The growth of cryptocurrency ushered in global interest leading to the development of crowdsourcing and an easy investment process. While there is a need for massive adoption of a crypto project, the success and otherwise of a project rely extensively on its ability to garner huge investment.
Retail fundraising in the crypto landscape gained attention with the introduction of ICO in 2017. Following this, the ICO system (Initial Coin Offering) faced many criticisms, particularly because it failed to verify project credibility and jeopardized many investments without any form of protection.
Numerous ICO projects turned out to be outright scams grabbing money from retail investors and discouraging people from entering the cryptocurrency industry. Eliminating this problem without totally eradicating crowdsourcing in the crypto landscape, DeFi introduced IDO as a preferred alternative.
What is an IDO?
An IDO (Initial DEX Offering) is a fundraising system that facilitates retail investments for cryptocurrency projects by allowing them to introduce their token or coin through Decentralized Exchange. Decentralized Finance introduces this approach to ameliorate the lapses of the Initial Coin Offering.
While an IDO is a verified fundraising and investment mechanism for crypto projects, it has obvious fundraising limitations. Hence, where the ICO fundraising approach could raise up to $ 1 billion, IDO projects enjoy limited capital or liquidity pool.
What is a Liquidity Pool?
A liquidity pool is a pool of cryptocurrencies or tokens that are locked in a smart contract. This is used to facilitate trades between the assets on a decentralized exchange (DEX). Instead of traditional markets of buyers and sellers, many decentralized finance (DeFi) platforms use automated market makers (AMMs). This allows digital assets to be traded in an automatic and permission-less manner through the use of liquidity pools.
How does an IDO (Initial DEX Offering) work?
Initial DEX Offering works by providing a liquidity pool for projects. This is possible with the token liquidity and the reward that is made available for capital providers. The presence of liquidity also provides users or investors with a smooth investment and reward system since they can easily trade or swap their tokens with other cryptocurrencies.
Mechanisms like the Proof-of-Stake (PoS) consensus facilitate network security and enhance long-term investment by discouraging token holders from selling soon and providing them with high rewards on the token stake in the network for a longer time.
Many projects provide DEX with liquidity by allocating a particular percentage of the fund to the IDO.
Early investors benefit heavily from a project launched on IDO because they get the token at a discounted price. Once the project has been launched, investors can resume trading if the project does not feature a Vesting Schedule. Where there is a Vesting Schedule, trading of tokens is put on hold until after the schedule.
What is Vesting Schedule
Vesting Schedule is the amount of time for which a certain amount of tokens is locked up and prevented from being sold. It is usually the period following the private sale of an IDO.
Following this launching is the public sale of the tokens that naturally increases the token value and enhances project adoption. As the token price moves upward, the crypto community becomes more interested in the project.
IDO also works with smart contracts that help manage tokens and liquidity pools. The gas fee for smart contracts execution is negligible since liquidity is already provided for trading pairs.
How does IDO affect Blockchain and cryptocurrency positively?
When we talk about IDOs, there are several benefits to look into. The wide adoption of IDO by many projects and the ability of the approach to pool reasonable investment despite the failure of ICO is another way of highlighting its benefits. Below are some ways IDO has positively impacted the Blockchain space.
One of the challenges posed by the Initial Coin Offering and Initial Exchange Offering is the need for intermediaries in the investment process. IDO eliminates this problem by allowing investors to invest directly in their preferred projects.
This enhances swift and faster investment decisions making it possible for investors to invest in several projects without a cumbersome process
Increase trust in the crypto space
The introduction of ICO in 2017 was followed by outright criticism and the loss of several investments. However, this does not end here; the inability of ICO to provide investors with quality protection leads to the growth of distrust and low participation in cryptocurrency projects. On the other hand, IDO provides investors with projects that undergo a series of verification processes. This has enhanced trust in the cryptocurrency space and gives investors reasonable protection.
Enhance wider adoption and participation in cryptocurrency and Blockchain
Crypto projects are definitely some of the most rewarding investment mechanisms existing today. Despite the issue of volatility, cryptocurrency reach has grown globally. Initial DEX Offering is an approach that has successfully facilitated investment decisions and global participation in Blockchain and cryptocurrency.
Provides crypto projects with equal access to liquidity
Fairness is needed in all aspects of life, and the crypto space is not left behind. Small and big projects get listed and access to an equal fundraising mechanism because IDO has low requirements and entry barriers. Hence, innovative projects get into the spotlight; gain wider adoption and huge capital by launching their project on IDOs
Blockchain development started in 2009, while it gained a massive-push-forward in the last couple of years and has developed into a full-blown innovation with several projects. Given that these projects’ success relies on capital availability, crowdfunding is an inseparable part of crypto projects. The introduction of IDO is a step in the right direction, and it has gained wider adoption by project teams and investors. However, DEX is yet to provide sufficient liquidity compared to its centralized counterparts.