What is IDO (Initial Dex Offering)

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17 Feb 2024

IDO is a crypto token offering held on a Decentralized Exchange (DEX). Liquidity pools (LP) play an important role in IDOs through their creation of post-sale liquidity. In a typical IDO, users lock their funds on the exchange in order to receive new tokens during the token creation event. A portion of the collected funds is then added to an LP along with the new token before being returned to the project.

IDOs offer a cheap and simple way for projects to distribute their tokens. IDOs have been around for some time, but the method is still evolving and new models such as Initial Farm Offerings (IFO) are emerging. It is likely that we will also see an increase in the use of KYC due to increased legal regulations in this area.

If you want to enter an IDO, you'll need a digital wallet like MetaMask and some crypto to both participate and pay transaction fees. You should definitely do your own research about the project and use a reliable DEX for your investment. While doing your research, you should examine IDO's mechanisms, project team and token economy. Token offerings involve high risk, so as always you should only invest an amount you can afford to lose.

Generally, a token offering is an exciting opportunity for investors in the crypto ecosystem. The chance to purchase a token at its launch price can be extremely profitable. But this is only one side of the story. When we look at the ICO (Initial Coin Offering) craze in Ethereum (ETH) in 2017, we can say that not all offerings were positive. There have been many frauds and pool drains (rug pulls), and investors have suffered great losses.

Since then, the crypto community has developed alternative token offering methods such as Initial Exchange Offering (IEO), Initial DEX Offering (IDO), and Security Token Offering (STO). How are IDOs, which have become a popular option, different from ICOs and are they safer for investors to use?

What is the token supply?

A token offering is a method of fundraising where a project or startup offers a new cryptocurrency to sell. Community funding methods may vary. For example, a centralized crypto exchange platform can be used to manage the process ( IEO ), a local financial regulator can be worked with ( STO ), or projects can manage the process on their own ( ICO ). Some investors buy coins for their intended use, while others buy for speculation purposes. For example, you can use the coin to stake in a governance mechanism, farm, or pay transaction fees.

How does IDO work?

IDO uses a decentralized exchange (DEX) to conduct token sales . The crypto project submits its tokens to the DEX, users deposit their funds through the platform, and the DEX completes the final distribution and transfer. These processes are automated and carried out through smart contracts on the blockchain.

The rules and stages of IDO depend on the DEX regulating the offering, but there are some common methods:

1. Following a security audit process, the project is considered to perform an IDO on the DEX. The project offers tokens at a fixed price and users lock funds in exchange for these tokens. Investors receive their tokens during the token creation event (TGE), which takes place afterwards.

2. There is usually an investor whitelist. To join the list, you may need to perform some marketing tasks or simply provide your wallet address.

3. Part of the collected funds is used to create a liquidity pool with the project's token . The rest of the funds are given to the team. Investors can buy and sell tokens following the TGE. The liquidity offered is usually locked for a certain period of time.

4. In the TGE phase, tokens are transferred to the user and the liquidity pool is opened for trading.

What is the future of the IDO model?

While the above is a typical IDO, token supplies are constantly changing. For example, the increasingly popular IFO (Initial Farm Offering) model has also emerged. Although it is difficult to say whether this can be called a traditional IDO, IFO is based on the same basic concepts: liquidity pools and decentralized exchanges.

Rather than locking their tokens directly, investors must first stake them in a Decentralized Finance (DeFi) LP to earn liquidity pool (LP) tokens. For example, a project that wants to sell its tokens for BNB in an IFO on PancakeSwap will require investors to stake their BNB and CAKE in the BNB-CAKE LP.

Then the BNB-CAKE LP tokens are locked for new tokens and the project receives the BNBs while the CAKEs are burned. The number of tokens you receive depends on how many people participated in the sale, and any excess funds you staked will be returned to you. Measures could even be taken to ensure smaller investors get a fair share of the IDO. Basic Sale and Unlimited Sale features in PancakeSwap IFO, which you can see below, can be given as examples of this.

Another possible change for IDOs is making KYC (Know Your Customer) and AML (Anti-Money Laundering) processes mandatory. Financial regulators around the world have become more interested in DeFi from a regulatory perspective. AML and KYC are now standard for centralized exchanges, and DEXs may also be subject to the same rules in the future.

What are the advantages of IDO?

Token offerings have become fairer and safer for investors over time. IDOs have some unique advantages to support this:

1. You do not need to interact with the project directly and trust its smart contracts. A reliable IDO platform will have several sales completed successfully. If smart contracts are the same, it may become easier for you to trust the supply.

