IDO’s Have The Potential to Be Great for Average Investors. What’s Holding Them Back?

From the humble beginnings of the crypto industry to the giant it has become today, one thing has remained constant:  a project launches, it has a token for investors, and those investors want to get in on owning some as quickly as possible.  From this trend has come some of the very best of crypto, along with some of the worst.  Billionaires have been made a number of times, while at the same time nefarious actors have scammed, rug pulled, or otherwise swindled from innocent participants.

Yet despite the risks, the appeal of investing early for the newest project is still incredibly exciting.  And the good news is, we as an industry have learned and evolved to reduce the risk of bad actors taking your money.  There is still risk, but the processes involved for finding projects, joining them, and taking part in what is hopefully a solid investment, have been continuously improved.  

ICOs and IEOs

One specific evolution has been how these tokens are initially offered to investors.  The original method for this was the ICO (Initial Coin Offering).  This was fairly straightforward, and involved the project who owned the token and an audience who might want to buy it.  Straightforward, however, does not mean simple, and there was a lot of work placed on the project.  All marketing for the ICO was the responsibility of the project, as was creating the smart contracts to manage the sale.  In terms of vetting potential buyers, where AML/KYC was required, this too fell on the project itself.  At the end of the day, the investment required to launch a successful ICO was significant.  Did it pay off?  Well, not every ICO has been successful, but many have been very successful, raising hundreds of millions for the top offerings.  The downside?  For investors, the downside could be steep because any project could launch their own ICO, not all projects were great or even legitimate, and as a result there were many scams that successfully took money from investors.  One final complication:  even if the ICO was legitimate, it wasn’t guaranteed that the token would make it on an exchange for a seamless secondary market, as the project had to gain an agreement with an exchange.  If they couldn’t find an exchange, the value of the token could drop precipitously.  

Given the challenges with an ICO, some projects evolved toward an IEO, or Initial Exchange Offering.  With this setup, some of the key steps were removed as the launch happened on the exchange itself.  This could be a good thing in that the token was already approved to be listed on the exchange, and even better since an experienced exchange can handle the smart contracts, any AML/KYC, and marketing efforts.  The exchange also performs more due diligence for its selection of tokens to launch, giving at least some protection to investors.  The problem?  Major restrictions of who can join, major fees, and a limited number of token releases.  While the control can be helpful, it can also become a major issue.

IDOs:  Getting Closer

The natural next step is to take what works with the IEO and improve it.  The result?  The Initial DEX Offering, or IDO.  This is similar in some ways to the IEO, but instead of the exchange handling most actions, a third party launchpad facilitates the launch between the DEX, the project, and the customers.  The token is already set up to launch on the selected DEX, so there are no issues in that regard.  The marketing efforts are typically shared by the launchpad and the project team, the smart contract by the project team, and the vetting of investors by the launchpad.  The need for AML/KYC varies by project, so there isn’t a set rule for that element.  How investors are whitelisted, however, is where the biggest elements are for an IDO.  How a launchpad handles this element is one of the biggest issues with IDOs, but simply doesn’t have to be.

A typical launchpad has a reputation closely related to the projects it has launched.  The variety of project vetting can vary wildly, but those top launchpads do their homework and protect their communities.  A successful launch with happy investors works well for everyone.  The rapid pace of an IDO can be intense, but is a natural consequence of this type of launch.  Investors usually have to create an account, perform any vetting, and are then whitelisted based on a number of criteria.  Many launchpads use this step to help boost marketing, requiring the whitelist process to include social media boosts of the project by those who wish to join.  Since they already want to join, this is usually something they have already done or are happy to do to further boost the project visibility.  However, the most controversial of these steps is requiring potential investors to hold large amounts of the launchpad’s native token, which can amount to $10k-50k worth of tokens.  Obviously, this massive buy in limits the majority of average investors and shuts the door to either institutes or wealthy investors.  However, this also gives even these lucky few an additional element of risk, as this token can be volatile and create a loss before they even get to the project launch.  

Notably, this biggest issue is itself evolving, with advanced launchpads like Coin Terminal choosing not to require any buy-in from investors.  In fact, it doesn’t even require an account set up for potential investors unless they are selected for the IDO.  This is good in that it streamlines the process for investors, but is also a strong show of confidence in the projects they help launch.  Essentially, Coin Terminal doesn’t truly benefit unless a launch is successful and investors see the value, coming back for more.  This truly is a step in the right evolutionary direction, because it better aligns the project, the launchpad, the DEX, and the investor.

What’s Next?

With the continuing evolution of the crypto economy, we will likely see the expansion of the IDO model, especially as launchpads work to implement strong vetting of projects, streamlined processes for those who want to participate, and removing unnecessary elements such as major buy-in through launchpad token purchases.  One thing is for sure, the crypto industry moves very fast, responds to the community, and is ever evolving.  It will be exciting to see what type of launch models will emerge in the next few years.