What Is an Initial DEX Offering (IDO)?

IntermediateJan 18, 2023
A fundraising method where the tokens are available on the Decentralized Exchange (DEX)
What Is an Initial DEX Offering (IDO)?

The initial DEX offering is a fundraising procedure developed to address the issues and administrative bottlenecks that have characterized other fundraising techniques such as Initial coin offering (ICO), initial exchange offering (IEO), and security token offering (STO).

The initial DEX Offering provides the simplest way for project developers to distribute their tokens and raise funds. The IDO fundraising technique involves running a crypto token offering on a Decentralized Exchange (DEX). In the initial DEX offering, the blockchain protocol developer or token issuer provides the token to the Decentralized exchange (DEX), while users and enthusiasts commit their funds through the platform. The Decentralized exchange is then saddled with the final distribution and transferred to those who made payment for the token.

What Is an Initial DEX Offering (IDO)?

Initial DEX Offering (IDO) is the process of running a crypto token and making it available on a Decentralized Exchange (DEX). In the initial Dex Offering, users can lock funds in exchange for new tokens during the token generation event. Part of the funds raised is then added with the newly launched token to a liquidity pool before being returned to the project later.

Initial DEX Offering is a token offering method where the project developer or startup supplies new sets of tokens for sale to interested investors. In the IDO crowdfunding method, the developer of the new token gives it to the decentralized exchange (DEX), interested investors will pool their funds into it through the platform that is issuing it, and the decentralized exchange (DEX) finalizes the distribution and transfer. The entire process illustrated is automated via smart contracts on the blockchain.

An Initial DEX offering (IDO) is a blockchain-based virtual crowdfunding procedure where the token is distributed via a decentralized liquidity marketplace. In IDO, liquidity pools are essential. The IDO allows an investor to lock funds into a smart contract before launching the token. So when the token is launched, the newly launched token will be released to the investors instead of releasing the locked funds. The locked fund will then be transferred to the project’s developer.

Unlike other fundraising and token offering procedures, the Initial DEX offering (IDO) procedure uses decentralized exchanges to facilitate token sales. Developers can not sell the tokens directly to investors; it is the smart contract run by the decentralized exchanges that handle the sales of the tokens. It is also via the same smart contract that investors commit their funds. Conclusively, the smart contract will keep the funds till the token is launched, and investors will receive their tokens accordingly.

How Does an Initial DEX Offering Work?

IDOs are restoring confidence and giving assurance to investors by professionalizing the crowdfunding process. The decentralized exchanges (DEX) facilitate token sales via a smart contract. Several decentralized exchanges and smart contracts can run the crowdfunding procedure in an initial DEX offering. However, most work in the same pattern and follow a similar approach. They include:

  • Vetting: The first procedure in an initial DEX offering is for the decentralized exchange team to conduct a due diligence assessment. The vetting process keeps fraudulent projects off the platform and ensures compliance;

  • Price Fixing: After a project accepts the initial coin offering, the fixed price for the token supply will be determined and concluded;

  • Whitelisting: Every initial DEX offering has a whitelist. Sometimes, investors must register their wallet address, join a community forum on discord or perform specific marketing tasks before being added to the project’s whitelist;

  • Investing: After an investor has been added to the whitelist, the investor can proceed to lock the amount they want to invest into a smart contract on the decentralized exchange. The funds will be locked in the smart contract, and the investors will receive the tokens once released;

  • Liquidity Pools And Fund Transfer: The raised funds for the project are divided into two. A part will be deposited in liquidity pools with the project’s token on the decentralized exchange (DEX), while the remaining portion will be released to the project. This arrangement ensures the project has trading liquidity from the first day while the investors receive their tokens in their wallets;

  • Trading Starts: Immediately after all the conditions have been met and exchange has been finalized between all parties, the liquidity pools begin trading, and the market determines the price of the token units.

Pros of an Initial DEX Offering (IDO)

Some of the notable advantages of an initial DEX offering include:

  • Transparent fundraising: An initial DEX offering is transparent and allows anybody to partake in it. When a token goes live, you do not need the permission of any centralized exchange to partake. Once you have your funds, you can go through the IDO rules and invest;

  • Quick trading: Exchange in IDOs can be instantly done. Investors can buy tokens as soon as they are produced and re-sell them at a higher cost sooner or later in the same initial DEX offering;

  • Liquidity On Demand: IDOs have liquidity on demand. Tokens in an Initial DEX offering can acquire immediate liquidity and boost the token’s price. Liquidity is the ability to sell and purchase. Liquidity provided post-sale in IDO helps reduce slippage and volatility.

Cons of Initial DEX Offering (IDO)

The shortcomings of an Initial DEX offering include:

  • Transaction fees: To participate in an initial DEX offering, you will need some crypto tokens to subscribe and pay transaction fees. These transaction fees vary across the tokens you use to invest in the project;

  • Loss of investment: Token offerings in IDOs involve high risk. You can lose your entire investment in a token offering if there is an irregularity in the project’s team or tokenomics.

Conclusion

The initial DEX offering method of crowdfunding became popular after the ICO craze of 2007 on Ethereum.

As other fundraising methods in blockchain and crypto became characterized by scams and rug pulls, the IDO comes with advanced technologies that promote transparency and due findings before a DEX agrees to launch the new token publicly.

Undoubtedly, the Initial DEX offering has recorded successes since its introduction to the crypto ecosystem.

Author: Valentine
Translator: Yuanyuan
Reviewer(s): Matheus, Ashley, Joyce
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