You might heard of IDO, here’s what you want to know about it

One of the best use cases of blockchain technology turns out as Smart Contracts. They later formed the basis for other innovations in the crypto space like DeFi, Dao, Dapps, and Dex which are decentralized finance, decentralized autonomous organizations, decentralized applications, and decentralized exchanges respectively.

With the beginning of cryptocurrencies and their trading, exchange and trading platforms emerged altogether. Those exchanges let crypto users trade and exchange their cryptocurrencies across different wallets and into other digital assets using their platform. The only drawback they possess is exchange was backed by a company or itself a company which acts as centralized authority control.

But with the emergence of blockchain tech where decentralization was at its core, its development resulted in decentralized exchange. These were having all the features of what an exchange platform has, on top of that it does not lie under any control of the authority. Instead, it’s working under leadership by a community where a group of people decides what and how the firm will act.

Now the same DEX or decentralized exchange is also managing to provide platforms to new and emerging crypto-related startup projects which are in need of funds. For the sake of generating funds, new projects were having other methods that are direct funding from Venture capitalists, Initial coin offerings and one of the latest is initial exchange offerings. The fundraising was done by these methods earlier and they still do but now with growing tech and development in system results in newer ways, such as IDO or initial decentralized exchange.

What is an IDO?

An IDO or Initial DEX offering is an approach for raising funds that pools capital generated from investment from retail investors. Since ICO, that is, initial coin offerings have drawbacks so IDO seems to compensate for the former crowdfunding model. An IDO works with a DEX that is opposite of what centralized exchanges are, that they are more of decentralized liquidity exchanges.

Among already existing models for fundraising, IDOs is the newest of all. But still, it lacks some features provided by its counterparts. One of them is scalability, which is very less in DEX offerings. On one side ICOs and IEOs are able to raise funds of more than $1 billion, the same has not been seen with IDOs yet.

All the methods have a primary goal to generate funds for projects, the difference between them lies in their mode of working. For instance, IDO is by far very familiar with IEO, but still the former came into existence being used. That proves that IDO might have some added values to the previous methods.

Working of IDOs

As the name suggests IDOs work based on DEXs that provide immediate token liquidity. This is the reason that allows dexs to operate smoothly without any unexpected turmoil for users. And there are also pretty good rewards for liquidity pool providers.

Trading assistance is provided in exchange for a fixed commission cut of the funds. Other concerns include its speed, as many projects use consensus mechanisms of proof-of-stakes. The mechanism no doubt is energy efficient and secure but decreases the speed which tends to make investors unable to sell rapidly.

The PoS consensus makes sure investors hold capital in the token supported inside their respected wallet and in return, investors manage to get rewarded for their staking.

As the project launches, investors are then able to begin trading the token. Investors who came early can later sell their tokens at price more than they bought as the offering goes live. It’s too obvious that early investors can buy a large number of tokens at a very cheap rate. After the sale goes live for the general public, the value of the token increases and as the first sale moves ahead, the price eventually goes higher.

IDO gas fees for a new smart contract execution are comparably negligible due to the pretty well-available liquidity. So it can clearly be seen DEX offerings are as capable, secure, and reliable as IEOs are but with very low fees.

However, their process ensuring qualification and eligibility of projects make various low-grade projects launch on the platform which ultimately turns out to be scams and investors have the risk of losing their capital.

Ultimately even DEXs are not eligible to be said entirely positive. Still, they are more trustworthy as there is no intermediary in between. But complete dependence on tech makes it exploitable in technological aspects that are needed to get over with.

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Andrew is a blockchain developer who developed his interest in cryptocurrencies while his post-graduation. He is a keen observer of details and shares his passion for writing along with being a developer. His backend knowledge about blockchain helps him give a unique perspective to his writing