Regarding the funding of brand-new endeavors, the cryptocurrency market can be quite innovative. In the conventional financial sector, raising cash is limited to taking out loans or soliciting the assistance of venture capitalists (VCs). Nonetheless, this strategy ultimately harms the creators of such projects in the long run.
The cryptocurrency space is vast, and the fundraising options available to new projects allow them to raise capital while engaging the community. Blockchain and cryptocurrency firms can exchange their tokens for fiat money or other cryptocurrencies. The cash raised are diverted to the enterprise’s expansion.
Initial coin offering (ICO), initial exchange offering (IEO), and initial decentralized exchange offering (DEX) are the three typical ways that crypto projects raise capital (IDO). Each of these approaches is described here, along with their pros and downsides.
Preliminary Coin Providing (ICO)
An Initial Coin Offering is a form of crowdsourcing. An ICO is comparable to an Initial Public Offering (IPO) on the stock market. ICOs were the first technique crypto and blockchain firms used to raise capital from investors.
During an ICO, a company will issue their blockchain-based token, and investors can purchase these tokens using cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) or stablecoins such as Tether (USDT) (USDT). The tokens issued by the company can afterwards be traded on a decentralized exchange (DEX) or a centralized exchange (CEX) (CEX).
The origins of ICOs may be traced back to 2013, when Mastercoin launched the first ICO. The platform was able to generate approximately $600,000 through the strategy. In 2014, Ethereum, the second-largest blockchain community based on market capitalization, also announced an ICO. The ICO successfully raised $18 million in 42 days.
The best aspect of ICOs is that they enable companies to raise capital without going through the rigorous process of obtaining governmental approval. While this is helpful for the business, it raises significant risks for the investor. Below are the advantages and disadvantages of ICOs as a funding strategy:
One of the primary advantages of ICOs is that they make it simple for a company to get capital. In addition, they provide significant returns for ICO managers. These managers generate tokens according to the duration of the ICO and distribute them to individual buyers.
If a venture is sustainable and has potential, an ICO can provide the necessary cash to propel it to new heights. This was the situation with Ethereum, where the project employed the capital to advance. Those that invested in the ICO and retained their tokens over time have also enjoyed significant gains.
The fact that ICOs should not be regulated makes them extremely risky for investors. A venture will entice investors to participate in an ICO by promising them high returns. However, the majority of projects turn out to be bogus, with developers departing with investor monies.
The US Securities and Exchange Commission has issued a warning regarding the possible hazards ICOs pose to investors. Nonetheless, the prospect for stunning profits has led some individuals to pursue endeavors that never actually took off or were abandoned. Before investing in an ICO, take the time to conduct a thorough background check on the project to determine its viability.
Preliminary Alternate Providing (IEO)
In many aspects, a Preliminary Alternative Offering is similar to an Initial Coin Offering. However, there is one significant difference: an ICO is available on a bitcoin exchange platform. Alternate platforms are the organizations that facilitate the purchase and sale of digital assets.
The bitcoin exchange platform is comparable to a third party in this process. The project will seek the services of an alternative, which are often provided for a fee, and the alternative will float the tokens on behalf of the project. Identical to with ICOs, an IEO lets an investor to purchase the tokens sooner than they’re legally introduced accessible in the market, generating room for main returns.
Due to the cryptocurrency alternate’s facilitation of this course of, initiatives that need to raise their funds utilizing this methodology should be sure to embody any particulars that may make their initiatives appear more credible. The project must submit a plan that can withstand a rigorous evaluation by the alternative funding it. To defend their reputations, exchanges should do due caution.
IEOs offer several benefits to the projects, one of which is that they will attract many customers. The fact that they are approved by exchanges also means that after the presale is complete, the token will be placed on the exchange, increasing its liquidity as soon as it reaches the market.
The primary benefit is that the activities should be completed with diligence. This reduces the likelihood of an investor falling victim to fraud in the cryptocurrency market.
The other advantage is that a cryptocurrency listed through an IEO may have increased liquidity on the exchange where it has been listed. The token will gain instantaneous access to a large consumer base, increasing in value as demand develops. In addition, listing on the exchange will serve as a marketing strategy.
An IEO is far less risky than an ICO, but there is a trade-off. An IEO is more centralized, which restricts access to the token to a single option. To participate in the IEO, a participant must register an account on the alternative platform. This may not be ideal for customers who appreciate the completely decentralized side of the cryptocurrency market.
Even if the endeavor has been evaluated, it is still susceptible to the volatility of the cryptocurrency market. In addition, the SEC has warned that certain IEOs will be as risky as ICOs if they do not comply with federal securities laws.
Preliminary DEX Providing (IDO)
An Initial DEX Offering is one of the most recent fundraising techniques introduced in the crypto and blockchain industries. IDOs enable blockchain-based projects to raise capital by selling their tokens on decentralized exchanges (DEXs).
IDOs, although being the most recent development, have become increasingly prevalent crowdfunding models for decentralized finance (DeFi) and decentralized applications (DApps).
In June of 2019, RAVEN carried out the first IDO on the Binance DEX. The IDO was a success, and since then, others, such as the Common Market Entry Protocol IDO and the SushiSwap IDO, have been on the market.
Initiatives seeking to raise cash through an IDO distribute their tokens on DEXs. DEXs provide a higher level of decentralization than CEXs. Among the most popular DEXs are Uniswap and PancakeSwap. However, there are an excess of these exchanges on the market.
Various cryptocurrencies, including Bitcoin, Ether, and USDT, are used to build a liquidity pool. Then, anyone with a Web3 wallet supported by the alternative can deposit funds. The best part about DEXs is that there are no Know Your Customer (KYC) requirements or identification requirements.
IDOs differ in characteristics from IEOs and ICOs. The enterprise will not own any of the tokens raised during the fundraising process in an IDO. In addition, IDOs are decentralized because these tasks are not required to adhere to a precise algorithm or set of rules.
IDOs have made significant progress over the past few months as a result of their diversity. As a result of the first IDO issued by RAVEN, this new fundraising strategy is currently replacing conventional funds in the blockchain industry.
IDOs increase liquidity for decentralized exchanges, which is one of their many significant benefits (DEXs). Compared to centralized exchanges, decentralized exchanges manage lower buying and selling volumes in the crypto space. Using IDOs, DEXs can hopefully fill this void and gain control over a substantial portion of the crypto market’s trading activity.
Moreover, IDOs provide a more decentralized mechanism for crypto and blockchain projects to raise capital. IDOs are moreover compatible with DeFi protocols and liquidity swimming pools, allowing them to tap into a fast-growing part of the blockchain business that’s quickly gaining acceptance.
The IDO crowdfunding method is still relatively novel in the industry. It’s only a matter of time before ICOs and IEOs reach the same kind of traction as they have in recent years. This is normally a disadvantage for projects that need to generate funds through IDOs, as fewer monies are typically raised through this technique.
IDO-related information is limited from an investor’s perspective. It may be difficult for the average investor to comprehend DEX launchpads. These launchpads are frequently technical, and their usability might be challenging for those without sufficient knowledge.
In the field of cryptography, new tasks continually emerge. The majority of these projects require finance, and ICOs, IEOs, and IDOs provide the ideal opportunity to raise the necessary amounts.
However, crowdfunding carries significant risks for the investor. The digital asset sector is far less regulated than the traditional financial sector. There is always the possibility that some of the projects raising funding may be fraudulent, resulting in investors losing money. Before investing in these crowdfunding platforms, it is therefore advisable to conduct thorough research.