It’s virtually impossible for new crypto projects to properly take off, or attain their full potential without some backing from external investors. This is where initial token offerings come in, and fundraising methods have tremendously evolved since the days of Ethereum’s ICO. But their evolution largely has to do with the platform where the fundraising is done. In this guide, we’ll explore the three most common fundraising methods in crypto, and at the end, explain which one is the best.
What is an ICO?
An initial coin offering (ICO) is part of the total token supply that is sold to the public independently by the project owners. This means you don’t need to go through a DEX or CEX to fundraise. They allow projects to fundraise before their cryptocurrencies are listed for trading on exchanges. ICOs are rarely used these days; they paved the way for modern-day blockchain fundraising.
Typically, you don’t necessarily need a launchpad to go through with an ICO, which means you directly deal with your potential investors. And this can be either private or public. In a private ICO, you issue tokens to a limited number of investors, usually high net-worth accredited investors and institutions. In a public ICO, the sale is free-for-all. If you choose to go the ICO route, you must consider what token sales model to implement. These include uncapped, hard cap, soft cap, hidden cap, Dutch auction, or hybrid model. And unlike IDOs and IEOs, tokens are listed once the ICO is completed which means the potential investors tend to be locked in for some period.
The primary reason why the crypto community frowns on them is due to the ICO legal minefield surrounding them in various jurisdictions. Yes, ICOs are currently the most regulated aspect of cryptocurrencies there is. It all started during the ICO boom of 2017 when investors would latch on and pour funds into any crypto project, even those without a minimum viable product. This led to an unprecedented number of scams and rug pulls with billions lost. So, in most countries, ICOs are either legal, regulated, or subject to future regulations.
Advantages of ICOs
- You directly manage your project’s smart contract, no third-party crypto exchanges are necessary
- You’re in direct control of ICO marketing
- It’s the easiest way to fundraise with minimum scrutiny before the token launch
- ICOs allow you to fundraise even without a functional minimum viable product
Disadvantages of ICOs
- Lack of project vetting and due diligence from crypto exchanges can be a red flag to potential investors
- They are a legal minefield and are regulated or subject to future regulations, which means you could be entangled in legal battles after fundraising
- Without the help of crypto launchpads, out-of-pocket spending could be costly during the marketing process
- The lack of immediate liquidity could scare off interested investors
What is an IEO?
An initial exchange offering (IEO) is an initial token offering done through a centralized crypto exchange (CEX). This was the natural evolution of ICOs; IEOs were intended to plug the faults of ICOs.
However, unlike ICOs, the token offering isn’t done directly between the project and investors. During an IEO, the token sale will be organized on a centralized cryptocurrency exchange platform (CEX). This differs from an ICO where the sale is done directly by the project. The only similarity between ICOs and IEOs is that the offering is done in a centralized manner. Other than that, IEOs are the closest thing to IDOs – a third part exchange is in charge of the token offering. But unlike in IDOs, the tokens aren’t simultaneously listed on the exchange for trading. Rather, tokens issued in an IEO come with the promise of a listing on the CEX and investors will not be scammed.
When you choose to go the IEO route with your project, the crypto exchange will thoroughly vet your project before it proceeds with the IEO. Ideally, different CEXs have different minimum requirements for a project to launch an IEO. You’ll also be required to pay a registration fee as well as a percentage of the tokens sold during the IEO. In return, the crypto exchange participates in marketing your IEO and handles the proceeds from the offering on your behalf.
Advantages of IEOs
- Guaranteed token listing after a successful offering
- Strict KYC and AML screening of potential investors gives your project an added credibility when tokens are listed
- Your token offering benefits from the CEXs extensive clientele base – providing a diverse pool of willing investors
- Your project benefits from the CEX’s PR and marketing expertise
Disadvantages of IEOs
- They are costly compared to IDOs since projects have to pay a listing fee and commission to CEXs
- Lack of immediate liquidity since tokens are only listed after the IEO is successful
- In some cases, according to an SEC guideline on IEOs, IEOs may have to comply with federal securities laws
- Some CEXs may limit the project from partnering with other exchanges during the IEO
What is an IDO?
Initial DEX offering (IDO) is an initial token offering done through a decentralized crypto exchange (DEX) – it is basically decentralized crowdfunding. The most important feature of an IDO is decentralized issuance, and thanks to liquidity pools used by DEXs, your crypto is immediately quoted on the DEX on which they were launched. An IDO allows you to raise capital and simultaneously bring your tokens to market.