2. Instant liquidity is provided after sales. IDOs lock a portion of the funds raised in liquidity pools to create a liquid market after the sale. This helps reduce slipage and volatility .

3. There is no need to register. You only need a wallet and funds to participate in the sale. It is not necessary to share your personal information. This makes the offerings open to all types of users. However, the lack of KYC and AML processes can also be seen as a disadvantage (we will talk about this in more detail in a moment).

4. IDOs are cost-effective and accessible for projects . It is often easier and cheaper for a small, less well-known project to make its tokens available through a DEX rather than a large, centralized exchange.

5. IDOs often have whale blocking measures in place , meaning it is not possible for a single investor to purchase a large number of tokens.

What are the disadvantages of IDO?

Some of IDO's strengths also lead to some of its weaknesses. These problems mainly arise from the decentralization and anonymity features of IDO.

1. No KYC or AML . Investors and projects are protected when the necessary controls are completed. These measures help prevent the laundering of illicit funds and the evasion of economic sanctions. For example, if the token is considered a security, it may not be possible to legally participate in the IDO from some countries.

2. Less in-depth review of projects . It is much easier for a disreputable project to distribute its tokens through IDO than to conduct an IEO with a large, regulated exchange.

What are the differences between IDO, IEO and ICO?

The methods used in IDO, IEO and ICOs are actually quite different, although the result obtained is largely the same. Here is an overview of the most significant differences:

Where can I access IDOs?

The first place an IDO can be found is in the project itself. Engaging with the project's community and following its social media channels is a good way to start. You can also check DEXs like PancakeSwap or DODO to see a list of upcoming IDOs. If you want to see a summary of all upcoming IDOs, you can check out CoinMarketCap's list of token offerings . Not all of these will be IDO, but CoinMarketCap clearly states which sales are IDO.

How to join an IDO?

To join an IDO, you will need a crypto wallet that can connect to Dapps, such as MetaMask or Binance Chain Wallet . You also need to have some crypto to purchase tokens and pay transaction fees. Exactly which crypto you need depends on the sale. You may even need LP tokens if you are participating in IFO.

After preparing your wallet, you need to connect to the IDO DApp using the connect button, which is usually located in the upper right corner . You can see an example below:

You will now be given specific instructions on how you can lock your funds in preparation for the token creation event. You should make sure that you have enough funds to pay the transaction fees. Most often, tokens are transferred to your wallet after the participation period ends. However, some sales may lock or stake your new tokens for a certain period of time. Before joining an IDO, be sure to read the relevant information.

Tips for staying safe in an IDO

Similar to other investments, you can be as safe as possible here with a few simple and practical tips:

1. Use the correct link to join IDO. Scammers will take advantage of the popularity and excitement of an IDO and create fake participation pages. You will permanently lose any crypto you transfer to a fraudulent page.

2. Use a reliable DEX Launchpad. There are many reliable DEXs such as PancakeSwap and BakerySwap where you can participate in IDOs. If you use these, your chances of successfully receiving your tokens after the sale are maximized.

3. Research the project you are investing in. Is there a reliable and well-known team behind the project? Is there a confirmation period for the funds collected? Is there a product ready to use? These types of questions can help you identify a potential pool drain scam.

4. Check IDO terms and conditions. You can receive your tokens with a delay or even the tokens can be staked and locked for a period of time. Depending on the token economy of the project, almost anything is possible and you need to understand them in full detail before investing.

5. Only invest what you can afford to lose. Token sales are notorious for being extremely volatile. You can easily get carried away and invest a higher amount than you should. But remember, sales are still risky, and even after solid research, you may be the victim of a scam, forgery, or pool dumping.

Popular IDO launchpad platforms

There are many DEXs that offer IDO services on different blockchains. A simple way to look for them is through CoinGecko's list of Top Launchpad Coins by Market Cap . All DEXs with their own coins, that is, almost all of them, are available in this list. However, it should not be forgotten that a high market value does not mean that the DEX is safe and reliable. You need to use this information along with other basic information before choosing a DEX to use for IDO .

With the combination of ease of use, low cost and accessibility, IDOs have become a standard method of fundraising for many new projects in the crypto market. In fact, token offerings have become an industry unto themselves. To summarize, it is generally safer to participate in selling through a Decentralized Liquidity Exchange rather than a project. But a big part of being successful in IDOs comes down to choosing the right project. For this, the best method in the crypto world is standard in-depth research.