange (CEX). IEOs were introduced with an aim to restore sanity in the crypto fundraising space by eliminating some of the risks associated with ICOs. Popular crypto exchanges like Huobi, Binance, OKEx and Bitfinex introduced IEO Launchpad’s that projects could use to fundraise and sell their tokens to a large swathe of retail investors.
IEOs were considered a breath of fresh air in early 2019 and initially revised retail interest in the crypto markets. IEOs benefits are the exchange handles KYC, many other compliance matters, projects get exposure to the CEX’s users, sometimes global marketing support, market-making services and importantly, an instant listing. Investors enjoy lower risks as the CEXs usually conduct background research and verify the projects, thus minimising fraud cases. Additionally, the waiting period for trading the tokens is reduced.
IEO’s however still require a large capital outlay to the exchange or a large percentage of the IEO fundraising amount. This may be impractical for many startups and negates the fundamental goal of fundraising. Oftentimes, projects are forced to give up a huge portion of their tokens to cater for these expenses thus losing power over the network. This too negates decentralisation, another fundamental tenet of the blockchain industry. For IEOs, the success of a project depends on the chosen CEX liquidity, user base and reputation in the market.
IEOs were very popular in 2019 and also have been in 2020. They do offer some improvements to ICOs. They have tried to cater towards the retail market, but they still come at a large cost to projects who want to fundraise and as many prices initially jumped and then dumped, this is also negatively impacted a lot of retail investors.
Automated Market Makers (AMM)
Automated Market Makers (AMM) are the latest evolution in the crypto space developed to address the flaws of their predecessors while providing a more efficient, inexpensive, and faster means of listing and trading tokens. AMMs have become the buzz in the crypto space thus boosting their popularity as the preferred means of launching tokens in 2020.
There are no listing costs for new tokens on AMMs and projects do not need market-making due to automation of all trades on these platforms. Listing is also much faster since AMMs do not require KYC checks or users setting up accounts. The permissionless nature of AMMs also ensures that anyone can participate in the token sales regardless of their location. Therefore, projects are able to bootstrap liquidity in a fast and efficient manner.
AMMs have experienced some challenges lately that adversely affect their efficiency. Wealthy crypto holders are using bots to snipe initial liquidity from the market through higher bids. This results in artificial price surges requiring retails investors to purchase tokens at higher prices. The current design of AMM platforms, such as Uniswap, allows whales to rig the market in their favour resulting in losses for retail investors. Furthermore, the rising gas fees is an indicator of AMMs scalability problems and a need for better solutions.
Just like with both ICOs and IEOs, the current AMM/Uniswap listing craze has not always been fair towards retail investors and with some of the scalability limitations on Ethereum 1.0, it has made the whole concept less appealing.
ZeroSwap DEX Token Offering platform
Here at ZeroSwap we’re developing a fair fundraising platform for the launch and trading of tokens on multiple chains all from single UX, which will address the problems that AMMs like Uniswap are currently facing.
Our token offering platform will debut some innovations that will transform the Dex Token Offering space and herald the next generation of fundraising, it will be monitored by algorithms underline providing all users with an equal opportunity to participate in the token offering.
One of the novel solutions that we are developing will help to curb market manipulation by crypto whales. ZeroSwap will democratize liquidity provision for new token launches by giving priority to the project fans and holders to create a liquid market. This will help minimise the external influence of specialised market makers.
We intend to make ZeroSwap a feeless platform allowing projects to launch their tokens for free thus giving them instant access to the much-needed liquidity, users can make on-chain transactions like adding or removing liquidity at no cost and with gasless transactions.
We believe our solution is the best in the market for both new projects and retail investors alike.