If you intend to go through with an IDO, your first step would be to find a reliable IDO launchpad. Most DEXs offer IDO launchpads, so this should be fairly easy. Generally, the IDO launchpad handles everything, from the vetting process to the liquidity pools – you won’t have to do any heavy lifting during the token offering. Once your project has been vetted and approved, the IDO price is set, and a whitelist is created. Investors registered on the whitelist can then lock in the funds they wish to allocate to the project in a smart contract on the DEX. They will receive the tokens once they are released. Part of the funds collected is then paid into liquidity pools with the project’s tokens on the DEX. This ensures the liquidity of the exchanges from the onset.
Liquidity pools are reserves of tokens deposited by users of a decentralized platform, locked into a smart contract, and used for the exchange of tokens by platform users. The assets deposited in liquidity pools are meant to serve token holders by facilitating seamless trading. In this case, a trader can withdraw a token from one pool (by buying) while simultaneously adding assets to another (by selling). This is how DEXs ensure the continuous presence of liquidity for token issuers. In short, everyone wins.
Advantages of IDOs
- Immediate liquidity thanks to IDO launchpad’s liquidity pools
- Your crypto is immediately available for trading
- You can partner with as many IDO launchpads for the token offering
- Minimal costs – you only need to pay for gas fees necessary for the deployment of a new smart contract for your cryptocurrency
- Easier access for investors with a shorter waiting period compared to ICOs and IEOs
- Easier crowdfunding since anyone can participate in your IDO
Disadvantages of IDOs
- The lack of KYC may attract unsavory investors that you’d rather your project not be associated with
- You’ll have no control over the crowdfunding process
What is the difference between IDO, ICO, and IEO?
On the surface, IDOs, ICOs, and IEOs may look a lot similar. But here are the top differences between IDOs, ICOs, and IEOs.
|Fundraising||By the project issuing the tokens||By a centralized crypto exchange||By a decentralized crypto exchange or an IDO launchpad|
|Token Listing||The crypto project reaches out to different exchanges for listing after the ICO. Note that listing is not guaranteed.||The CEX lists the tokens immediately after concluding the IEO||Listing and the IDO are done simultaneously thanks to liquidity pools|
|Smart Contract Management||Exclusively managed by the project||Managed by the CEX||Both by the launchpad and the project|
|Vetting Process||No due diligence is done by a third party||Projects are vetted by the CEX to ensure they meet the exchange’s minimum standards||The DEX or IDO launchpad conducts thorough due diligence to ensure the project meets the minimum standards for an IDO|
|Token Sale Marketing||The ICO is solely promoted by the project||PR and marketing are done by the CEX on behalf of the project||The promotion of the crypto project is carried out by both the launchpad and the project.|
|Token Availability for Trading||Investors must wait for the tokens to be listed after the ICO before trading commences||Tokens can only be traded after successful completion of the IEO||Tokens are immediately available for trading as the IDO progresses. In some cases, a vesting period might be implemented to lock in anchor investors|
IDO vs ICO vs IEO: Which is better?
As we’ve mentioned, ICOs paved the way for modern-day blockchain fundraising. At this point, IDOs and IEOs are your only practical choices. But, which one is better?
Admittedly, both IDOs and IEOs tend to legitimize your token offering primarily thanks to the rigorous due diligence conducted by launchpads. So, ensure you partner with a reputable launchpad first.
However, in the grand scheme of things, IDOs should be the preferred method for your initial token offer. One of the biggest selling points for IDOs is the liquidity pools ensuring an instant and continuous liquidity for your project’s tokens. They are the best alternative to crowdfunding without the unnecessary complications of centralized offerings. They are fully decentralized and require little to no fee for the token listing on DEXs. More so, you are free to partner with as many IDO launchpads as you want to maximize the exposure of your initial offering.
The Bottom Line
Initial token offerings vary, but they primarily differ depending on whether the issuance is centralized or decentralized. The biggest drawback in ICOs is the lack of project vetting which makes investors vulnerable to massive losses. For IEOs, centralization tends to be the sticking point for most potential investors. CEXs are susceptible to cyberattacks. And in some cases, since they hold investor funds, they might be subject to federal securities laws which could be a potential minefield for your crypto project.
This, in our opinion, makes IDOs the best-suited avenue for initial token offerings, especially since they ensure immediate liquidity, immediate trading, and lower costs for listing.