This article is not financial advice. Ensure to do your research before putting money in this volatile asset.
All the 3 methods of raising funds involve exchanging a portion of the projects cryptocurrency for fiat currencies like USD or other established Crypto like bitcoin.
- ICO – Raising funds on own platform
- IEO – Raising funds on a centralized exchange
- IDO – Raising funds on a decentralized exchange
Lets look at what is in it for you in knowing how projects raise funds?
These methods provide an opportunity to investors to get the token of the project at a low price.
As the adoption of the project increases the prices of the tokens are expected to increase. The investors can then sell it at a higher price.
What is an Initial Coin Offering or ICO?
It is one of the methods used by companies to raise funds for their crypto projects.
The funds are needed for their project development efforts.
The company issues part of its project’s cryptocurrency (token) to the public. People exchange fiat currencies like USD or major cryptocurrencies like Bitcoin or Ethereum to buy the tokens
Is it like Initial Public Offering (IPO) in stock markets?
Unlike IPOs, ICOs do not entitle buyers to a stake in the company. Nor do they give any rights to influence decisions in the development of the project.
Anyone can start an ICO.
Unlike IPOs, which happens when companies have reached a certain maturity, there is no such need for ICOs.
During the ICO, there is usually no working product. The funds are raised based on the project’s whitepaper (informational document).
Think of ICOs like a Kickstarter for Crypto projects. The fundraising happens at the token’s website instead of a different platform.
The success of the ICO depends on the roadmap of the project and the team behind it.
One of the most famous ICO for cryptocurrency has been Ethereum’s ICO. It took place in 2014. Around 7 million ether were bought using bitcoin in the first 12 hours of the sale. (~ $2.2 million)
However there are few downsides as well.
ICOs of a lot of low-quality projects took over high-quality projects.
Various projects without sound business plans, transparency, or credibility have turned out to be scams. There are ICO scams of over $650 million as well.
The ICOs are hosted on the Project’s website. If adequate security measures are not in place on the website then they are prone to hacks.
What is an Initial Exchange Offering or IEO?
IEOs are another way of raising funds by the companies for their projects.
It is like ICOs. But in IEOs a centralized exchange oversees the sale of the cryptocurrency. The white papers are scrutinised by the exchanges.
There is higher due diligence than ICOs because an exchange is also involved.
A few of the famous Platforms for IEOs are:
- Binance Launchpad
- OKEx IEO
The projects are vetted by renowned exchanges. As the reputation of the exchange is at stake there is less chance of the project being a scam.
The exchanges have considerable security measures in place. So they are less prone to hacks.
You can trade the cryptocurrencies on the exchange after IEO ends.
In ICOs you may not find a marketplace to trade as these are new currencies.
The exchanges are popular and they have an existing user base. This makes the discovery of the projects easier.
Expensive for the creators:
They have to pay fees to list their project at an exchange.
If the exchange is not available in your country then you cannot be a part of the IEO.
There is still a possibility of a pump and dump.
What is an Initial DEX Offering or IDO?
It is a new way of fundraising by crypto projects.
IDOs are like IEO.
The difference between IDO and IEO is the type of exchange on which the initial token sale is offered. IDOs are offered on decentralized exchanges like uniswap, bancor.
In decentralized exchanges, there is no dependency on a central authority. So IDOs also does not depend on any centralized authority.
Understanding IDOs with an example:
Binance is a centralized exchange and Uniswap is a decentralized exchange.
The token sale offered on a centralized exchange like Binance is IEO.
And the token offered on a decentralized exchange like uniswap is IDO.
Benefits of IDO over IEO
Don’t need high exchange fees to get listed.
Less waiting period & fewer restrictions for getting listed on the exchange.
Complicated to use:
One of the challenges is that people may find using a decentralised exchange overwhelming. Centralized exchanges like coinbase & binance are popular among beginners.
There is a chance of fake tokens being listed on the exchanges which copy the original ones.
The token prices increase as more investors swap the tokens. Only a few investors get the token at the listed price.
All the 3 methods have their advantages & disadvantages. IDOs are the new model of raising funds. More awareness and improvements are still required.
With the increase in popularity of DEXes, IDO should also become more popular.