The cryptocurrency market has recently seen three powerful waves of investments. However, while investors of different levels of professionalism, including representatives of major venture capital funds, have invested millions of dollars, many ordinary users still wonder what ICO, IEO, and IDO are.
In a nutshell, these are three mechanics of attracting investments in crypto projects. Let’s consider each of them in more detail.
ICO: Initial Coin Offering
ICO (Initial Coin Offering) is a crypto analog of an IPO, an initial public offering on the stock exchange. These mechanics have existed since 2013, but the real boom of ICO projects came in 2017 thanks to a media campaign and the boom of The DAO.
In 2014, ICO investments helped raise about $26 million, and $96 million in 2016. According to various sources, the number of funds raised in 2017 was $4-5 billion. Despite falling in popularity, ICOs kept growing due to the collapse of The DAO project, which followed shortly after its launch. According to ICObench’s estimate cited by The Block’s analyst Larry Cermak, more than 5,600 ICOs had been conducted, and over $64.5 billion had been raised by the end of 2020.
ICOholder’s data shows that as of November 11, 2022, more than 52,000 ICOs have already passed, are going on right now, and are planned. It seems impossible to estimate the total amount of funds raised this way.
Ethereum is the main blockchain platform for projects entering ICOs. The ICO mechanics revealed several weaknesses of the cryptocurrency market:
- The involvement of unprofessional investors unable to assess the real prospects of a particular project.
- Companies with a product at an early stage, flaws in product development planning, and limited or unreliable information about the product enter ICOs.
The first point led to a large number of funds received by non-viable projects, resulting in an average return on ICOs of minus 80% in 2020. Then it continued to decline. Only about 10% of all projects showed a profit. Nevertheless, the question “what are ICO projects” increasingly arises among amateur investors drawn by the opportunity to make huge profits. However, those crypto investors, who figured out what “crypto ICO” is, gave preference to projects entering IEOs in late 2018.
IEO: Initial Exchange Offering
The mechanics of an IEO (Initial Exchange Offering) is a logical evolution of the idea behind ICOs. The key difference lies in the word “exchange,” and it practically nullifies both weaknesses of ICOs: the incompetence of investors and entrepreneurs. The bottom line is that IEO projects are selected by representatives of exchanges. Therefore, doubtful ventures are filtered out, and tokens of IEO projects are sure to be traded on these exchanges. Binance became a pioneer in this area by launching Binance Launchpad, especially for IEOs.
A large number of people who wanted to buy tokens as part of IEO campaigns created an excessive load on the exchange servers, resulting in failures on platforms. A “lottery” became the solution — a new mechanics of acquiring tokens within IEOs, which was also introduced by Binance and became the accepted standard. The essence is that the investor must keep tokens of the exchange in their account. Before trading begins, tokens are exchanged for lottery tickets. The more exchange tokens there are, the more tickets you get. Each ticket can turn out to be a winning one and allows a certain number of tokens within the IEO to be purchased. In this way, the token distribution mechanism becomes more transparent and fair, and exchanges gain additional liquidity.
Collecting accurate data on IEO volumes is a challenge. For example, the greatest hype around IEO projects was in the first half of 2019 — more than $1.2 billion was raised in May of that year, although the figure had already dropped to $125 million in June. A total of $1.7 billion was attracted during IEOs in 2019, CoinMarketCap reported. It’s difficult to estimate the exact volume of IEOs in 2022, but there are two examples:
- Binance Launchpad conducted 65 campaigns, raised $107 million, and locked in another $3.1 billion in BNB tokens for future campaigns. The overall number of participants is 3.6 million.
- The OKX Jumpstart platform had 12 campaigns and raised $122 million, with a total of 1.6 million participants.
Other platforms don’t make their data publicly available. The popularity of IEOs was short-lived because ICOs are still being practiced. In 2020, decentralized finance (DeFi) began to rapidly gain momentum and brought a new form of initial offering.
IDO: Initial DEX Offering
The essence of the IDO (Initial DEX Offering) mechanics is the issuance of tokens backed by liquidity pools on DEXs (decentralized exchanges). The mechanics incorporated the strengths of both previous waves:
- IDOs are held on independent platforms, whose experts sift out dubious projects and help work out weaknesses in potentially interesting ones.
- Token distribution takes place among all interested participants, subject to pre-registration in the project’s whitelist, the purchase of a lottery ticket in the form of a token, or if there’s a certain amount of tokens in the hosting platform’s account.
- The tokens are guaranteed to be listed on one of the major DEX. Most projects launch ECR-20 tokens on Ethereum and are traded on Uniswap. However, BEP-20 and TRC-20 tokens, which belong to Binance and Tron, have become more popular lately.
A characteristic feature of IDOs is the lack of strict guidelines for conducting them and the fact that KYC is rarely required to participate. Much depends on the token issuer. A prime example is the launch of the CPD token by CoinsPaid. It was planned as a part of the IDO, and CoinsPaid attracted dozens of strategic partners during the preceding information campaign and held a whole series of events. As a result, the demand for CPD greatly exceeded the supply.
So, the IDO is both a mechanism for attracting investments and a powerful tool for popularizing tokens offered for trading, which ultimately positively affects the dynamics of their value after the listing starts. Due to the described combination of factors, projects have high chances for stable and long-term growth after the IDO.
According to CryptoRank, MISO, which has attracted almost $475 million in investments as of November 11, 2022, is the leader in IDOs. DAO Maker comes in second place, with 106 campaigns and $42.6 million raised so far. The service’s list includes a total of 76 platforms where IDOs can be made. Everything indicates that this form of initial offering, as the most reliable and flexible, will prevail during investment attraction in the early stages of developing crypto projects in the foreseeable future.